Strategic cost analysis for planners

Paul Clarke, Director, DevelinPhil Harding, Chief Financial Officer, City University London

Develin Consulting LtdCedar House, ThurningNorthants, PE8 5RA, UK

Tel: 01784 224207Mob: 07710 466567

paul.clarke@develin.co.ukwww.develin.co.uk

City University LondonNorthampton Square

LondonEC1V 0HB

Tel: 020 7040 3109philip.harding.1@city.ac.uk

www.city.ac.uk

Who we are

• Develin has worked with 15 UK Universities

• We have also worked within the following sectors:

– Financial Services

– Utilities

– Logistics

– Retail and Wholesale

– Manufacturing

Sustainability is the challenge

Financial and academic plans are in place that define a path to financial sustainability. Responses include:

• Targets for School / Programme contribution : Perhaps 30% or greater:

– Consideration of the mix of outputs, removing outputs with little or no margin and seeking growth opportunities in higher margin areas.

– Also focusing also upon unproductive areas of Research.

– But assume removal of unprofitable activities will also impact school and central support costs.

• Support cost reductions.

• Structural changes – e.g. merging schools / depts plus different support models.

Key assumptions

Whilst also delivering:

• Attractive study methods;

• The right courses;

• Quality in everything that the student experiences;

• Clarity about brand;

• Upward progress in the rankings;

It is a change management task that cannot be left to chance

In support of change

Status quo is not an option – all agreed

Little dispute about what has to be done

Staff surveys often show willingness for change

Wide agreement there is much that can be improved

Resisting change

Conflicts of interest in the senior management team

Staff express fear of being personally impacted by change process

Power is devolved

Academic autonomies and freedoms

Inadequate management skills

Scepticism about ability to change

Poor communications

Fear of the future

Decision making difficult

Planners are central to providing a clear direction

Structures Subjects / Courses

Partnerships Staff complement

Methods technologies

Scenario black box

Market intelligence

Innovative ideas

Benchmarking

Financial targets

Changes in legislation

Data

Data

Investment return

Affordability

Sustainability

Student / staff satisfaction

KIS metrics

League table progress

Income

Employer satisfaction

Finance kpis

Non finance kpis

What is cost analysis?

Defining what key activities cost and how costs behave within your organisation in a manner that helps you decide future courses of action i.e.

• Influence thinking about scenarios

• Guide choices

• Build consensus

• Test hypotheses

• Win resources

A shared understanding is vital - imagery rather than detailed numbers work best

Key elements

• An hour of module teaching costs ???

• For every x% change in student numbers this changes by ???

• This varies by ??? if the course is new

• Quality costs for every programme change are ???

• For every % increase in new student numbers Student Services costs increase by ???

Each area develop ‘rules of thumb’ that are shared and challenged e.g.

Finance territory? - yes, but the choice of activity and ‘driver’ combination needs to be focused on the key questions raised through scenario planning.

Examples of images that have helped build a common view of the world

0

100

200

300

400

500

600

700

800

900

1000

School 1 School 2 School 3 School 4 School 5 School 6

£

£ per Student FTE

Front line support for students and academicsSchool 1 School 2 School 3 School 4 School 5 School 6

Academic Support Services 61,904 100,587 392,853 49,244 33,897 121,101 Appeals, ECs, Complaints and Academic Misconduct 36,399 13,568 7,998 9,990 44,647 54,892 Assessment, Examinations and Assessment Boards 102,891 252,138 - 40,521 294,267 128,081 Ed Tech Support Services - 48,121 - 27,924 - 192,644 Internationalisation Support / Administration 4,566 28,338 - - 8,262 - IS Specialist Services 62,816 68,554 - - 20,724 60,714 IS Support Services 107,645 276,517 27,193 77,333 94,402 101,649 Lib Support Services - 39,276 223,308 78,556 36,713 - Performance management and Improvement 4,036 16,800 11,585 3,994 3,433 15,394 Programme Administration 209,284 953,173 192,417 265,960 143,323 336,383 Programme Approval / Development 12,951 21,072 - - 21,765 6,993 Provision of student ambassadors - - - - - - Research Support Services 53,282 70,723 127,729 13,195 170,049 101,795 Student Finance 41,594 54,290 - 22,334 437 20,906 Student Support 35,917 236,599 269,148 - 50,976 -

