Tuesday, 30 November 2010

Raising Tuition Fees is Bad Business

Academia is a business at the end of the day. Its raw material is knowledge and this is transformed into qualifications. It is subject to the laws of supply and demand just as any other business would be and more importantly the laws of income and expenditure.

The big issue with nearly all higher and further education establishments is matching expenditure to the value of the brand. Through years of mismanagement, arrogance and poor business sense, most academic organisations carry legacy overheads of forty percent. In the worst examples I have heard examples over eighty percent.

What does that mean? A degree currently costing £3,000 would have a real value of delivery of £1,800 and the remaining £1,200 going towards overheads. Overheads are what it costs to run the working environment. So all the academic managers and admin (staff), heating & lighting, legal fees, maintenance and any other cost you can think of to run the business.

Sidebar: What is worse is your degree is partially funded by the government. I am not sure on the exact ratio but in 2008 it was 110%. Meaning the “income” for the HE establishment was £6250. Later I will explain how your education is provided at a fraction of this with the rest being squandered by your HE institution on inefficiencies. For now though lets forget the funding and look at what you pay yourself.

What is unusual about that? Well commercial business run much smaller overheads with the average estimated to be around 10%. This keeps prices competitive and process and systems have to be efficient and lean.

Why is this important? A commercial training company delivering accredited degrees with its lean management structure will deliver education value of £2,700 and the overhead just £300. Assuming the degree can be delivered at the same quality as the academic model for the same money then it costs £1,800 to deliver and £900 would be profit.

What is the difference? Well it is about how a commercial company would handle a situation with a forty percent overhead. Good business dictates a rationalisation of the overheads until the value of the brand is not damaged and a sustainable profit can be made. Bad business would be to paper over the cracks, reduce the value of the brand and pass the additional cost of all of the inefficiencies on to the customer.

Why would business rationalise rather than make larger profits ? Market forces will determine how value of the education delivered is compared to price. The market itself operates on supply and demand and it is the market that dictates what customers are prepared to pay. Even where the value of the education delivered is high, too high a price will lose market share.

Why have the government raised the tuition fee cap? Simply, it is a far less complicated and difficult an exercise. Excessive overheads exist throughout government and are cultural as much as anything. Culture change takes time. They have gone someway to addressing the liabilities within the overheads by enforcing change through funding settlements and various changes to pension scheme.

What were they hoping to achieve? Ideally, more value to the tax payer and the beneficiary of the educational experience. Where funding is reduced by twenty percent then the overheads MUST reduce accordingly.

What implications are there with the raised cap? Students are consumers. In free competitive markets they can exercise their buying preference. Those institutions that address their overheads and become competitive and offer value for money will continue to exist, those that don’t will fail.

Will that affect the academic landscape? Yes! Where academic institutions do not meet customers expectations then the private sector educational providers will offer greater value for similar quality and price.

In conclusion the government may or may not have proposed an effective way to tackle the underlying sickness affecting higher education today. Too many me-too products from too many institutions offering little added value not least to UK plc but to career prospects of their graduates. However, it is also possible for institutions to fail and some will to the benefit of the consumer, tax payer and commercial providers.

Is it not about time this ethos should be expanded to every government department. As a one time student I say to my peers “You quiet rightly feel angry, ill treated and aggrieved but focus these frustrations towards the right place – Your Institutions. If any raise fees then it’s a clear sign given the margins involved that they do not value their consumer, YOU!”

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