advantages and disadvantages of diversified funding in universities

Terdmy Educ,~'on d.mt Mm~gement, VoL 4, No.?., 1998, 85-93

Advantages and Disadvantages of Diversified Funding in Universities

Gareth Williams

Funding and ideology

Fashions change. When I worked for the OECD in the mid-1960s it was widely believed that only large-scale funding by government could prov/de the finance necessary for large-scale expansion of student numbem A particular ortho- doxy was that only a single powerful government agency could ensure that university funding grew more or less proportionately to student numbers. If there is a variety of funding sources, no government agency has a strong vested interest in the financial viability of either individual universities or the university system as a whole.

A major weakness of devolved budgets - or 'decentralised centralism' as it has been described by Clark (1998) - is that, in a time of financial stringency, the providers of funds can reduce budgets and then leave to others, lower down the hierarchy, the headaches of how to implement the cuts. This applies both nationally and in institutions. Many of universities which began to de- volve budgets to faculties and departments in the late 1980s did so in order to bring home to departments the realities of 'the cuts' and to force departments to take the unpalatable decisions they necessitated (see Williams 1992). Warwick, which even then had some healthy surpluses to allocate, was much keener to keep control at the centre.

However, even 30 years ago the Robbins Com- mittee was not entirely convinced by the view that single budgets were best for universities

(Robbins 1962). The Robbins Committee was meeting at a time when there were very rapid moves towards a single unified source and mechanism of funding for UK universities - the block grant from the University Grants Commit- tee (UGC). Robbins believed that academic freedom, institutional autonomy and efficiency would all be buttressed if funding for universities came from several different sources.

The Dearing Report (NCIHE 1997), which is a less well thought out document than its predeces- sor of 35 years earlier, does not explicidy consider the theme. Diversification of funding sources is taken for granted. For the last 15 years trends have been in the opposite direction to those of the early 1960s. Both funding sources and funding mechanisms have diversified considerably since the early 1980s. The Dearing Report im- plicitly supports diversified funding in the context of its two main themes of promoting a 'Learning Society' and attracting more resources into higher education. Dearing accepts the dominant ideology of"the past two decades: that higher education has many different customers and that each should contribute to the costs ofthe services they consume.

However, there was an interesting shift o f em- phasis between Robbins and Dealing. For Rob- bins, the concept of a common culture was a central theme. Universities existed to preserve, extend, develop and disseminate this culture. One essential issue was the autonomy ofuniversi-

t~fessor Gareth 14qlliams is He4.d of Polify Studies, Imtiaae of Education, Uni'~'siff of'London, 55-59 Gordon $quar¢ LONDON, I4~C I H ONT. Tel: +44 171 612 6375. lax: +44 171 612 6366. Emai l: t~dclo ~'o," ac. uk

85

86 GARETH WILLIAMS

ties and colleges and academic freedom from government interference in order to pursue these aimg For Dearing, the issue is one of customers and suppliers. It is considered appropriate for providers to be paid for the specific services they provide and for individual consumers to pay at least part of the cost of the services they receive.

O f course, P, obbins may have been wrong. It is an open question whether diversified funding in- creases or diminishes institutional autonomy and academic freedom. While universities with diversified funding are certainly not wholly dependent on a single government agenc~ their only real autonomy and the only freedom for academic suppliers of services may be the freedom to decide which consumers to sell services to. Even this is a dubious freedom if they are in the position of needing to sell their services to all comers in order to survive. One is reminded of ' the majestic egalitarianism of the law, which forbids rich and poor alike to sleep under bridges, to beg in the streets, and to steal bread' (Anatole France 1894).