Totals 733,284 2,179,756 1,252,230 589,050 922,894 1,140,552

Student FTEs 2,088 2,429 2,607 1,012 1,882 2,098 Front line activity costs per student FTE 351 897 480 582 490 544

£ per student FTE for front line support activities

Relationship between NSS scores and support activities

0

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School 1 School 2 School 3 School 4 School 5 School 6

£

0

10

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Mean NSS %

£ per Student FTE

NSS

£ per student FTE for front line support activities compared with mean NSS scores for Schools

Further images that have mattered

Annual hours for one Law LecturerActivity HoursAcademic support & guidance 60Administration 90Feedback 50Teaching preparation 185Marking 155Tutorials 60On-line marking 30Seminar 1 48Lecture 1 152Lecture 2 98Lecture 3 120University Meetings 30Dev T&L Materials 40Invigilation 10Enterprise 40Recruitment 10Professional Development 20Dept/School Meet 10Course/Module Leadership 130Faculty Events 25eMail 180Quality Assurance Process 15Moderation 25Personal Tutoring 40Induction/Enrolment 25CPD 40

1688 1580 -108

Which can be compared with a threshold of:

52 weeks minus (annual leave plus bank holidays plus any discretionary days):

less = hours in deficit

Further images that have mattered

Hours in surplus

Hours in deficit

Individual members of Academic staff

Range of hours in surplus / deficit for academic members of staff within the departments within one School

-1,200

-1,000

-800

-600

-400

-200

-

200

400

600

800

Further embedding of relationships

Balance (Hours)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-500

-400

-300

-200

-100

-

100

200NSS

Balance

Average balance of hours by academic department as related to mean NSS scores per department

NSS

Categorisation of activities also opens eyes when planning change

17%

30%

18%

35%Student appealsStudent complaintsStudent withdrawals course changesVL recruitmentTeaching coverRemedial teaching

Distraction

Student recruitmentBid preparationResearch grant application

Development

TeachingMarkingTeaching preparationResearchPG student supervisionFeedbackTutorials

Core

PublicationsModerationPartner meetingsQuality assurance processConferencesAppraisalsInvigilationNew staff mentoring

Discretionary

Planning and innovating collaboratively

• Based upon all areas knowing ‘rules of thumb’ about drivers of cost and capacity usage

• Standard planning and scenario templates include reference to impact upon drivers

• Proposals for change are reviewed collaboratively by each area impacted for their impact upon the key drivers

• Permits activity that will drive non financial kpis in the right direction to be assessed for impact on income and cost.

• Requires close collaboration between Planners and Finance.

23.8%

12.2%

50.7%

4.5%8.9%

HEFCE NHS Tuition fees Research grants Other

HEFCE

NHS

OtherResearch grants

Tuition fees

( )

( )

( )( )

( )

23.8%

12.2%

50.7%

4.5%8.9%

HEFCE NHS Tuition fees Research grants Other

HEFCE

NHS

OtherResearch grants

Tuition fees

( )

( )

( )( )

( )

City University Income Profile

Current profile by income stream

-5

-15

-25

5

15

25

35

2012-13 2013-14 2014-15

Tuition fees

NHS HEFCE Total income

Forecast changes in £M to 2014-15

£M

City University Financial Strategy

• Definition of Financial Sustainability:

“being able to continue to generate surpluses and to invest over the long term to deliver the mission of the institution”

JNCHES Review of higher education pay and finance data (December 2008)

– To resource a significant scale of investment – To achieve sufficient financial health (reserves, liquidity)– To meet future risks and investment needs– Where 6% = £11m surplus

• City’s financial strategy:

To achieve financial sustainability – i.e. a surplus of 6% pa required in 5 years

Elements of financial strategy

• Surplus generation and reinvestment

– cash generated/capital expenditure plans

• Resource allocation model

– transparent and equitable

– incentivise performance

• Strong controls

– staff recruitment

– material non-pay expenditure

• Liquidity, borrowings & treasury management

• VFM, including procurement

• KFIs and key financial risks

Where Finance & Strategy Planners are working together

• Assessment of financial performance

• Market repositioning

• Scenario planning

• Major decision appraisal

• Pricing

Leading to the development of shared and adaptive capacity:

– Common systems, tools, datasets, formats, performance measures

– Identification of core variables – student and staff numbers/mix; tuition fees/scholarships/bursaries; Research income; FEC recovery rate; space requirements

• Course costing improving in credibility & value

• Used to set student number targets

• Starting to be used in pricing

• Major challenge remains in allocation of academic staff time ( and cost)

