A risky business

This blog was kindly authored by Paul Woodgates, independent Higher Education consultant, non-executive director and Deputy Chair of the Board of Governors of De Montfort University.

Tom Richmond’s recent HEPI Debate Paper A degree of regulation: Building a more financially sustainable and resilient higher education sector argues that the woes of the higher education sector stem from excessive risk taking. I want to challenge this notion and argue that taking risks, far from being the cause of the financial crisis enveloping the sector, is essential for climbing out of it.

We can start by agreeing that financial sustainability is essential. Our universities, routinely cited as one of the UK’s greatest assets in a highly competitive world, are in severe financial peril. We urgently need to ensure they are financially viable and consistently return surpluses sufficient to allow investment for the future.

But I cannot agree with Tom Richmond’s plans to achieve this. He sets out eight recommendations which, he says, will deliver financial health to the sector by constraining what he sees as risky decision making. Most of them will result in lower income, increased costs or both. While they might remove some of the grounds for media criticism of universities (by restricting franchising, for example), the paper presents no reasons for supposing that financial sustainability will be the outcome.

How did we get here?

The financial bind in which universities find themselves is that they are caught between income from teaching each home student which (in England) has fallen by a third in real terms since 2012, and costs which have inexorably risen. Combined with funding for research that does not cover the cost of conducting it, unsupportable pension costs and increasing expectations on the level of support universities must provide to students, the numbers no longer stack up.

The response of most universities to this has been to recruit international students – often at scale. It’s worth remembering what an extraordinary asset international students have been to the UK. As well as providing revenues that have kept universities afloat, they have enabled a valuable internationalist dimension to the student experience. For the UK, international students create a net economic impact of £37.4 billion per year (according to a London Economics and HEPI report), as well as being of huge importance in terms of soft power. And for the international students themselves, the experience of higher education can be life-changing and open up opportunities that could not conceivably exist for them otherwise – surely important for universities whose mission statements mostly say that is precisely what they are here to do.

So international students have – for a good number of years now – been the saviour of UK universities. Of course, that has created a dependency upon them, which Tom Richmond is right to point out. But it is an odd conclusion that the implication of that dependency is that we should have fewer of them. That’s like being at 30,000 feet, noticing that you have a massive dependency on the plane you are flying in – true, but still a great deal better than being there without it!

Drastic reductions in the number of international students will achieve the very opposite of financial stability – it would create huge funding crises, cuts much deeper than we have seen so far, and almost certainly institutional insolvency. Demand may well have plateaued or will even gradually fall in time anyway due to global instability, increased competition and new provision in countries of origin (particularly China), but it would be highly counter-productive to make it happen faster than it otherwise would.

Rather than being an example of ‘excessive risk-taking’, seeking international students, and other growth initiatives such as franchising, were a rational response to the policy and financial context within which universities operate. That is not to argue that everything has gone well – there have been examples of over-recruitment beyond the capacity of institutional infrastructure (particularly student accommodation), and clearly not all franchising has been effectively overseen. But to condemn all such initiatives as excessive risk-taking is surely to miss the point that universities must reinvent themselves in line with the modern world. That means taking risk.

The risks of action, and the risks of inaction

All that said, it is right to be concerned about a dependency on necessarily uncertain student flows – particularly international students. The response to that should surely be to develop more and diversified income streams – to create resilience through multiple different sources of income. At the simplest level, that might mean recruiting more international students from countries beyond the big three of China, India and Nigeria. It also means developing new whole educational offerings such as apprenticeships and modular qualifications, collaborations with other providers, TNE campuses abroad, online products, use of AI and much else. But all such initiatives inherently carry risk.

My criticism of the sector then, is not that it has taken excessive risk but that it has not taken enough. The reason that it is suffering now is that it has not been sufficiently assertive in finding new ways of creating value for students and society that drive revenue to sit alongside international student flows. Risk-taking absolutely is required – without it, there is only decline as universities become less and less relevant to the world they live in.

Of course, willingness to take risks is not  the answer on its own. The sector needs to get better at taking risk – having the management and governance capability to understand the risks of any initiative, how those risks can be managed and the financial upside that must be present to justify taking them. That requires high-quality data and the ability to interpret it.

It also means taking a portfolio approach to new developments. Not every initiative will work (or if it does, it suggests a lack of radical thinking), so seeing developments as a portfolio which must deliver a result in total, but not necessarily for every individual element, is critical. Collaboration is also key – sharing risks with others may make them more palatable.

Arizona State University (ASU) is perhaps the best example of a university that is the embodiment of successful innovation and risk-taking. ASU has grown into a prestigious organisation with revenues of close to $6 billion based on a vision of a “New American University”. Anthony Finkelstein, President of City St George’s, has made some very interesting observations about ASU’s approach to innovation and risk on his Substack, Prof Serious.

The risk of not taking risk

Ironically, one of the biggest risks facing the sector is that universities do not take sufficient risk but instead turn in on themselves and respond to the pressures they face by retreating into an ever-decreasing core of their traditional activity. Far from delivering financial sustainability, the result will be a death spiral of income shrinkage, cost-cutting and decline.

To thrive, and probably even to survive, universities need to pursue innovation, take bold decisions and be willing to take and manage risk. Regulation must be cognisant of that need. Now is the time for the sector to become good at taking risk.