English universities’ cost cuts must be strategic and transformational

So we now know that the only change in the financing of universities in England – for the moment, at least – will be the small increase in tuition fees announced in the recent budget. And, as the chair of the Office for Students, Sir David Behan, suggested last week, this will not be enough to pull many universities back from the financial cliff edge amid falling student numbers and rising costs.

About 40 per cent of English universities expect to be in financial deficit in 2023-24. Some are already facing severe cash-flow problems, and there is endless speculation that some might go under.

Behan suggests that universities should consider “a transformation of their offer”, as well as greater collaboration and perhaps even mergers. He is quite right to call for radical thinking. Local authorities were in a similarly perilous position around 2017 as austerity bit. And while some have negotiated the problems reasonably adeptly, others have in effect gone bankrupt (and one in four is facing the prospect).

So what are the options? Some universities might attempt to generate more income, but this might prove difficult in the current climate. Others, as Behan suggest, will consider merging with another university – but this is no panacea.

That leaves cost reductions. Traditional approaches include freezes on recruitment and building maintenance, voluntary redundancies and a requirement for all departments to make a standard percentage reduction in their budgets. But there are two problems. Such cuts might not generate the level of savings needed because the low-hanging fruit has already been picked. And they risk imposing higher costs in the longer term.

What is required is sustainable cost reduction, based on a strategic plan that is transformational, rather than just more of the same. This should define which activities the university will undertake, and how, based on realistic (not over-optimistic) scenarios around the economic, policy and student recruitment environment.

In recent decades, many universities have invested heavily in fixed assets, especially buildings. This incurs ongoing running, depreciation and financing costs. But the move away from in-person lectures means that buildings could be substantially underutilised in future. A hard-headed assessment of this could open up the option of selling – or renting out – some buildings.

Another option is to identify the loss-making activities – academic or commercial – that any university in deficit must have. Not all have to be cut, but maintaining an activity implies an acceptance that the (properly quantified) losses will be subsidised by profitable activities. This should be acknowledged and kept to a minimum.

There will be several types of running costs incurred by most departments – such as marketing, premises, energy and small items of equipment – that add up to a lot. Examining specific types on a university-wide basis can identify duplication and highlight where more coordinated procurement might result in substantial overall savings.

There is also a case for universities to agree to reduce marketing spends. Something similar was adopted in the health service some years ago, when it was noted that internal health markets were prompting NHS trusts to divert significant sums from patient care into competitive marketing.

Whatever cost savings might be made elsewhere, the reality is that more than half of university costs are in staffing, so it is inevitable that these must come under review, too. Universities are generally large and complex organisations, whose structures and working methods have evolved over many years and might no longer be strategically appropriate even today, let alone in the years ahead.

How many academic schools/departments are really needed? Is there the potential to delayer their management structures? Are there processes that might be simplified so that – perhaps coupled with investment in technology – they require fewer staff?

In many organisational types, including universities, expenditure on central departmental functions is sometimes excessively large compared with the costs of front-line functions. Moreover, such costs tend to creep up when times are good. An organisational review should consider which of these functions can be described merely as “nice-to-haves” in the current financial climate.

Make no mistake, to be done robustly, a strategic approach to cost reduction will be complex, time-consuming, disruptive and painful. Universities will need to involve stakeholders; gather relevant data; analyse and document processes and structures; ask questions about the value each of those activities actually generates; and benchmark against other universities (and other organisations) before identifying and implementing possible improvements.

Implementation can also be tough. The changes might have major implications for the university, students and employees, so it is important that the process is managed effectively. There needs to be internal transparency about the size of challenge and the wisdom of the response.

Finance needs to be made available to implement any technological solutions and to fund compensation packages. And financial planning and management needs to be enhanced to ensure that the proposed cost savings are sustainable and actually achieved. Quite often, they are not. I have known many organisations (including at least one university) to agree to voluntary redundancies for people later discovered to be fulfilling critical roles, requiring them to be rehired on much higher consultancy rates.

Strategic cost reduction is a challenging agenda for universities, which must be undertaken while ongoing academic activities are being maintained. But it can provide the basis for a successful future.

Malcolm Prowle is professor of performance management at the University of Gloucester. He was previously a senior financial manager in several organisations and a management consultant in the higher education teams of two international consulting firms.