Universities must pay their bills
Universities need money. They need to pay their staff, maintain their facilities, invest in technology, support their students and conduct research. An institution that continually operates at a loss, without sufficient financial support, is unlikely to remain a university for very long.
There is nothing wrong with universities operating efficiently, generating surpluses or pursuing commercial opportunities. Indeed, responsible financial management is an essential part of university leadership. This applies to public and private universities, whether they are research-intensive institutions or primarily focused on teaching.
But there is something that I think deserves more attention. At what point does financial sustainability stop being a means of supporting a university’s academic mission and start becoming the mission itself?
Consider a university that increases student recruitment, reduces its reliance on full-time academic staff and improves its operating margin. Its governing board may be delighted with the financial results. But what if those same decisions increase teaching workloads, reduce supervision time and weaken academic quality?
Has that university become more successful, or has it simply become more profitable, and is that sustainable?
Who decides what success looks like?
We often discuss the performance of universities without asking who determines what constitutes success.
For some governing boards, financial performance may dominate discussions. Student recruitment, revenue growth, operating margins, cash flow and expenditure are relatively easy to measure. They can be presented in dashboards, compared against budgets and reviewed at regular intervals.
Academic success is more complicated. Teaching quality, the student experience, research achievements, the development of academic staff and the long-term reputation of an institution are not always easily captured and displayed on a dashboard.
Of course, universities measure many of these things. They have student surveys, graduation rates, research indicators, external reviews and accreditation processes. But collecting information is not the same as giving it sufficient weight when making decisions.
If a governing board spends most of its time discussing finances, what message does that send to the Vice-Chancellor and senior leadership team? And if those leaders are assessed primarily on their ability to meet financial targets, what behaviour is the institution encouraging?
A university’s real priorities may be revealed less by its strategic plan than by what its governing board measures, rewards and is prepared to protect.
When efficiency starts affecting academic quality
There are many legitimate reasons for universities to seek efficiencies. Administrative processes can be improved, technology can reduce costs and resources can be allocated more effectively. Universities should not be immune from the financial expectations that exist in other organisations.
The difficulty arises when cost reductions begin to affect the activities that make a university a university.
Increasing student numbers without a corresponding investment in academic staff might improve financial performance in the short term. Replacing full-time academics with temporary staff may reduce employment costs. Increasing teaching workloads might allow an institution to deliver more programmes without recruiting additional employees.
Each of these decisions could be defensible. Part-time academics, for example, can bring valuable professional experience into the classroom. But the cumulative consequences need to be understood.
Who has time to develop new programmes, supervise research students, undertake research, mentor junior colleagues or provide additional support to students who are struggling?
A university can continue recruiting students and reporting positive financial results while gradually weakening the academic environment on which its reputation depends.
The problem is that financial improvements may be visible almost immediately, whereas academic deterioration can take years to become apparent.
When commercial pressures influence academic decisions
There is an even more uncomfortable issue to consider. What happens when commercial objectives begin to influence decisions that should be based primarily on academic judgement?
Take student progression as an example. Universities have a legitimate interest in helping students complete their programmes. Supporting students who are struggling academically is both educationally responsible and financially sensible.
But there must be a distinction between helping students meet the required academic standards and changing, or even ignoring, those standards to improve retention or graduation rates. It is in nobody’s long-term interest to allow students to progress or graduate without meeting the required academic standards. Although students may initially benefit from such decisions, the longer-term consequences could affect their professional credibility, the value of their qualifications and the reputation of the university.
The same tension can arise in admissions, assessment, programme approval and graduation decisions. If revenue depends heavily on recruiting and retaining students, the financial consequences of academic decisions can become difficult to ignore.
I am not suggesting that universities routinely compromise their academic standards to increase revenue. However, governing boards and senior leaders need to recognise that commercial pressures can create incentives that conflict with academic responsibilities.
The existence of academic regulations and quality assurance procedures is important, but those safeguards need to operate effectively when financial considerations make academic decisions inconvenient.
Are governing boards asking the right questions?
This brings us back to governance.
A governing board has a responsibility to ensure that a university remains financially sustainable. But its responsibilities should not end there. It must also ensure that the institution is fulfilling the academic and educational purposes for which it exists.
