Universities are experiencing sustained financial pressure. In Australia, policy ambiguity coupled with declining government funding is the new norm. In the UK, the continuing uncertainty about how Brexit will be delivered, along with the Government’s review of the post 18 education landscape and industrial relations problems in the sector, are all adding to existing funding challenges. While many universities are fine tuning their budgets to ‘get the job done’, only a select few are asking the more fundamental question: what is the financial model we need to be successful in an increasingly competitive, global market?
To get – and stay – ahead, each university needs to establish a high-performing financial model that drives strategy, enables decision making at all levels, and ultimately lifts operational performance. This requires challenging long-established assumptions about major revenue sources and cost barriers; thinking carefully about the inherent incentives and trade-offs within the financial model itself; and better understanding how costs can be optimised to deliver improved financial performance in an increasingly revenue-constrained market.
In our experience with a diverse range of university clients, high-performing financial models share some distinctive characteristics. These characteristics position financial decision-making as a core driver of overall university success and create the right operating environment to improve decisions at all levels. Even small adjustments to better align a university’s financial model with these characteristics can make a big difference to overall performance. High performing financial models should:
A high-performing financial model both proactively informs strategy, and cascades that strategy into clear financial metrics that enable ongoing systems of measurement and oversight. Without this, financial decision-making is not at the centre of the thinking that drives the university, and the finance function risks being relegated to little more than reconciliation processing.
To be high performing, the finance function needs to be well connected to strategy development, to ensure that decisions about strategy are informed by robust financial analysis. This means bringing more insight to numbers. For example, in education, performance of courses and units relative to expected performance is a better basis for decision making than bottom-line estimates of positive/negative performance. In research, growth aspirations are more informative when tested against probability weighted estimates of future research revenues that reveal the potential long term return on investment of the portfolio as a whole.
Often overlooked when a university develops its strategy is the need to revise decision making responsibilities and align the financial enablers and barriers of operational leaders. For example, the financial model that best enables a rapid student growth strategy is substantially different from one that focusses on increasing student quality while maintaining volume. While the top line financial metrics of these strategies may look similar, where the financial model places operational decision-making authority and how it incentivises decisions that align to the strategy must be different.
Ultimately, the financial model needs to align individuals who make operational decisions that affect revenues and costs (e.g. developing a new course, changing the teaching delivery model, prioritising research investment) with the broader strategy. These decisions need to be matched by accountability for the budget, but also for student numbers, revenue and space utilisation targets.
Aligning individuals to deliver on strategy requires incentives and controls that encourage constructive decision-making and behaviours. In our experience, universities often have incentive and control systems that conflict with the behaviours and decisions they wish to encourage. For example, poor systems of control can create incentives for faculties to compete with each other, or make it difficult for students to participate across faculties. Similarly, if charges for central services are seen as ‘taxes’ on faculties, this can act as a disincentive to grow student numbers.
What we know influences the quality of the decisions we make. That’s why it’s crucial to deliver the right type of information, in the right format, to suit each individual role.
Universities can produce a diverse array of financial information. There are also a wide range of tools available to support financial decision making. A high performing financial model effectively maps the types of information and tools available; the channels through which they are provided (including whether via push or pull); the frequency of delivery; and the format of the information presented to different roles, based on their decision-making responsibilities and needs. While there are always trade-offs in delivering on this (system costs in particular), prioritising the information needs of roles that have the greatest impact on the key drivers of revenues and costs can have a marked impact on overall financial performance.
A high performing financial model requires a high performing finance function. Regardless of how a finance function is organised (e.g. centralised, business partners, embedded), its role goes well beyond transaction processing and budget setting; it drives change and enables financial accountability across the university. In addition to deep and specialised knowledge of higher education financials, the finance team needs to deeply understand university strategy, how to enable effective decision making aligned to strategy, and how to proactively partner with leaders across the university to drive change.
A high performing financial model and finance function has the potential to do more than improve the budget and strategy cycle. It has the power to transform the culture of decision making. Because of this, the institutions that embrace a high performance approach to financial management are more dynamic, better placed in the market and more in control of their strategic agenda.
Get in touch for more information on how to improve the performance of your university’s financial model.
This article was co-authored by Joe Bartlett-Marques.