When, on November 29th 1990, the then Australian Treasurer Paul Keating faced a financial crisis that would severely damage major sections of the Australian economy he said “[t]his was the recession we had to have”. Later, when queried about the statement, Keating responded “he [would] take the blame for it so long as he also gets the credit for the subsequent flowering of the Australian economy where real incomes for middle Australia have grown more than for those in most of our trading partners.”
This story reveals the dual sides of a crisis. For many people, especially those in the media, crises are all about doom and gloom. But for visionaries and risk takers crises represent opportunities for real meaningful change. Not change that is forced upon decision takers but change that is realized by decision makers.
In the higher-education sector nearly all commentators and university administrators are shouting that the COVID-19 crisis represents a major threat to the system. There will be catastrophic shortfalls in university revenue which will lead to massive job cuts and sever disruptions to student learning and research. These effects will undoubtedly occur. And given the massive public debt that governments have been forced to accumulate to counter COVID-19, there is little hope that government purse strings will be loosened to help the sector recover.
So like it or not, universities are in for some major renovations. The big question is whether their senior managers and governance committees will be up to the task?
For us the COVID-19 pandemic represents an opportunity to undo many of the strategic mistakes universities and policy makers have made in the past. For example, most public universities look more like bloated conglomerates than focused intellectual capital and information dissemination institutions that can help the economy and society navigate the future. The typical university needs as many administrative staff as academic staff to deliver an ever-greater array of courses and social programs let alone satisfy government demands for greater and greater alignment to politically motivated compliance structures. The costs to run a typical university are massive.
COVID-19 Turns Strain into Trauma
Many commentators have noted that the higher education sector has been under stress for some time. For countries such as China, where the sector had been under-developed and under-funded, the stress is mostly related to increasing investment, finding the critical human capital, and ensuring that the investment goes into material outputs rather than bureaucratic or political empire building. For other countries the pressures relate to demands for greater efficiencies, concerns over value for money (both education and research), the production of job-ready graduates, access to educational opportunities, and pressures of a declining demographic of the university-aged population relative to the number of institutions operating.
For the most part university management has addressed these pressures by raising revenues through student acquisition, geographic and programmatic expansion, squeezing efficiencies out of the teaching function via casualization and increasing student/staff ratios, raising debt in the bond markets, and where possible increasing fundraising. Most of these piecemeal efforts can be implemented in the short to medium term. In the case of cost control, we have seen the increasing casualization of academic staff and the reduction of academic support that is not related directly to the generation of revenue. These revenue-raising and cost-control responses have not come without some adverse side effects such as the lowering of student entry and exit standards. Hence, the strategic model used by nearly all universities to deal with the environmental pressures they have been facing has been expedient, short-term, and based on marginal, incremental adjustments. However, over time, these short-term fixes have exacerbated long-term problems.
COVID-19 has put the spotlight on the expansion of student numbers as the principal way to cover the increasing costs of running a university. Some of this has been related to bringing in more local students via new programmatic offerings, but the vast majority of the expansion of revenues is related to the explosion in foreign students. While this is seen most readily in the case of Australia and the UK, foreign student enrolments have expanded globally, particularly where English is used in teaching.
For many institutions foreign students are no longer marginal to their operations but core to their survival. The growth of these students occurred gradually to help universities counterbalance what they argued was deficient government funding. In some ways foreign student revenues became the ‘crack cocaine’ of academia. What was a short term fix became a long term addiction serviced a global market of agents who act as ‘dealers’. When the supply was disrupted by COVID-19 addicted universities realized they had a problem. In the case of the University of New South Wales this was a nearly $600M budgetary deficit.
What is clear now is that the strategies developed by most universities to deal with the environmental pressures they have been facing has been expedient, short-term, and based on marginal, incremental adjustments. Over time these short-term fixes have exacerbated some long-term structural problems.
Robbing Peter to Pay Paul
A key aspect of the overseas student revenue model is the cross-subsidization game played within universities. The vast majority of foreign students come to the university to study business. This is great for universities as business studies are relatively cheap to teach and the student expansion can be accommodated by teaching staff who know little about the academic aspect of management and business studies. What this has led to is the industrialization of the business schools in many countries and their expansion onto foreign shores with branch campuses which in most cases involve business related studies.
Cross subsidization shows up in two ways. One is pure cashflow. As the Chartered Association of Business Schools has shown, the average business school in the UK pays its university approximately 38% of its revenues in central administration taxes, with 11% of institutions paying more than 60% of revenues. This works best for the university when it is done at scale. Hence, you find that business schools tend to be exceeding large and can service as much as 40% of the entire university student population in some cases. This ultimately has limits which are often discovered only when they have been passed as the University of Newcastle discovered in 2018/2019.
