Is this the crisis higher education needs to have?

On 29 November 1990, the then Australian treasurer (and future prime minister) Paul Keating, facing a financial crisis that would severely damage major sections of the Australian economy, said: “This was the recession we had to have.” Later, when asked about the statement in an interview, Keating reportedly responded that he would take the blame for it as long as he also got the credit for the subsequent flowering of the Australian economy, and the attendant income growth for average Australians.

This story reveals the dual sides of a crisis. For many people, especially those in the media, crises are all about gloom and doom. But, for visionaries and risk takers, they represent opportunities for real, meaningful change. Not change that is forced upon decision takers but change that is realised 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 severe disruptions to 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 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.

Although most of our research has been on Australia and the UK, we believe that its lessons apply right across the leading English-speaking countries and beyond. For us, the Covid-19 pandemic represents an opportunity to undo many of the strategic mistakes universities and policymakers 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 as academic staff to deliver an ever-greater array of courses and social programmes, let alone satisfy government demands for closer and closer alignment to politically motivated compliance structures. The costs of running a typical university are massive.

Many commentators have noted that higher education has been under stress for some time. For countries such as China, where the sector had been underdeveloped and underfunded, the stress is mostly related to increasing investment, finding the critical human capital and ensuring that the investment goes into solid outputs rather than bureaucratic or political empire building. For other countries, the pressures come from demands for greater efficiencies and concerns over value for money (in both education and research), as well as anxiety about the production of job-ready graduates, widening access to educational opportunities and the pressures of a declining university-age population relative to the number of institutions.

For the most part, university management has addressed these pressures by raising revenues through expanding and diversifying recruitment; geographic and programmatic expansion; squeezing efficiencies out of the teaching function (via casualisation and increasing student-to-staff ratios); raising debt in the bond markets; and, where possible, 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 reduction of academic support that is not related directly to the generation of revenue. Yet these revenue-raising and cost-control responses have not come without adverse side-effects, such as the lowering of student entry and exit standards.

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 involved bringing in more local students through new courses, but the vast majority of the expansion of revenues comes from an explosion in numbers of 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 in their numbers 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 has become a long-term addiction, serviced by a global market of agents who act as “dealers”.

When the supply was disrupted by Covid-19, addicted universities realised they had a problem. In the case of the University of New South Wales, this was a nearly $600 million budgetary deficit, which has led the university to look at staff pay cuts and other measures.

What is clear now is that the strategies developed by most universities to deal with the environmental pressures they have been facing were expedient, short term and based on marginal, incremental adjustments. Over time, these short-term fixes have exacerbated long-term structural problems.

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A key aspect of the overseas student revenue model is cross-subsidisation. The vast majority of foreign students come to universities to study business (for example, in the UK one in every seven students enrolled is in a business subject). We have seen the industrialisation of business schools in many countries and their expansion on to foreign shores through branch campuses, with a massive expansion in the total number of such schools over time (estimated at more than 16,000 in 2017).

This is great for universities since business studies is relatively cheap to teach and, as data from the Association to Advance Collegiate Schools of Business show, less than 50 per cent of academics teaching in business meet the criteria of a “scholarly academic”. This means that there is greater flexibility about who is qualified to teach at a business school that can still meet accreditation standards.

Cross-subsidisation shows up in two ways. One is pure cash flow. As the Chartered Association of Business Schools has shown, the average UK business school passes on to its university about 38 per cent of its revenues for central administration, while 11 per cent of institutions pay more than 60 per cent. This works best for the university when it is done at scale, serving to generate not millions of dollars in free cash flow but tens or hundreds of millions. Hence, you find that business schools tend to be exceedingly large and can service as much as 40 per cent of the entire student population of the university in some cases. This ultimately has limits that are often discovered only after they have been passed, as when a decline in the intake of Chinese students at its Sydney campus led to severe financial problems at the University of Newcastle in Australia in 2018-19, and when scandals erupted about the extensive use of essay mills by foreign students.     