Cross-subsidy

There is only one strategy for achieving academic freedom in a market econom¢ It is a strategy in which Warwick University has been remarkably successful. The secret is to ensure a surplus on each income-generating activity that can do so, and to continue activities that cannot produce a surplus only if they are deemed to be directly connected to the university's core mission and helping to achieve it. This surplus, analogous to profits in a commercial enterprise, provides funds for the university to pursue the activities that it, rather than its customers, considers to be important - maybe courses that are intellectually worthwhile but which do not attract enough students to be commercially viable, maybe pure curiosity-driven research, maybe cultural facilities, or maybe investment in facilities that will

generate a profit, or worthwhile activity, in the future.

Even ira university is making a significant surplus, the issue ofwho has the right, or the discre- tion, to dispose of it remains an important issue.X In brief, it is whether the surplus is retained by those who generate it: or whether it belongs to the university as a whole. The importance of a university being able to manage cross-subsidy cannot be over-emphasized. The university must be able to use some of the income generated by its 'cash cows' to subsidize activities which it considers to be worthwhile but in need of subsidy These may range from pure research to providing access opportunities for studems who have no other resourceg The management problems in achieving this are not inconsiderable. Staff who are able to earn a surplus must be encouraged to do so and not to feel made that they are sacrific- ing their future academic careers by becoming too commercial. Those in need of subsidy must be discouraged from believing that the university owes them a living. To achieve this, two conditions are necessary. One is that the university has some acceptable way of monitoring the workloads of individual members of staff. 2 The other is that all income coming into the university should be 'taxed', preferably at a fiat rate. 3 The money generated by the 'tax' should be allocated according to 'need', as indicated by the university's own priorities and the information provided by the workload monitoring.

The issue is partly one of efficiency. If the individuals and groups who are generating a surplus do not believe themselves to be sufficiently rewarded, they may be tempted to take their surplus in the form of increased leisure or activities which will advance their own individual careers. It is partly a matter of equity. If the university is a community, those who are able to generate surpluses should feel some responsibility for those in

1 It provides a clear demonstration of the fallacy of the widely-held belief in English-speaking countries that university autonomy and individual academic freedom are synonymous.

2 Or at least individual 'basic units' (see Becher and Kogan 1992). 3 There may be some cases where the university considers activities to be only worth doing if they can

generate a large 'profit' and others where there are special reaso/~ for doing it even though it can produce only a small surplus. These special cases should be kept to a minimum.

ADVANTAGES AND DISADVANTAGES OF DIVERSIFIED FUNDING 87

segments of the market where profits are not so easily come by. However, it is also a matter of power. Decisions about the allocation of profits of a company are made by its directors, influ- enced mainly by the Chairman and Chief Ex- ecutive, but constrained by shareholders' expectationg Decisions about the allocation of university surpluses are matters for the university alone. However, this is where the tension between the collective autonomy of the university and the intellectual freedom of individual members of staff becomes acute.

Mechanisms o f finance and sources o f finance

It is important to distinguish between diversity of sources of finance and diversity of mechanisms of finance. In the past this was confused because in Europe, traditionally, there was usually one dominant sour~ the government, and one dominant mechanism, the funding by the government of a staffing establishment through a line item budget for each university and college. Britain has always been slightly different in that British universities have always been autonomous corp- orations with a great deal of financial and academic autonomy. However, in Britain also, between the end of the Second World War and the early 1990s, the government was overwhelm- ingly the dominant source of funds. However, the dominant mechanism in Britain until the mid- 1980s was the single lump sum or block grant, which universities could spend more or less as they wished:

Since the early 1980s the British government has diversified the mechanisms by which it makes funds available to higher education institutions (see Table 1 below). In the early 1980s nearly two-thirds of their income came in the form of a single flow of funds and a further 10 per cent as closely associated fees paid by government on behalf of students. Thus over three-quarters of their funds came directly from the government in a form that was completely unhypothecated. By 1996 the total figure had fallen to 54 per cent and, in this 54 per cent, the fees component had risen to nearly 13 per cent, the teaching and research component of the Funding Council grant

had been split and there were a large number of special initiative grants from the Funding Coun- cils amounting, in total, to more than 3 per cent of the total income of the sector.

