Are the shutters coming down on UK higher education?

One sultry afternoon in June 2002, I discovered something strange. Leeds had the biggest indoor market in the UK, with more than 500 units. Owning one guaranteed prosperity. As one trader had previously told me: “Stalls are like gold dust. You can’t get one for love nor money.” But here was something unprecedented. Mandy’s Gifts stood shuttered, deserted following a visit from the bailiffs.

Reading about Heriot-Watt University’s financial troubles last month reminded me of Mandy’s Gifts. Potentially, these are local difficulties: “something and nothing” as they say in Yorkshire. But the Edinburgh institution’s management might not be wrong in suggesting that other universities could soon find themselves similarly embarrassed.

In his excellent 2014 book, Seeing What Others Don’t: The Remarkable Ways We Gain Insights, the psychologist Gary Klein explains why tiny discordant developments easily dismissed as inconsequential can be early predictors of impending trouble. Mandy’s Gifts fitted that bill because as soon as one stall stood empty, they were no longer gold dust. Why pay £80,000 to £100,000 (at 2002 prices) to buy one from another trader when you could take a vacant one for nothing from the council?

Admittedly, Mandy’s Gifts was a tiny unit located in an obscure corner of the market. Even so, over the next 10 years, more and more shutters came down, leaving a once-bustling market hall resembling a ghost town. And many traders who had planned to sell up and retire discovered, late in life, that their businesses were virtually worthless.

Among the first to flounder were those who had borrowed heavily to buy their prized stall. At the time, the risk had seemed minuscule. Living costs were reasonable, and local employment levels were high. Supermarkets, cheap clothing chains, out-of-town shopping malls and the demise of heavy industry lay largely in the future. There was every reason to expect that the good times would continue to roll.

Over the years, most universities have been run “steady as she goes”, eschewing risk. Compulsory redundancies and deep cuts have been rare compared with some other industries. More recently, however, many have abandoned customary caution, borrowing heavily to fund rapid expansion and improved facilities. The strategy makes sense. Universities need to continue attracting students in a more competitive environment, and no one expects the decades-long expansion of higher education to suddenly go into reverse.

But expectation, however reasonable, is not certainty. Heriot-Watt is potentially a harbinger because it shows how exposed universities have become. Clearly, running a higher education institution is much more complex than running a market stall – but that is precisely the problem. Although all business comes down to “cash in” versus “cash out”, those dimensions of complexity provide space for problems to hide and quietly multiply.

Heriot-Watt says that it needs to save the equivalent of 6 per cent of its income over the next two years, requiring it to shed about 100 jobs. The causes that it cites include local issues, but also “UK-wide” ones, such as “the ‘Brexit-effect’ creating uncertainty affecting postgraduate uptake”; “the UK government’s immigration policies and messaging” and “a shortfall in overseas fee-paying students due to a world-wide economic downturn”.

This goes to show how vulnerable modern UK universities are to recruitment shortfalls. It also exposes the uncertainty that may lie behind neat income forecasts and apparently achievable recruitment targets. Projections can be hypnotic. They become a mask of authority that discourages questioning.

Yet there is plenty to question: not least, the swathes of planned or partially completed student accommodation blocks proliferating in many UK cities in expectation of ever-growing student numbers. What, for instance, might be the implications of the government’s mooted two-year degrees on students’ accommodation needs? What about distance learning? Some of those new blocks of flats may be private-sector developments, but they will still reflect very badly on their neighbouring universities if they become derelict. And who would have thought that reputable law schools in the US would struggle to recruit? The advent of apprenticeships means that the same could happen in the UK.

Another worry is the international market. Amid rapidly declining enrolments from India, UK universities have become very reliant on Chinese students. But the Chinese economy is faltering and US president Donald Trump seems set on inciting a trade war that, by suppressing growth and ramping up hostilities, could make Chinese students both less financially able and less psychologically inclined to head to the West.

In Leeds, the real winners were the traders who sold their stalls just before the downturn. Were their decisions to cash in at that moment merely coincidental, or had they picked up even earlier signals than the failure of Mandy’s Gifts? Heriot-Watt is not the only weak signal of possible trouble to come in the higher education market. Articles have appeared in the quality business press pondering what the government would do should a university go bankrupt. Indeed, it is not impossible that the whole sector could falter. That might seem unthinkable, but so was the financial crisis of 2008 – until it happened.

At the very least, Heriot-Watt signals that we are going to have to learn to live with a lot more turbulence, as universities scramble to re-engineer business models and lay off staff (not all voluntarily) in light of constantly changing circumstance. In short, universities will be welcomed into the real world.

“Fools learn from their mistakes,” said Bismarck. “Wise men learn from other people’s.” Weak signals are weak only because we treat them as such. Heriot-Watt’s miscalculations should prompt universities across the UK to revisit their levels of exposure and to review their future projections. They must ask themselves two critical questions. What needs to happen to keep us on an even keel? And what will happen if we fail?

Helga Drummond is professor of decision sciences at the University of Liverpool Management School. “Mandy’s Gifts” is a pseudonym.