UK HE Sector – observations from our insights and research

The UK is a global leader in higher education, with six of the world’s top 25 universities in a sector that generates more than £30 billion of revenue for the UK economy. However, with declining access to funding and increasing costs, universities face some challenging times ahead.


Recent years and austerity measures have seen higher education finance directors increase their focus on cost reduction. Their institutions have been reducing the cost of administrative activities to invest more in the front line and enhancing the student experience.

Between 2013 and 2014, we saw a rise in the proportion of the sector’s finance directors seeing cost reduction as ‘somewhat a priority’ from 56 per cent to 79 per cent. This year the focus has intensified, with those seeing it as a ‘strong priority’ increasing from 17 per cent to 56 per cent – the largest relative rise across all priority areas.

Overall, cost reduction is joint second in the list of strong priorities for our finance directors and follows the overwhelming sentiment that operating costs are set to rise over the next 12 months. With rising student expectations and intense competition, institutions need to invest in infrastructure, teaching and career support to attract students all of which impact on delivery costs.

Rising staff and pension costs also continue to loom large for the sector.

University finance directors clearly indicate there is still some way to go in reducing costs across the sector. This is not to say the sector hasn’t already made strides in the area of efficiency – savings are running at twice the level they were in 2008, and actual efficiencies have exceeded targets since 2007.

One of the areas identified for cost reduction was in back office cost sharing amongst higher education institutions, where 72 per cent of respondents indicated there were savings to be made, up from 62 per cent in 2014. The attitude towards back office cost sharing is consistent across the research and teaching-focused institutions surveyed, but there is some disparity when comparing responses regionally with 78 per cent of those surveyed from England (excl. London) stating there are cost savings to be made, compared with 63 per cent in London.

Where cost sharing may work for universities is where the institutions share a geographic location or are not in direct competition with each other. Looking forwards, developments in technology make the gains from back office cost sharing more attractive and less constrained by geographic factors.

Overall, the sector must build on its success and transform further in order to fully offset the risk of financial failure. Each institution has its own mix of subjects, their own unique cost structure, and each will need to reshape its operating model in order to best direct spending, attract revenue, and reduce costs.

International recruitment

International growth is an attractive option to increase the revenue needed to offset rising costs and falling funding. However there are concerns over government visa policy.

The latest data illustrates an increasing reliance on international tuition fee income. The income generated through tuition fees from international (non-EU) students increased by 10 per cent (£295 million) between 2012-13 and 2013-14 at English higher education institutions. Much of this can be explained by an increase in fees rather than a growth in the overseas student population, which only rose by 1.7per cent (HEFCE, Higher Education in England: Key Facts, July 2015).

Given the potential for higher fee levels from these students, 44 per cent of survey respondents view growing international numbers as a ‘strong priority’ and 50 per cent ‘somewhat of a priority’. This reflects the increasingly competitive mood amongst a number of institutions in the undergraduate student market.

However, our research has found that the sector’s finance leaders have an overwhelmingly negative view on the subject of government policy and its impact on international recruitment. Some 56 per cent believe it has a significant negative impact, up from 33 per cent last year.

The growth is likely to be on domestic campuses. International expansion, for example through overseas campuses, appears to be far less of a priority for those surveyed this year – down from 78 per cent in 2014 to 39 per cent now.

Diversifying sources of income

Further diversification of income is needed across the sector to respond to funding challenges. As a proportion of the total income from alternative sources remains static at 20 per cent, universities need to look to earn their revenue in new ways rather than rely on government funding. Ways to do this include:

Collaboration with private companies and providers can reduce costs and improve efficiency. Coventry University has partnered with Unipart manufacturing to deliver a state of the art manufacturing and engineering department, and Royal Holloway has transformed part of its teaching costs by teaming up with Pearson. Nonetheless, barriers to entry, including a lack of strategic alignment, can present challenges.

Alumni funding is one avenue which the sector has explored successfully in recent years, although at levels still modest compared to the USA, and with significant variation across the sector. Funds raised from donors in the five years to 2012 were seen to have increased from £513m to £693. Though alumni funding may be more natural territory for Russell Group universities, with more affluent student demographics and entrenched outreach infrastructure, more can be done elsewhere. With universities increasingly moving towards American-style ‘telethon’ campaigns and active engagement of critical relationships, it is important to understand the motivations and approach that will attract this kind of support.

Bond issuance is a viable option to raise funds, though remains difficult for lower-tier institutions to access. This has become particularly difficult with the increasingly standard use of pre-lending reviews.

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