These aggregates still understate the degree of diversification of government funding. In 1995-96 the teaching allocations were the result of amalgamating allocations to 44 different funding 'cells' depending on academic subject, the level of study and the 'mode' of study (full- time or part-time) of the students in each univer- sin/. The research component was an amalgama- tion of separate allocations for each of about 80 separately identified specialist research areas. In 1998-99 the matrix is to be simplified, partly (it is claimed) to help restore some autonomy to uni- ve.rsities in determining their own internal allocation of resources. However, the main point remains unchanged. In fact, the additional weights attached to various factors such as level and mode of study mean that in practice there will be little reduction of complexity or any significant loosening of the detailed financial control over universities. It is unlikely, therefore, that it represents any real reversal of the trends of the last 20 years towards increasing complexity of funding mechanisms.

Maximizing funding from public sources is a major cause of management effort. A particularly grotesque example is the research assessment exercise. The income a university receives is a function of its research assessment quality rating and the number of staff it deems to be 'research ac- tive'. Thus the more staff entered, the more money a university will get on the so-called 'volume measure'. However, if staff are entered whose research achievements are low, this risks lowering the 'quality rating' and, hence, reducing the value of this much more powerful financial driver. However, there are no firm rules for deciding how many staffneed to have what level of research achievement to obtain a particular quality rating. So, deciding how many staffto enter bears some similarity to a game in which skill and chance are mixed. The game is a particularly complex one because it is zero sum game - the value attached to a particular score depends on how many others get that score or higher. Finally,

88 GARETH WILLIAMS

Table 1 English Higher Educat ion Inst i tut ions: Sources o f Funds, 1982-83 and 1995-96

Sources o f Funds % o f total

1982--83 1995-96

Public Sources

Funding Council grants

Teaching. na 27.3

Research na 7.5

Other na 3.1

na 3.2

na 0.5

65.9 41.6

9.9 ! 2.6

4.7

Capital

FE grants

Total Funding Council Grants

UK and other EU fees

Research grants

Office of Science and Technology O~,esearch Councils)

Other public sources (incl EL))

Income from public sources for other services

Total Public Sources

5.0

2.1 3.9

2.9 3.5

85.9 66.5

Private Sonrces

Overseas Student Fees 3.2 4.7

Home student fees (part-time and post-graduate)

Research

3.3 6.1

UK Charities na 3.2

UK industry ! .3 1.6

na 0.9 Other (including overseas)

Other income from private sources

Services rendered na 3.1

Total Private Sources 14. I 33.4

Total All Sources i O0 I O0

5mm:es: 1983-83: Williams (1992), pp.6--10. 1995-96: NClHE (1993), p.264.

to make the game even more interesting, the rules about converting the quality scores into cash are not decided until after the quality ratings have been determined, so each university is taking its decision about how many staff to enter without knowing the trade-off between the volume and quality scores. Millions of academic and administrative staffhours are spent on preparing for this exercise every four years.

At the same time as this quasi-marketization of income from public sources, the proportion of funds from genuinely private sources has increased considerably, rising from one-seventh at the beginning of the 1980s to more than a third in the mid-1990s. A much wider variety of courses is being 'sold' to a much w/der variety o f students who do not qualify for the full financial support enjoyed by full-time undergraduate students. More research is being 'sold' to industry,


though, contrary to much of the rhetoric, this remains a small component of the total in all but a small number of industry-oriented research uni- versitieg

Evaluation

Diversity of funding is now a fact of life in British higher education. This section sets out elements of an evaluation of its effects.

On the plus side, new funding sources have certainly helped universities and colleges to remain solvent during a period of severe cuts in public funding. Universities, such as Warwick, which have developed the widest dispersion of funding sources are the ones which have weathered financial stringency most successfully- they have been able to use surpluses from non-core work to initiate new developments in their core teaching and research.

