Navigating the path to financial stability in higher education

This is a challenging time for higher education providers as a number of factors combine to put financial sustainability firmly on the boardroom agenda. In this post, we take a look at how higher education institutions can navigate their cost pressures based on where they are in their finance journey.

Universities undergoing a financial examination

Universities are presented with an array of familiar, but increasingly urgent, financial questions. The regulated fee cap on domestic students is squeezing income in real terms at the same time as competition for international students is intensifying. Inflation is exacerbating the pressure on cost bases and restricting the ability to make critically needed investments in infrastructure and growth initiatives following a Covid-driven period of cash conservation.

Institutions are used to dealing with financial pressure. But arguably too many have carried on with a business as usual approach instead of asking hard questions about their strategy and business model.

A journey with multiple starting points.

The time has come for institutions to rigorously appraise their position and find a credible path to financial sustainability.

That journey can start in various places – we commonly see three states that most institutions fall into, each with different pressures (and opportunities): Stabilise, Realign and Grow.

Those in the Stabilise category face the most immediate and pressing issues. An institution that needs to stabilise could be at risk of a major financial event in the near-term such as a breach of its banking/debt covenants. Its ability to meet basic financial obligations could be in doubt. The situation is likely to be worsening, adding more urgency to the problem. The priority here is to establish a full picture of the current position in order that the appropriate financing options can be considered. Is there a need for immediate funding or is there still headroom for the time being? Are there any quick wins that will deliver savings or income boosts? How can the position be stabilised in order to gain more time and create a platform for growth?

Institutions in the Realign grouping are more stable from a short-term perspective but are in danger of plateauing and therefore seeing financial performance and sustainability eroding over time. They need to look across the key elements of their model – strategy and vision, operating and business models, academic portfolio, the student value proposition – to build the evidence base of where they are and build a strategy to reset and refresh with a clear, coherent and joined-up roadmap for the future.

Those who are in the Grow category are in a stronger position – but they still need a clear strategy if they are to maintain this and capitalise on it for the future. This means assessing mechanisms to stimulate core growth – new markets to target, new products and propositions to launch, the possibility of acquisitions to expand into adjacent areas or create a university group – as well as exploring ways to increase their ability to deliver their own independent solutions in order to manage change and thrive.

The way ahead

Whatever phase your institution is in, there is a way ‘up and out’ to create a sustainable future. Here are three key points that apply whichever stage your institution is at:

Strategic clarity is essential. Define who and what you want to be as an institution, set your goals accordingly and be ruthless about pursuing that vision. Be prepared to think differently here, taking account of the factors that make your institution what it is. A good question to start with is: Why do students choose to come to you? Then: What can you do to maintain and, where possible, maximise and increase those qualities and attributes?

Beware of the ‘growth trap’. Growth often becomes the de facto ambition – but what if quantity comes at the expense of quality? Staying the same size or even reducing in certain areas can be equally valid strategic principles. Remember also that if you grow in an area that is loss-making, growth will make your financial position weaker rather than stronger.

Rigorously challenge internally what’s achievable and ensure that plans are granular, realistic and fully costed. Make sure there is proper alignment within the institution so that different departments are pulling in the same direction and working towards mutually supporting goals.

The current climate in fact creates an opportunity to reset and think holistically about your institutional strategy, purpose and operating model. For those with the cultural will and desire to do things differently, great strides can be made to become more financially and operationally sustainable.

At KPMG, our extensive experience of working with higher education providers means we truly know and understand the sector. We have worked with over 160 institutions in the past year alone. Our multi-disciplinary professionals can advise and support on all aspects of debt financing strategy including lender engagement, as well as key areas such as revenue diversification and growth,  digital and data strategy, operating model, employee value proposition, workforce planning and skills building.

We stand ready to support, challenge and advise you all the way as you shape up to this sternest of university examinations.