The second form of cross-subsidization is labour subsidization. Universities often ask business schools to do joint degrees with schools with weaker demand so as to avoid the harsh reality of closing financially precarious non-business programmes. Invariably, these programmes end up with lower entry standards. For example, a common conversation at an open day is a parent or student pointing out that they are ‘just’ under the cut-off for studying a business subject but wonder if they could still get in. The usual administrative response is to say, “No. But if you are willing to consider studying […], there is a joint programme that you can get into and you can then also get a business degree”.
The Dead-Weight Cost of Too Much Administration
A crucial characteristic of most Australian universities is that they are over administered. Many vice chancellors lament the amount of red tape that winds its way through their institution. Many are also trying to reduce this burden. However, there is a long way to go. And as noted by Max Weber, bureaucracy can, at some point, perpetuate itself not for any purpose other than to continue to survive in a “polar night of icy darkness”.
Many commentators in the THE and elsewhere have bemoaned the decline of faculty governance and control and the rise of the administrative machine. We need not go into all of the details of why this has happened but there are profound implications to this administrative weight. The first is that few administrative functions generate revenue or save cost. Hence, each such action has costs that the academic staff who generate revenue have to cover by teaching more students, generating more grant income, or generating more philanthropic or corporate support. As most administration is a short-term fixed cost any downturn of revenues makes this pressure worse.
The second issue is that a large number of administrative functions do not have a direct line of sight to the main revenue sources of the university, nor do they align with the institution’s primary strategic priorities. Hence, academic staff find themselves increasingly engaged in activity that does not make them a better teacher, does not make them a better scholar, does not make them more likely to obtain external funding, nor does it enhance their reputation as intellectuals or scientists. Few, if any of the administrative activities academic staff deal with enhance the student experience and some can be detrimental as bureaucracy stifles creativity and innovation in teaching and learning. Many administrative activities are aimed at compliance, government regulations or oversight, an administrator’s interpretation of what is ‘best practice’, the increasing number of accreditations that exist in higher education, or mitigation of some internal operational risk – although interestingly none of these risks seem to have included the lockdown from a pandemic.
When the Luck Runs Out
To date many universities around the world have been lucky with their financial management. But that luck has run out. And because COVID-19 has caused governments to massively increase their deficits there will be no government bailout to cover all the current losses. Poor strategic thinking got the universities into their current situation so some significant rethinking is required to get them out of this mess.
No doubt the strategy of choice will be to muddle through. Those in positions of leadership today are well placed to proceed in this direction, as it is the muddling through of past decision making that has created the financial dependencies that are putting so many institutions at risk. But this path misses the opportunity for more emboldened and enlightened individuals to rethink and refocus the next generation of universities. Notwithstanding this opportunity don’t expect council members and senior managers to voluntarily vacate their positions for a new group of strategic thinkers. Expect them to violate a fundament rule of business, namely, that the best people to get you out of a mess are not the same people who got you into the mess.
Hence, the ultimate question is whether institutions will look on current crisis as a ‘threat’ or an ‘opportunity’. For us, it represents a once-in-a-generation opportunity for the truly disruptive and entrepreneurial leaders to stand out. But this will require a level of change at the university level – e.g., potential breakups and mergers of universities, creation of specialist universities versus the current conglomerate university and closures of faculties – that few will want to take on until it is mostly too late. It requires a sea change in what are considered to the ‘job requirements’ for university leadership across the board (from VCs through to Deans). It will require policy makers to step back from their natural desire to control universities by stealth – via various frameworks and data reporting demands – while failing to adequately support the sector by kicking the bulk of the financial burden to others and being complicit in the ballooning of the administrative burden that dominates a university sector fixated on compliance. It will require the business community as a collective to step up to the plate with more than lip-service and invest more fully in the sector – perhaps through an education surcharge onto VAT/GST – if they want to keep the benefits of the human and intellectual capital flowing. And finally, it will require society to recognize that you ultimately get what someone pays for – be that someone taxpayers, students and their parents, businesses or the overseas students.
NOTE: A variant of this post is published by Times Higher Education and available here.
Timothy M Devinney is Chair and Professor of International Business at the Alliance Manchester Business School, University of Manchester. Grahame R Dowling is Professor Emeritus at the University of New South Wales. Their latest book, The Strategies of Australia’s Universities: Revise & Resubmit, will be forthcoming in June 2020 from Palgrave MacMillan.
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