The diversification of public funding mecha-

nics has, in some respects, had the opposite ag- gregate effect. By paying for each individual activity separately and using its power as a mono- psonistic buyer, the government has been able to squeeze any slack, or capacity to make surpluses, out of the system. Within each funding cell in teaching, all providers have been progressively squeezed towards the resources and the level of provision of the lowest cost provider that is judged to be offering courses of acceptable quality.

Universities are certainly more 'productive', as measured by global quantitative indicators. Since 1980 the number of students has risen by 120 per cent, the number of graduates has risen almost proportionately and the proportion of graduates with 'good' honours degrees has increased. According to the Dearing Committee, the overwhelming majority of students are satisfied with the teaching they are receiving. At the same time, expenditure per student has fallen by 50 per cent in less than two decades.

The output of research, as measured in publications, has increased and there has been a steady rise in the research assessment scores of most universities since the system was introduced in the mid- 1980~ It is oRen claimed that this is an indicator of overall quality improvement. However, it

is also claimed that there has been an increase in the amount of relatively trivial research that leads to rapid publication.

In research, also, a growing proportion of funds are being allocated on the basis o f competitive bidding. Though it is claimed by research sponsors that quality rather than cost is the deciding factor, it is inevitable that, with limited funding available, contracts are awarded to the bidders who offer an acceptable product at the lowest cost.

According to the Dearing report, the UK science base is the most cost-effective producer of research in the world, as measured by citations per unit of expenditure. In terms of the number of contributions to publications and the number of citations in science, engineering and medicine, the UK comes second only to the US. It also comes second to the US in the number of major prizes and medals won.

At the same time, the amount of'non-core' activity, as measured by income from 'other services rendered', has increased spectacularly. In the case of these other services, which are mostly sold on the open market, it is reasonable to assume that income received is an indicator of the value of these services to whoever is paying for them.

In sum, as providers of services in the knowledge industry, there can be little doubt that quantitative measures of output and efficiency have increased considerably at the same time as funding sources and mechanisms have diversified.

But there is, of course, no such thing as a free lunch. The nature of academic work has also changed considerably. Universities are much more tightly managed. Staff are working harder. Much of the increase has been in administrative work. British academics claim to have one of the highest academic workloads in the world. Ac- cording to one large-scale comparative study in the early 1990s:

English university professors are considerably less satisfied than their European colleagues with various aspects of their jobs. Many of them are not satisfied with their salary, and there is a higher proportion than in any other country analysed who would not opt again for the academic profession. As regards the

90 GARETH WILLIAMS

conditions of their work, English academics report the highest proportion of their time spent on administration. They rate resources for their work more negatively than their European colleagues (though less negatively than their Japanese colleagues). (Enders and Teichler 1997)

Several studies have shown evidence of stress amongst UK academics (see, for example, Fisher 1993).

There are pervasive doubts, within the academic profession as well as outside, about whether the quality of the output of both teaching and research is really being maintained. Denting concedes that 'many of those giving evidence expressed concerns both about the quality of students' experiences and about the standards of degrees' (NCIHE 1997). There are also wor- ries about whether the quality of research is really being maintained - whether the 'publish or per- ish syndrome', encouraged by the fiercely com- petit ive research assessment exercises, is distorting the type of research done and the ways in which it is disseminated.

In a mass higher education system it is hardly surprising that mass production methods are beginning to dominate, as they do in, for example, the mass media and mass tourism. In a world which is often described as 'post-Fordist' as far as manufacturing is concerned it is noticeable that many of the service industries, of which higher education is one, are becoming increasingly standardized and 'Fordist' in nature. There is nothing intrinsically wrong in this. Goods and services provided for a mass market at prices which are appropriate for the mass market can meet the needs of the majority of consumers. That is, after all, why they become mass activities in the first place.

