Many universities across the Anglosphere – Australia, New Zealand, the United Kingdom, Canada – need to re-think their operating parameters as they slide into deficit.
Analysis of universities across these markets quickly reveals many common ingredients. They are characterized by highly educated populations served by institutions with an average of 15,000 equivalent full-time students, research funded through a model of cross-subsidization, and a significant reliance on international students as a source of income.
Ratio of Domestic to International Students in HE in 2022
A declining tolerance for student immigration has also triggered cuts to international student numbers in each market. This has been accompanied by increased scarcity of and competition for government funding, policy constraints on student growth and associated fee income, exposure to volatility of demand from key countries such as China and India, greater competition from non-university digital education providers, and inflationary costs.
The Australian higher education sector is not alone in facing into increased financial pressure. Over half of universities across Australia, New Zealand and the United Kingdom experienced a net operating loss in 2022 (the last year of official, comparable data) – a stark contrast to the state of these sectors in 2018, when less than a quarter were in deficit. As more universities fall into deficit, the risk to long-term financial sustainability grows and institutions will need to choose how to respond.
New Avenues and Hard Decisions for Financial Sustainability
Historically, scale has been a key avenue to drive financial sustainability, with larger student cohorts supporting investment in research and other strategic priorities. Now, scale alone is unlikely to support long-term sustainability, given the scrutiny on international education and slow, or even declining, population growth in domestic university-aged populations.
Regulation and changes to legislation are also making it harder for many universities to pursue growth strategies and more expensive or difficult to operate.
Universities need to rethink the role of their institution and how this translates into future size and shape and the funding sources and operating model that will set them up for success.
With challenging operating environments and threats to revenue, universities can no longer afford to tough it out or wait and see what will happen. Fence-sitting is no longer an option.
Universities with negative operating results by country, (% of total)
Looking across the Anglosphere, institutions are pursuing different approaches to strive towards ongoing financial sustainability. These include:
- New strategic directions: Universities will need to take a more nuanced view of scale when setting their strategic direction. Comprehensive disciplines coverage may not be the right approach for all universities, and some may need to adopt a narrower focus to enable targeted investment.
- Hard funding choices: Universities will need to better prioritise resources to improve financial performance. This may involve ceasing some activities all together, identifying activities that can be completed at lower cost, and sharing them across institutions.
- Operational efficiency: cost pressures are unlikely to abate, and universities will need to embed ongoing operational efficiency into the institution.
- Cultural evolution: Universities are the ultimate human capital-centred organisations and large change is hard to do without an engaged university community. And for it to persist and sustain it needs a supportive cultural environment.
To get back to financial sustainability, universities will need to act across all these domains. If not done in a consistent and coherent way benefits of action will be eroded.
Genevieve Beart is a Principal and James Twaddle is a Partner with Oliver Wyman.
