Universities on a financial rollercoaster

Thursday, 14 March 2024

Universities have been on a financial roller coaster since COVID.

It’s just over four years since the first case of Covid arrived in Australia. Since then, universities have been on a financial roller coaster, with many ups and downs and tight corners in international and domestic student recruitment flowing from the Covid pandemic and government policies.

The recently released Accord proposals, even if implemented in full, are unlikely to offer immediate salvation. The question for individual institutions, and those responsible for their leadership and governance, is whether there is any way of insulating their institutions from these rollercoaster effects in the future.

The story of the last four years is well known. First, the closure of borders during the pandemic led to a dramatic drop in international student revenue. This was matched by a resurgence in domestic demand as the effects of lockdowns took hold. Then, as international numbers recovered, domestic demand dropped as year 12 students sought a break from online study, exited school with unscored ATARs, or took advantage of a buoyant labour market.

Overall, the pattern of the last four years has been one of domestic and international enrolments patterns mirroring each other – if one was up, the other was down.

Going into 2024, many universities would have been hoping that light would start to appear at the end of the long tunnel of Covid-related financial problems. Instead, universities face an environment in which – unusually – both domestic and international demand is weak.

Domestic numbers are showing only tepid signs of recovery from the Covid induced decline in demand; and the sudden and unexpected reduction in visa approvals has inflicted Covid-scale losses once again on many institutions.

The light at the end of the tunnel has been snuffed out and for many the rollercoaster ride continues.

Many vice-chancellors and their finance committees may ask: “Can we get off this rollercoaster, and if so, how?”

Some may place faith in the government to come to the rescue with improved funding rates for teaching and research flowing from the Universities Accord. This is unlikely, at least in the short term. The Accord proposals, even if fully funded by government, will take time to implement, and will mostly reduce unfairness to students rather than increase the unit of resource to universities.

So, can universities secure a more certain financial future for themselves, and begin to insulate themselves from the revenue rollercoaster as far as possible?

There are several options.

First, at the level of strategy, universities could consider what opportunities there are for revenue diversification, or for revenue growth. These may lie in improving existing processes to generate more revenue through different industry partnerships and student pathways, a different mix of courses and offerings, or building on unique strengths (measured by discipline, campus location or technological capability).

Over time, the creation of an Australian Tertiary Education Commission (ATEC) will enable individual universities to chart a more differentiated course according to their own circumstances, and to break the straitjacket of the Dawkins era. ATEC, if established, is designed to encourage greater diversity in the system. This will open strategic choices for universities that have hitherto not been available.

The changes to funding models proposed by the Accord, for teaching and research, may require universities to rethink their business models, and will require a good understanding of the revenue implications of different strategic choices. Universities that to date have allowed cross subsidisation of courses will need a much clearer commercial and demand-led understanding of the financial impacts of more differentiated offerings.

Any big strategic moves are likely to require significant investment – they will succeed only if backed by appropriate resources, for example capital investment for differentiated campus or online student experience.

Which brings us to a second set of options, at the level of operations, to increase the efficiency of an organisation or improve the return on assets. Both are likely to be required to generate the cash needed to invest in the big strategic moves and to increase a university’s resilience to the revenue roller coaster. This could include improving staff productivity through technology, extracting richer returns from existing assets especially real estate, or generating bigger returns from existing activities.

Finally, it pays to shockproof a budget model. This means the executive and council knowing in advance what levers can be pulled quickly in the event of a sudden or unexpected revenue shock.

University finance committees around the country who in many cases have anticipated optimistic outlooks for 2024 are more likely to be looking at some worrying numbers this year. This should be the trigger to take a closer look at the way universities run themselves and fund their operations, and at their strategic options in a post-Accord environment. Perhaps universities can finally get off that rollercoaster ride, or at least face its twists and turns with greater confidence.