It is becoming increasingly harder for Australian universities to achieve financial stability and manage risks given sustained market uncertainty and rising cost-base.
The funding needs of Australian universities are growing due to ever-increasing cost-bases, the need to invest to remain competitive and manage the long term impact of the COVID-19 pandemic. While cost-out activities dominated the headlines over the last two turbulent years, 2022 has seen renewed focus on the revenue side of the ledger. Given the expected decrease in international student fees – the major revenue source used to-date to manage the variability in government funding – points to the need to continue to diversify revenues and grow funding sources as a means to hedge risks.
Gaining more control of university finances in uncertain times
Australian universities have seen success by diversifying their revenues over decades and it had contributed to COVID-19 recovery. However, diversification has not been easy or quick to achieve or manage, or spread evenly across the sector. Furthermore, as commercial or other revenues currently represent only ~13% of revenues for a typical Australian university, there remain significant and relatively untapped opportunity for universities to proactively continue to diversify their funding and create revenues from new or non-traditional sources.
We believe there are opportunities to maximise the value of a university's existing assets – physical or other – that are within their control to generate revenue to support excellence and student experience. These include for example:
- Research & teaching capabilities and talent
- Infrastructure/ real-estate
- Brand & reputation
- Admin/ campus operations
Using existing assets will be easier and faster to execute vs taking on new business lines that have little or no relationship to a university core business.
Done right, revenue diversification initiatives can establish greater flexibility and control of financials, with profits to be re-invested in research and education outcomes. By focusing on new and improved product and service provision, a university can also enhance the value and experience for students, staff and the community.
Holistic portfolio for financial sustainability
Multiple initiatives are required to diversify revenues. In consultation with university leaders, we have outlined a methodical approach using scenario planning to assess and prioritise the optimal mix of revenue-diversification initiatives - likely with various levels of risk and return over changing time horizons. This portfolio approach amortises risk, and it can be tailored to institutional unique objectives, risk/investment appetite, asset mix and academic heartland. As such, it is equally useful for large institutions with significant staff in enterprise functions through to small institutions that wish to move to their next stage of maturity. The approach is underpinned by guiding principles that ensure a university remains purpose – and not profit – driven.
1. Define strategic rationale and selection criteria using scenario planning
- University strategy
- Risk/investment appetite
- Financial ambition and diversification targets using scenario planning
- Baseline current assets/ capabilities
2. Probe opportunities
- Identify potential market demand
- Qualify value and competitive dynamics for each opportunity
- Develop initial set of initiatives/programs
3. Assess and prioritise
- Test initial set of initiatives/programs
- Apply screening criteria to arrive a balanced shortlist including assessing synergy value
4. Align on strategy and implementation
- Consider the ability to win; assess risks
- Define execution requirements
- Identify business/op model changes
- Develop roadmap including quick wins
5. Prepare for execution
- Develop business cases
- Mobilise for next stage
Continued focus on systemic revenue diversification is important and will require sufficient investment and capability building as well as partnerships or platforms to deliver optimum returns in the short-to-medium term.
In order to identify a revenue diversification strategy that is appropriate for each institution, KPMG Strategy and Education specialists have developed a phased approach. Phase 1 involves the mapping of:
- Financial performance
- Drivers of performance
- Past and on-going revenue diversification initiatives
- Existing partnerships that might be capitalised on, or even expanded, in the identification and execution processes of revenue diversification.
Revenue diversification represents a significant yet unexploited opportunity for Australian universities, not only in achieving financial sustainability, but also in generating value and enhancing the experience of students, staff, the community and society.