The past eight months have thrown up challenges for universities greater than they have ever faced before. From the closure of international borders to the massive disruption to movement of people, COVID-19 has forced universities to reinvent their way of working almost overnight.
Many have risen to the challenge. Classes were transferred online. Short courses were rapidly created. Researchers pivoted to examine the impacts of the virus. New collaborations sprang up. Efficiency initiatives were launched, scaled up and accelerated.
Now they have adapted to the immediate problems, universities are thinking about the longer-term. It is clear revenue will not rebound any time soon. With the federal budget deficit forecast to reach $214 billion this financial year, appeals for more funds from government are likely to fall on deaf ears.
Universities need to find ways to work with reduced resources.
There are five main ways universities can reduce operating costs
Universities will need to make some tough choices when it comes to saving money. The shortfall caused by COVID-19 has been forecast to reach between $11.5 billion and $18.1 billion by 2024.
It is unavoidable that valued colleagues will be farewelled and treasured initiatives will be shelved. But with prudent management, universities can make the decisions they need to get out the other side in a strong position.
Recently Nous analysed the finances of 15 leading Australian universities to understand where they have the capacity to reduce operating costs. We applied conservative assumptions based on our knowledge of those universities and actual savings from our work with universities in Australia, the UK and Canada.
What did we find? On average, these universities can each save around $100 million (ranging from $25 million to $220 million), which is an average of 9.5 per cent of their operating costs. In total, these 15 universities can save $1.52 billion from their operating costs.
Based on our experience, these cuts are achievable and sustainable. They enable universities to direct scarce resources to core functions of teaching, research and engagement. For some institutions, these savings may be fundamental to their viability.
These savings come from five fundamental strategies:
- Reset external spending. Universities spend considerable amounts on contracts, supplies and materials. During good times it is easy to let those costs accumulate without ensuring they are delivering value for money to the university. By improving their procurement processes and thinking hard about what they procure, universities can achieve significant savings.
- Strengthen and streamline professional services. Over time it is understandable that bureaucracy can accumulate at a university. Cost savings can be achieved by removing unnecessary layers, expanding spans of control, and streamlining and automating corporate processes. Done right, universities can save costs while directing more of their care and attention to the needs of stakeholders. Our work with universities has delivered substantial net savings – over $30 million per year in savings in one Group of 8 university and £15 million annually in a central London university.
- Rationalise the course offer and architecture. Many universities have a long tail of lightly attended units that generate minimal revenue and sometimes run at a loss. By rationalising course offers and redesigning course architecture, universities can save funds as they ensure their offer meets the needs of students or prospective students. For example, we worked with one Group of 8 university to increase profitability from 2.5 per cent to 6.5 per cent in the first year of a new course architecture.
- Incentivise research productivity. Universities can increase research productivity by refocusing research investment to priority areas and better managing research performance. Research productivity not only improves rankings; it enables universities to have the greatest possible impact. Nous’ work with two universities contributed to their recent rapid ascent in THE rankings and we recently improved research productivity in another university by 8 per cent.
- Better utilise existing space. Physical infrastructure is one of universities’ biggest costs, and most space is used for only a small proportion of the time available. Online learning has become common practice at many universities, prompting a rethink about the need for physical spaces on campus. By improving their space utilisation through timetabling, teaching hours and blended learning, universities can reduce the need for large capital expenditure projects. For example, Nous recently supported a university to avoid capital expenditure of around $120 million in the coming years.
By implementing these strategies, universities can not only reduce costs, they can strengthen their institutions and position them to succeed through the pandemic and beyond.
Cost savings accumulate through phased work across categories
Many leaders will recognise the need for reform but see challenges in implementation. This is understandable given the scale of the task.
From our experience, major change needs to be segmented into three time horizons:
- First six months. This is the chance for quick wins through identifying and implementing easier changes in order to build momentum for more substantive changes.
- Six to 12 months. Big-ticket changes can be planned, implemented and embedded in this time.
- Beyond 12 months. Maintaining a sustained focus on efficiency improvement can help to achieve more complex improvements such as process automation.
Short-term savings will plug budget holes but will not deliver value in the long term. Cautionary tales abound: before working with Nous to improve their cost reduction, some of our clients underwent substantial, painful staffing cuts, incurring large redundancy costs, only to see costs quickly rebound to levels higher than before the cuts.
Sustainability comes from a well-planned portfolio of changes that address the underlying drivers of cost and value in higher education. These underlying drivers include governance and empowerment, complexity, specialisation, quality, automation, standardisation and incentives.
From our experience working with leading universities in Australia, the United Kingdom and Canada, we know that long-term success comes from a portfolio approach focussed on the interventions that will deliver greatest long-term value.
Get in touch to discuss how we can help you to achieve sustainable cost savings.
Connect with Sarah Connelly and Tom O'Connor on LinkedIn.
Published on 16 October 2020.
 Modelling individual Australian universities resilience in managing overseas student revenue losses from the COVID-19 pandemic, University of Melbourne, 28 May 2020