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The publication on Friday of a report from the Office for Students (OfS) detailing the financial challenges facing higher education institutions in England is accompanied by calls for “bold and transformative action” to improve the sustainability of these organisations.

Past experience over 15 years of dealing with institutions in financial difficulty in a variety of roles from senior leadership, to governing body and sector oversight has led us to believe that the future will not be characterised by the emergence of lots of voluntary shared service and joint activity.

Over the last twelve months we have spoken to university leaders, governors, consultants and auditors about the recruitment and financial challenges in the higher education sector. Based on these conversations it appears that a majority of institutions are taking most of the following ten steps to reduce forecast financial deficits:

1. Introduce a freeze on new staff recruitment.
2. Reduce non-pay budgets.
3. Renegotiate credit/overdraft arrangements and banking covenants.
4. Introduce voluntary severance arrangements and contingency planning for compulsory redundancies.
5. Prepare optimistic forecasts of future income growth based on improved recruitment assuming they could achieve one per cent of all undergraduate and postgraduate course numbers at other UCAS registered providers.
6. Withdraw from expensive low demand science courses, eg chemistry and physics.
7. Pause or reschedule capital programmes.
8. Mothball or sell buildings.
9. Engage in tentative discussions with nearby institutions about shared services or course transfers.
10. Withdraw from courses with low league table rankings, profitability, potential future growth and political sensitivity.

Unfortunately, there are problems with a number of these actions which will limit implementation or create unintended negative consequences or both.

Dial down your expectations

Reductions in non-pay budgets (option 2) will challenge the income of the sector-wide shared services and representative bodies that already exist and which are dependent on subscription income. We won’t list the bodies that currently exist in this category, but when a list was created to accompany the development of the Higher Education and Research Bill there were over 200 organisations involved. Crucially this change will reduce the information sharing, strategic awareness and staff development capability within the sector limiting the ability of providers to interpret developments and respond to them.

Optimistic student recruitment forecasts (option 5) may fool governing bodies, but they won’t deliver the expected results and only run the risk of making the hole deeper. There are 453 higher education providers in the UK and 165 universities. Simple maths indicates that a one per cent target of all students in a course category is unlikely to be achieved. Beyond this numeric limitation there is a major problem with optimism bias. The UK government’s Infrastructure and Projects Authority (IPA) assumes that there will be an optimism bias of up to 20 per cent in most estimates of future cost savings or income growth. This tendency to see things through rose tinted glasses can be mitigated by comparing past forecasts with the actual out-turns and by the regulator publishing optimism bias estimates by institutional type on a regular basis.

They can also be overcome by scenario planning, wargaming possible changes and conducting pre-mortems. There is guidance on all these techniques on the UK Civil Service website. These are all techniques governing bodies should be using, and this activity should be led by the independent members of these boards.

Department closures and course portfolio changes (options 6 and 10) have the potential to create significant regional and national skills problems. There are at least two regions of the UK where strategically important subjects are currently being considered for discontinuation which will leave these areas with subject cold spots. This could be overcome with an increase in the expensive subject premia for selected subjects guided by regional assessments of need. This is something that Local Skills Improvement Plans (LSIPs) should be empowered to do under guidance from Skills England and the OfS.

Voluntary shared services, course transfers and mergers (option 9) generally don’t work as intended in the higher education sector and lots of time and/or money can be wasted in their planning. The basic problem is that institutional leaders want to appear supportive publicly, but privately won’t do anything without a massive risk premium. That is additional cash in plain language. Preliminary estimates suggest that this could be £30m to £100m per medium sized institution in difficulty.

The problems with shared services and course transfers are VAT regulations on commercial shared service provision and Transfer of Undertakings Protection of Employment (TUPE) regulations. These add a minimum of 20 per cent to costs, excluding the upfront delivery costs and also create considerable uncertainty and risk of litigation. We have un-fond memories of going down this path in 2009–10 and again in 2015–17.

The challenge with going further than shared services is that the research on mergers (they are really takeovers) suggests they generally don’t produce benefits and probably fail more often than they succeed in higher education settings. For every Writtle College there are several ALRA, Heythrop and South West London colleges. Where they don’t fail they take an average of ten years to fully bed in new arrangements and someone will have to pay for the additional costs of rationalisation.

Many institutions are also focusing on income growth through rebuilding their overseas student income through increased recruitment agent activity, franchising or investment in improved league table positioning. There are problems here also as competition increases agent fees have risen as a proportion of students acquired and the real price of the courses on offer has fallen. A number of universities now no longer distinguish between home and international students in their postgraduate taught student fees. There are also potential problems with agent and franchise quality which sector quality bodies find hard to monitor in a timely manner. The gross income from these activities varies from £1,000 per student to £300 when these fees are paid by the franchisee and they aren’t always paid in full or on time. This is additional revenue, but as many business owners have learnt painfully in the past, “turnover is vanity, profit is sanity, but cash is king.”

The goal of better global league table positioning also appears attractive at first sight. There is folklore with some substance in the sector that a place in the top 100 of the QS or THE world rankings leads to improved high fee overseas student recruitment. The problem with this approach is that governors are easily duped by presentations that promise this achievement in the future. It is also problematic because the rankers have plans to increase the number of institutions they list from around 2,000 now to a greater proportion of the about 18,000 universities it is reckoned exist globally. This broader market penetration offers them the prospect of increased income from consultancy advice about how to rise up the rankings.

Aside from any ethical issues, the problem here is that as new entrants and lower rated institutions rise up the league tables others will be forced down. There are eight UK universities in the top 100 currently and 17 in the top 200. Will that be the case in ten years’ time? It seems unlikely and in this there are also problems for the rankers. The currency and prestige of the QS and THE systems depends on their being a disproportionate number of UK institutions in the upper reaches of these lists. If there aren’t, why would funders and prospective students bother with these league tables, why not use the Academic Ranking of World Universities (ARWU), CWTS Leiden or US News and World Report?

Plan for a bleaker future

The sad conclusion of the above is that there will be a reduction in higher education institution capacity over the next five years. This won’t be evenly spread geographically, by level or by subject. It would be best if these changes were handled by institutions individually mindful of their impacts locally and regionally.

If this is not possible or is unsuccessful due to leadership and governance failures, or exogenous shocks, this could be handled by managing down some activity on a regional footprint overseen by joint Department for Education (DfE), OfS and Skills England engagement.

If this is problematic because of Competition and Market Authority (CMA) rules it might be wise to explore the possibility of creating regional federations like the bodies that oversee most state provision in the USA. This has been considered several times in the UK in the past, most fully in 2003 by the Higher Education Funding Council for England (HEFCE). If this approach is necessary for legal reasons, it would be a good idea to trial it in one or two places before adopting it as an England-wide model. We anticipate that there may be judicial reviews instigated by institutions fearful of this change and the consequences for institutional autonomy.

That then raises the prospect of government legislating to overcome these legal challenges. At present this only seems likely and possible in the wake of one or more major provider failure. A medium or large failed institution will cost a lot of money to teach out the students over at least a five-year period. Several failed institutions would be a calamity. Now is the time for governing bodies to reassure themselves that they have the right balance in the list of ten initiatives above and for the regulators to consider the risks on a regional as well as a national basis. Through this activity we hope it is possible to get a better understanding of what bold and transformative change might actually look like in future.