• Relationship with TRAC

Subject/course/module - assessment of financial performance

Current university sector

Traditional sector

New universities

City

Highest perceived quality

Lowest perceived quality

High degree of specialisation

Diverse portfolio of courses

Market repositioning

Likely future university sector

Broader base institutions

Complete providers Specialists

Aspirational cohort

Focused research and education universities

Highest perceived quality

Lowest perceived quality

High degree of specialisation

Diverse portfolio of courses

The new elite

Squeezed middle

Price focused

City

New insurgents

Scenario planning

• Major focus of work in Planning and Finance

• Undertaken at School and University level

• Seeking to achieve both academic aspiration and financial sustainability

• Developed excel based planning model

• Used by Schools with corporate consolidation

• Multiple scenarios and sensitivities

Analysis and appraisal for major decisions

• Course/subject development

• Contraction/withdrawal

• Infrastructure investment

• M&A

• Overseas ventures

Pricing strategies

• Market research and competitor analysis

• Developing use of course costing model

• Pricing to support market repositioning

• More sophisticated use of scholarships and bursaries

• Some flexibility for ‘non standard’ pricing, eg market entry

• Overseas vs home fees comparison becoming more acute

Research• Proportion of academic staff producing 3 and 4 star

outputs (%)

• RCG income (£k)/academic FTE

• Quality-related (QR) research income (£k)/academic FTE

• Citations/academic FTE

• PGR students per academic FTE

• PGR completions in 5 years (%)

• Academic staff with a doctorate (%)

• Proportion of full economic cost recovered (%)

Enterprise• Enterprise income (£k)/ academic FTE

• Proportion of full economic cost recovered (%)

How will we know we are succeeding?

University KPIs, for example:

Education• National Student Survey (average of Qs 1-21) (%)

• Post-graduate student satisfaction (source and units to be identified and agreed)

• Student:staff ratio

• Good honours degree (1st or 2:1) (%)

• Student progression and completion (%) (by level, domicile and mode of study)

• Entry tariffs (UG)

• Student numbers (by level and domicile) with proportion of overseas (non EU) students

• Proportion of UG students with entry grades of AAB or higher (%)

• Proportion of students in graduate-level employment after 6 months of graduating (%)

• Widening participation targets (4 measures per OFFA agreement targets)

(Plus ‘Enabling’ KPIs not shown here)

£0

£5,000

£10,000

£15,000

£20,000

£25,000

£30,000

£35,000

£40,000

£45,000

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

City

City comparator group

Other UK HEIs

Proportion of research-excellent staff

Median spend amongst aspirational comparator set

Further examples of collaborative work

Average annual capital expenditure (5 year average per student FTE): all UK HEIs

Portfolio Analysis

6.0

4.0

1.0 2.0

6.0

4.0

1.0 2.0

Intellectual capital (relative research performance)

Execution capability(ability to deliver other elements of the Vision)

Relatively strong within top half of performers in RAE08 Unit of Assessment

Relatively weak within bottom half of performers in RAE08 Unit of Assessment

Weak

StrongCurrent proportion of staff assessed to have a GPA of 3 or more

50% and above

25%-49%

0-24%

Changing environment demands new behaviours

• Entrepreneurial leadership

• Strategies to reposition

• Integrated institutional and financial planning

• Customer service excellence

• Competition and marketing

• Financial awareness

• Communication

• Efficiency and effectiveness

“We’ve got no money so we’ve got to think”

Ernest Rutherford

Implications for Finance

• Ongoing scenario planning

• Supporting academic aspirations, whilst..

– Delivering financial sustainability

– Performance monitoring

– Propagating key skills

– Risk management

“top performing finance functions spend between 15 and 20% of their time on compliance and control”

PWC ‘Finance at the crossroads’ 2009

Thank you

We would now like to seek your views about some elements of this presentation.

Key points

• Achieving better outcomes that will matter to students and other Stakeholders – plus better financial performance is a change management task. Planners and Finance both play a central role.

• Scenario planning that will drive innovation is vital but outcomes more likely to drive change if they reflect shared understanding of cost and income.

• Building widespread knowledge and understanding of cost is not easy. It’s about numbers but finding influential images helps.

• Close collaboration between Planners and Finance seems to be important.

• As City has shown, where this is taking place, the Scenario black box starts to have real and lasting impact.

Thank you for coming