The second form of cross-subsidisation is labour subsidisation. Universities often ask business schools to do joint degrees with schools that have weaker demand to avoid 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 student (or parent) 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: “No, but if you are willing to consider studying X, there is a joint programme that you can get into, which will also give you a business degree.”

This cash cow facilitates one of the crucial characteristics of most universities in Australia (and many other countries): that they are over-administered. Many vice-chancellors lament the amount of red tape that winds through their institution, and many are trying to reduce the burden. However, there is a long way to go. As noted by Max Weber, bureaucracy can perpetuate itself for no other purpose than to continue to survive in a “polar night of icy darkness”.

Many commentators in Times Higher Education and elsewhere have bemoaned the decline of faculty governance and control in the face of the rise of the administrative machine. We need not go into all of the details of why this has happened, but this administrative weight has profound implications. One derives from the fact that few administrative functions generate revenue or save cost; rather, everything they do has costs that academic staff have to cover by teaching more students or generating more grant income, philanthropic or corporate support. As most administrative costs are fixed, at least in the short term, any downturn in 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. Hence, academic staff find themselves increasingly engaged in activities that do not make them better teachers or scholars, do not make them more likely to obtain external funding and do not enhance their reputation as intellectuals or scientists. Few, if any, of the administrative activities academic staff have to take on enhance the student experience and some can be detrimental, since bureaucracy stifles creativity and innovation in teaching and learning.

Many administrative activities are aimed at compliance with various agencies, including governments, funders and accrediting agencies. They are also driven by administrative interpretations of “best practice” and the desire to mitigate some operational risk – although, interestingly, none of these risk assessments seem to have included lockdown from a pandemic.

Most of today’s universities are built on what Richard Rumelt of the University of California, Los Angeles calls “bad strategy”: a strategy that “accommodate[s] a multitude of conflicting demands and interests”. It is this piecemeal approach that has created the financial dependencies that are putting so many institutions at risk. 

To date, many universities around the world have been lucky in their financial management. The boom in foreign students came knocking at a time when governments were cutting back on funding – as did the cheap borrowing made possible by liquidity and low interest rates. But that luck has run out. Poor strategic thinking got universities into this mess, so some significant rethinking is required to get them out.

No doubt the strategy of choice will be to muddle through. That is what the vast majority of university structures are adapted to do, after all. Don’t expect council members and senior managers to voluntarily vacate their positions for a new group of strategic thinkers to work towards what Rumelt calls “good strategy” by “focusing energy and resources on one, or a very few, pivotal objectives whose accomplishment will lead to a cascade of favorable outcomes”. Expect them, instead, to violate a fundamental rule of business: that the best people to get you out of a mess are not the people who got you into it in the first place.

Yet, for us, the present crisis represents a once-in-a-generation opportunity for the truly disruptive and entrepreneurial leaders to stand out. Turning the crisis into an opportunity will require a degree of change at the institutional level – breakups, mergers and closures of faculties – that few will want to embark on until it is too late. And it will require a sea change in what are considered the “job requirements” for university leadership (from vice-chancellors through to deans). In particular, they need to put more emphasis on entrepreneurial risk-taking, rather than simply being a safe pair of hands, and to be willing to hire true scholars who can lead by example instead of career administrators who left behind their true academic calling to pursue a path of managerialism.

It will also require external actors to mend their ways. It will require policymakers to step back from their natural desire to control universities by stealth while shifting the bulk of the financial burden on to others, fuelling the ballooning of the administrative burden that dominates a university sector fixated on compliance. It will also require the business community to step up to the plate with more than lip-service if executives want to keep the benefits of universities’ human and intellectual capital flowing.

Ultimately, it will require societies to recognise that, in higher education as in everything else, you get what someone pays for – whether that be taxpayers, local students and their parents, overseas students or businesses.

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 of marketing at the University of New South Wales. Their latest book, The Strategies of Australia’s Universities: Revise & Resubmit, will be published in June.