Imagine a board meeting where management reports that student recruitment is ahead of target, revenue has increased and the operating margin has improved. These are encouraging results and, understandably, board members may be pleased.
But what questions should follow?
Has the number of academic staff increased sufficiently to support the additional students? Have teaching workloads changed? Are students receiving appropriate academic support? Has research activity been maintained? Are academic staff being given opportunities for professional development?
These questions should not be treated as secondary matters that are only considered when something goes wrong.
The challenge is to develop governance arrangements in which academic quality receives the same serious attention as financial performance, even though the two cannot always be measured in the same way.
And governing boards need to be prepared to act when the evidence suggests that apparently successful financial decisions are having damaging academic consequences.
What behaviour are university leaders being encouraged to demonstrate?
There is another dimension to this discussion: the incentives facing university leaders.
If a Vice-Chancellor is appointed with ambitious revenue targets and is subsequently assessed mainly against financial performance, it would be unsurprising if commercial objectives became a dominant consideration.
The same applies further down the organisation. If deans and heads of department are expected to increase student numbers, reduce staffing costs and improve financial contributions, they will naturally devote considerable attention to these activities.
None of this necessarily indicates poor leadership. Leaders generally respond to the expectations placed upon them, particularly when those expectations influence their performance assessments, contract renewals or career prospects.
The more interesting question is whether governing boards have established an appropriate balance between financial and academic objectives.
There is also a question of timescale. Financial targets are frequently annual, and the performance of senior leaders may be assessed over relatively short periods. Yet decisions affecting academic quality, research capacity and institutional reputation can have consequences extending well beyond the tenure of any particular leader.
A decision that improves this year’s financial results might create problems that a successor will have to resolve several years later.
Who is accountable for those longer-term consequences?
Can financial and academic success be measured together?
I do not think we should regard financial sustainability and academic excellence as competing objectives. A well-managed university needs both, and its governing board should recognise that neither can be considered in isolation.
But this requires a broader understanding of institutional performance.
Financial indicators should sit alongside meaningful evidence about academic quality, student outcomes, staff development, research activity and institutional reputation. The relative importance of these measures will differ between universities, depending on their missions, but they should all contribute to an assessment of institutional success.
Governing boards also need to understand the relationships between these indicators. A reduction in academic staffing costs might improve financial performance, but what has been the effect on teaching quality, supervision or research? An increase in student recruitment might generate additional revenue, but has the university invested sufficiently to support those students?
The aim should not be to produce ever more performance indicators. Universities already collect substantial amounts of information. The challenge is to ensure that the information is used to make better decisions, particularly when financial and academic priorities appear to conflict.
Perhaps governing boards should regularly ask a simple question: Are the decisions that make our university financially stronger also making it academically stronger?
If the answer is no, or if the board cannot answer the question, there may be a problem.
So, when does a university become more business than university?
Universities have always needed to manage their resources, and financial pressures will not disappear. Indeed, institutions that fail to take financial sustainability seriously may ultimately fail the students and communities they exist to serve.
But I worry about what happens when financial performance becomes the dominant measure of institutional success. If governing boards reward revenue growth and cost reduction without giving comparable attention to academic quality, they risk encouraging decisions that gradually weaken the institution.
We should not assume that a financially successful university is necessarily an academically successful university. Equally, academic excellence cannot be sustained indefinitely without appropriate financial resources.
Perhaps the real test of university governance is what happens when the two objectives come into conflict. Does the governing board understand the academic consequences of its decisions, and is it prepared to accept lower short-term financial returns when necessary to protect the institution’s educational mission?
I would be interested in hearing from those who have served on university governing boards or in senior academic leadership positions. Are universities getting the balance right, or are we increasingly defining institutional success in financial rather than academic terms?
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About the author
Professor Graham Kendall is an academic and university leader with extensive experience in higher education governance, research and institutional management. He has held senior university leadership positions, including Vice-Chancellor, Provost and CEO, and Deputy Vice-Chancellor, and is an Emeritus Professor at the University of Nottingham. He has published more than 300 peer-reviewed papers and writes regularly about university leadership, research and academic integrity.