Inefficient maybe, but not on this scale: For profits vs. UKHE

Policy makers dream of a firm corporate hand bringing competition and efficiency to the university sector. This dream is encouraging alternative providers into UK higher education in hope they will provide equivalent or better services at competitive cost.  Support to “For-profit” institutions via public policy assumes businesses will manage profits and expenditure within a rational market. Reality does not always follow assumptions, so let’s compare some traditional and some “for-profit” institutions, think about costs, and ask questions. Let’s make use of readily available information that a student, investor, or policy-maker might consider.[i]

The traditional UK institutions considered here are the University of Cambridge, Manchester Metropolitan University, and the Open University (OU). These were compared to The University of Phoenix (UPX),[ii] Kaplan Higher Education (KHE)[iii], and Education Management Corporation (EDMC). 

Why these? Cambridge is an excellent research oriented university.  Manchester Met is a representative of the UK’s post-92 Universities and OU is the UK’s premier online learning provider. They served 264000 students (2010/11) with a net income of £1.97 billion. UPX, EDMC and KHE together served 635,000 students generating approximately £5.7 billion of revenue through a variety of “for-profit” Institutions.  To give an idea of the scale, in 2010/11 HEFCE distributed a total of £4.5 billion to UK Higher education institutions in support of teaching through its recurrent grant.

Consider the table below.

	UCAM	MMU	OU	UPX	EDMC	KHE
Students (Headcount)	20395	34970	208710	380800	150800	73800
Income (Million £)	1251	248	471	2736	1828	886
Teaching as % of income	17.0	82.3	87.4	91.5	92.8
Teaching income (Million £)	212	204	411	2503	1696
Income/student (£)	61339	7095	2254	7185	12119	12003
Teaching income/student (£)	10405	5836	1970	6574	11247
Part time  % of total students	9.4	21.2	99.9			57[i]

 What is in the numbers?

First, income at a university is not only from teaching. At an excellent University, teaching might be a small fraction of the total. In the period considered, income from teaching ranged from 17% (Cambridge) to 92.8% (EDMC).  Where did the remainder come from? It included, research grants, contracts, investments, and “other.” “Other” might include textbook sales, catering service income, and some large businesses. For example, Cambridge obtained 17% of income from teaching, about 40% from Cambridge Assessment and Cambridge University Press, and the remainder, approximately 43%, primarily from research related activities. 

Second, the “For-profits” showed fewer signs of efficiency than might be expected. KHE (73800 students) had income in excess of Manchester Met and OU combined (243680 students). Similarly, with three times the money as Manchester Met and OU, EDMC taught 60% FEWER students. The policy maker’s dream of efficiently run corporate providers profiting from inefficiency within the current UK University sector is “imaginative.”

Third, where did the money go in the for-profits? When measured against comparable UK institutions, £2.6 Billion out of £5.7 billion of income went somewhere. I think, a lot of this is vacuumed up in marketing (which they do very well).

 Before going into detail, let’s return to the Policy Maker’s dream. One view might be that a well run corporation could generate 10-20% profit while maintaining or lowering costs with no effect on academic standards. To test this dream  using the data here, we need to estimate the characteristics of a peer UK institution to the for-profit institutions in the table.

KHE’s part time students represented 57% of the total and 60% were taught online suggesting its activities are similar to an institution roughly midway between OU and Manchester Met.  Such an institution would on average have income of £4674/student. Ignore for the moment the notion that there might be £400-800/student (~10-20% ) profit to extract. KHE has an income per student nearly 3 times this. Let’s assume UPX and EDMC serve a similar proportion of non-traditional (part time) students. Suppose a simple business model in which KHE, EDMC, and UPX subcontract their teaching to a 50:50 hybrid of OU and MMU. This would leave a profit of £7329/student (61% of income) at KHE, £7445/student (61% of income) at EDMC, and £2511/student (35% of income) at UPX. Dividends to investors are somewhat lower than this might imply, especially against the notion that 10-20% could be squeezed from the 50:50 hybrid. The difference (£2.61 Billion) exceeded the combined income of Cambridge, Manchester Met, and OU. 

Is there inefficiency in UK higher education? Not on this scale.  UK Universities are not as inefficient as popular perception might believe. Equally, “for-profit” institutions are not as efficient and the amounts returned to shareholders seem wildly incommensurate with expectations set by efficiently run peer institutions. The public opportunity cost of the gap between the UK institutions and the “for-profit” providers (£2.61 Billion) could have funded all the activities of Cambridge, Manchester Metropolitan, the  OU AND the University of Warwick while keeping ~£200 million in reserve.  

Now, the question. When the new fee regime is introduced will UKHE still be as efficient? It will be difficult to assess this until the students who entered UKHE in 2011/2012 complete their studies. The trends may be visible when the 2012/2013 financial reports are out but it could be several years before a full picture is available.

As always, the data here are correct to the best of my understanding. Where mistakes have been made, please correct me.

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[i] Information used here is from University and Corporate annual reports, UK HESA data on student numbers, and UK HEFCE data on recurring grant amounts for 2010/11. The latter is broken down into a number of categories. To obtain teaching income for the UK institutions, The teaching grant and fees items in the annual report were used. The “research” portion of the HEFCE recurring grant was subtracted from the sum of the two items. The research component of the HEFCE grant is linked to RAE performance. Exchange rate used was US$1.6 = £1 which was roughly correct for the 2010/11 period (the last for which financial data is available). New annual reports shoould be out soon.

[ii] The University of Phoenix data were obtained from the Apollo Group annual report.

[iii] Information on Kaplan Higher education is via its parent company’s (Washington Post Corporation) Annual report.

[iv] KHE reported that ~60% were taught online and 57% of its students attended part time in 2009. Part time student data was not presented for the 2010/11 year. I have taken this value as correct for 2010/11 as it appears in the annual report.