How will universities survive renewed budgetary pressure?

Many of us in the higher education sector are acutely aware of the current financial pressures experienced by universities around the world. Rising debts and net losses are becoming increasingly commonplace and many more universities are only just keeping their heads above water. Even some recently reported surpluses at universities in Australia and Canada have been regarded as post-COVID-19 blips reflecting aggressive cost cutting during the pandemic.

These indicators suggest that long-held higher education business models are no longer financially sustainable.

In my conversations with university leaders, the message is clear – the long-term systemic issues are only going to get worse and financial sustainability for universities outside the research elite is an increasing challenge to manage. In the UK, for example, the Office for Students recently announced it was monitoring the “shaky finances” of 30 institutions and would not prop up those at risk of going under.

What happens to a sector where universities are left to fail? It’s a question that needs some serious answers and actions to combat it.

Financial squeeze thwarting investment in critical digital transformation

Traditional funding models are declining. Universities are variously contending with shrinking enrolments, reduced government funding or caps that push down the real-term value of tuition fees. Fee income from international students – a cornerstone of most higher education funding strategies – is no longer stable or certain.

As inflows are being squeezed, outflows are escalating. No institution is immune to inflation increasing energy, wages and borrowing costs. Inevitably, balance sheets are being eroded.

In this environment, it’s hard to see how universities will be able to fund the digital transformation necessary for their institutions to thrive in the future. Students in higher education expect a better, more modern, more digitally enabled experience.

But, when it comes to essential capital investment, many institutions find themselves in a vicious cycle. Without financial sustainability, universities won’t be able to engage in this digital transformation. Yet, without digital transformation, they may not achieve financial sustainability. ?

Mid-tier institutions finding it especially tough

Prestigious universities recruiting high volumes of students onto popular programs are most likely to ride out these challenges. But for the vast majority occupying the middle ground, competition and challenge will only intensify.

To find out how mid-tier institutions are responding to these challenges, EY researchers teamed up with Times Higher Education (THE) to conduct in-depth interviews with 11 university leaders in Australia, Canada, the UK and the US.

In each market, our interviewees expressed concern about the long-term financial sustainability of the higher education sector. They expect to see many more institutions going into deficit in the future. Not surprisingly, the pursuit of financial sustainability is high on their agenda. Some report turning to more drastic measures like selling property to be able to balance the books, merging with other institutions, or closing courses and departments. But, as many leaders described it, cost cutting is merely “trimming around the margins.”

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A radical rethink is required

Improving financial health will require university leaders to embrace new thinking. Mid-tier universities, in particular, need to address persistent structural issues, including generic and undifferentiated strategies, poor employability outcomes for too many programs and patchy student experience.

As explained in our EY and THE white paper, we believe regaining financial strength will require a fundamental rethink of the university business model. In practical terms, survival may require developing commercially focused portfolios, merging to achieve scale or building multiple revenue streams outside of traditional funding models.

We recommend bold action to:

1. Develop strategic distinctiveness by backing success – including actively accepting disinvestment in weaker or non-strategic areas.
2. Create and capture the cost and network benefits of scale.
3. Deploy digital technology to enhance teaching and learning, and employee and student satisfaction.
4. ?Invest in change capacity across people, processes and technology to bring faculty along on a challenging transformation journey.

The white paper includes details of these strategies, the thinking and approaches of our interviewees and an analysis of the financial state of play in higher education across the four countries.

You may also be interested in the ideas discussed in our recent financial sustainability webinar with THE. Guest panellists included: Dan Greenstein, Chancellor of PASSHE; Diana Beech, CEO, London Higher; and Susan Shaffer, Higher Education Lead Analyst, Moody’s. It was a terrific conversation.