Creating more space in your budget for investment in the academic mission – is growth the answer?

Tall woodland treesThe universities in the four countries (UK, Canada, Australia and New Zealand) where the UniForum program currently operates, cover a very broad range of scales, with the largest often being a lot more than 10x bigger than the smallest. This diversity provides students with a wide range to choose from in terms of campus experience, approaches to learning and teaching, research focus and development support. In a regulated fee regime, such as found in these four countries, where total funding per student place may not vary between institutions, a key question for the university leadership is how scale impacts their institution’s capacity to invest in its academic mission. Our research shows there are indeed effects driven by the scale of a university, and that the size range in the UK and Canada means universities in these countries are going to be more susceptible to scale impact than in Australia and New Zealand, perhaps requiring consideration of some different choices.

Does scale matter in university administration?

Figure 1 compares the distribution of annual teaching and research income (our key measure of scale) for the 39 Universities in Australia and New Zealand against the 162 UK Universities and against the 89 Universities in Canada.

Figure 1: Comparison of university annual income (“scale”) by region

Figure 1 Comparison of university annual income (scale) by region

The median annual teaching and research income of the Australian and New Zealand universities falls at £340m (US$450m) with an upper quartile above £520m (US$690m). The median in the UK is significantly smaller with half of the UK’s 162 universities having income of £150m (US$200m) and in Canada this falls further to less than £80m (US$100m).

Our research involving 47 universities in the UniForum program shows that two key factors account for a very high proportion of the variance in the daily administration and support operations spend on resourcing across all universities: first, a university’s scale; and second, the teaching and research mix. University scales in this group range from £80m (US$100m) to £1.5bn (US$2bn) with teaching and research mix ranging from 90% to 25% teaching.

Scale effects are more significant in some markets than others

The results suggest the effects of scale and teaching and research mix on administration spend in all three regions are very similar, despite significant differences in regulation and funding. Further research shows that at the overall administration spend level, the overall resourcing model choices, processes, and technologies used are highly comparable across all four countries as are the factors that dictate spend levels. 

Figure 2 shows the results of research into what an average university spends of its teaching and research income on daily operations as a function of that income.

Figure 2: Effect of university scale on administration and support services spend

 

The striking finding is that the median scale university with a teaching:research mix of 90:10 in the Australian & New Zealand group, spends 22% of its teaching and research income on resourcing its day-to-day administration and support service operations. Due to their smaller scale, the median UK university with the same teaching and research mix spends 27% of its income on the same services, 23% more than the median of the Australian and New Zealand university group. That means the median UK university has 5% less income to invest in its academic mission compared to the median Australian and New Zealand university.  In Canada, a median scale university will spend 33% of its income on its daily operations, meaning it has 11% less of its income to invest in the academic mission compared to the median from the Australian and New Zealand group.

These differences are not due to differences in administration efficiency but simply the effect of amortising the fixed resourcing costs that must be incurred by a university to open its doors over different scales. Changing the relative mix of services and spend on each or changing the way in which daily operations are delivered will move the university up or down relative to the average spend line. These two effects will have different relative importance depending on the scale of the institution.

Efficiency and scale effect for smaller universities

Smaller universities that are highly sensitive to scale have some challenging choices if they wish to reduce how much of their income is spent on administration. Options to gain scale and the benefits described above, through organic growth, through mergers, or through sharing back-office operations with other institutions should all be considered but are certainly not easy.

The other option is to understand how efficient their administration and support service delivery is relative to the scale of university and its teaching and research mix. Our research shows that most universities fall between the +2.5% of income and -2.5% of income curves from the scale curve for their teaching:research mix. Our studies also show that simply having above average spend is not in itself an indication of inefficiency. The university may be consciously choosing to allocate above average spend to some strategic services, such as supporting the student experience. To understand where there are efficiency opportunities requires understanding the service portfolio mix, the spend choices and how well aligned spend is with the strategic direction of the university.

If a median scale university in the UK with income of £150m (US$200m) could identify efficiencies worth 2.5% of income, this frees up revenue for investment at a level enjoyed by an average university with revenue of £250m (US$330m). 

Whilst not easy to achieve, finding efficiency improvement opportunities may be easier and quicker than growing income by the 67% needed to achieve the same benefit purely through increased scale.

Choices for the larger scale universities

For the largest quarter of UK and Canadian Universities, the results presented in Figure 2 have a different message. In this portion of the scale curve, growth delivers very little reduction in the proportion of income spent on administration. The only way for these institutions to free up income for investment in the academic mission is through changing the way in which services and administration is delivered.

Consideration of alternative models?

Whilst seeking opportunities to grow and strengthen the institution is important, if a key need is to free up income for investment, then it is also important to ask what actions could be taken that go well beyond the normal level of effort to realise administration efficiencies.

For the smaller universities an old question worth revisiting is whether the availability of cloud-based ERP systems provides the opportunity to create multi-institution shared services for non-strategic services. A significant blocker in the past has been the use of highly customised finance and HR systems and the lack of uniform processes for the routine activities. Does this change with the adoption of more standardised implementations in the move to a cloud-based ERP? 

Another barrier has been the lack of understanding of what position each participant may be in before consolidation. Our research into ways to measure and track service delivery efficiency and effectiveness shows that this is now readily done, making the business case more robust and transparent for all. Our research also show there are now well-developed methods to track the realisation of benefits and provide highly transparent views of these to all parties. Does this remove the uncertainty that previously undermined interest in investigating this course of action?

Future UniForum Insight articles will share research into the relative effects of growth and cost control on freeing up income at different scales as well as the effect of growth in teaching relative to research on the cost of supporting different functions. Subscribe to UniForum Insights.

 

The UniForum program

This is a collaborative program open to all universities to help inform their efforts to make the most effective use of student fees and research income.

Further information on the UniForum program can be found at UniForum. Past UniForum Insights articles can be found here: UniForum Insights.