Tips for universities navigating financial headwinds

Warnings of the financial challenges facing some UK universities have dominated headlines in recent days. While there is significant diversity of financial and operational performance across the sector, The truth is that all institutions are grappling with rising costs.

It is important, therefore, that a measured approach is taken, not least to avoid unsettling students who may be left wondering if it is their university being referred to on the front pages.

Having worked on the only formal turnaround of a university, and having undertaken assessments to determine how higher education institutions could feasibly close, I have identified several factors that should be considered when a university finds itself in a financial tight spot.

Going into insolvency

Most universities are constituted as higher education corporation entities and therefore the Companies Act/Insolvency Act is untested on how it would be applied in such a scenario. However, if an institution were to become insolvent then a few unusual factors would come into play.

First, the student contract requires a failing institution to provide alternative provision of comparable standards to students. However, it is unlikely that students would readily move from one location to another. And even if this could be arranged, managing such a process would be challenging.

We must also consider how lenders, including the banking community, will respond to any insolvency. The reaction of funders, should any organisation fail, will be weighted carefully, given the potential consequence of needing additional security or guarantees.

As for any administrator that might be required and appointed to protect existing learners and maintain course provision, the costs of running an insolvency of a university for an extended period will undoubtedly be significant. The pressing question will be whether all their objectives will be achieved solvently and with the cooperation of all stakeholders.

Fundamentally, understanding what could be sold in order to maximise the return to creditors is key to ensuring viability of an insolvency process. Many universities may be able to offload assets, such as spin-out or start-up entities, particularly if they have innovative or advanced facilities. 

Sale of property may also be possible, but may be subject to educational use covenants and a potential clawback of related capital grants.

Keeping it running

The better approach, wherever possible, is to keep the organisation running, reducing the cost base and effecting an accelerated but controlled turnaround strategy.

There are some preliminary options that higher education management teams looking to turn around an institution should consider.

First, make an honest assessment of the financial position of the institution now and what it looks like over the next five years. It is important to challenge whether the assumptions made are optimistic and run scenarios to consider the financial impact if key variables change, such as student numbers.

There must then be real engagement between management and academic staff to recognise that these challenges are real and will require everyone to pull together to address problems.

With that cooperation, leadership teams can develop a contingency plan to work out what can be done to reduce costs, potentially closing courses, while still attracting new students.

This is an extension of business-as-usual management, but with the filters of a greater time imperative and the need to be clear on where the line is drawn regarding loss-making and profit-generating activities.

Finally, institutions must develop clear internal and external communications plans. It is critical to ensure that staff, students, unions and policymakers understand the direction and, more importantly, the reasons certain decisions are being taken.

Just as important is communicating when the objective is likely to be delivered and when the proposed austerity period will come to an end. 

By being upfront and honest, management can remove uncertainty and promote engagement.

If the improvements can’t be delivered internally through the proposed turnaround, then as soon as this becomes apparent, management may need to consider alternative strategies, such as mergers with other sector providers, to maintain provision within regional boundaries.

Higher education institutions are facing a challenging period, but there are ways to navigate it without adversely impacting the quality of teaching or the overall student experience. By acting promptly and decisively, many universities currently facing headwinds can have a sustainable financial future.

Andrew Burn is a restructuring partner at KPMG.