However, there is also a need in all mass markets, whether it is motor cars, entertainment or tourism, to meet a variety of different customer needs and interests. In higher education for a learning society, this is essential. Mass higher education can never be fully standardized or rou- tinized. The demands it has to meet are far too varied. In principle these varied needs can be met- from a single source of funds through detailed planning and regulation. However, the mass

higher education of the future must also be capa- ble of adapting quickly to changes in its social, economic and technological environment. It is hard to see any way in which a central planning framework could achieve this. Universities and colleges must be able to seek new customers and to be rewarded if their judgement of changing needs and demands is vindicated.

These developments are certainly not confined to the United Kingdom, though it is the case that, for the most part, they have occurred much more rapidly in the English-speaking countries. None- theless, it is informative to speculate on the underlying causes of these widespread trends. I want to propose two underlying reasons, which, between them, can explain most of the changes we have seen in the United Kingdom during the past few years - and I suspect they have wider ap- plicability.

One is that we are observing the natural reac- tion of any commercial enterprise when its core business is no longer growing. The history of higher education throughout the first four-fifths of the twentieth century was expansion of numbers of young students in their late teens and early twenties as populations expanded and an increasing proportion of school leavers qualified for entry. Despite the rhetoric about lifelong education, this remains the dominant public and political perception of what higher education is really for. This is borne out by the political con- troversy in the United Kingdom that followed the government decision that this group of students should make a financial contribution to the cost of their studies after they graduate. The question is too politically sensitive even to raise in many Western European countries which are quite willing to see their universities extract money directly from many other clients.

From the late 1980s onwards, when the birth- rate decline that began in the mid-1960s began to affect higher education, the potential core clientele has been at best stagnant and in most West- ern countries declining quite sharply. This presented few problems when only a relatively small proportion of the core clients were in a position to receive the service. There was a very strong case for increasing participation rates.


However, following the massive expansion of participation rates in the quarter-century following the mid-1960s it may be that this market is becoming saturated. Not everyone is able to benefit from higher education in the traditional sense, and not everyone wants it.

Like any other economic enterprise in similar circumstances, universities and other higher education institutions have been seeking to diversify their clientele. In the case of universities, there are three acceptable ways of doing this. One is to en- courage existing customers to buy more of the product - that is, to persuade them that a first degree is no longer adequate and that postgradu- ate studies and continuing education throughout life are necessary to obtain the full benefits from higher education. The second is to seek new clients by modifying the product - new subjects, new modes of delivery and new packaging. The third is to diversify into new product ranges - such as consultancy and short courses, confer- ences and holiday lettings. Some (e.g. Clark 1998) refer to the 'core' and the 'periphery' to distinguish the two types of business. He refers to 'demand response', implying that there are changing demands for higher education which institutions are adapting to meet. I have doubts about this as a complete explanation. The demand from traditional clientele in traditional universities remains strong and nearly all universities still see this is as their primary market. Those universities which are successful in this market are the ones which, for the most part, do least to develop new markets.

In this context there is a certain amount of mendacity in discussions of higher education participation" in Britain. Claims for government funding for continued expansion are based on the assertion that about one in three young people enter higher education and that this ought to be higher. However, the Dealing Committee also agrees that 'forecasts suggest that, if current patterns of participation continue, more than half o f today's school leavers will experience higher education at some time in their lives' (NCIHE 1997, para 3.5). This is not referred to any further as the committee builds up its case for further expansion.

This is not to deny that a good case cannot be made for increased public funding for higher education. There are benefits to society and to individuals from education beyond school but the strategic management of higher education needs to be based on an appreciation of current circumstances and not on mindless extrapolation of the situation as it was a decade or more ago.

The other factor contributing to increased diversity in higher education is the rapid rate of change in information technology. This has many implications for higher education. One is its effect on the nature and status of'knowledge' itself. In a stable society, such as the European middle ages, the main task of universities was to transmit established knowledge, perhaps refining it some- what on the way. Later, after the enlightenment, they began to create and disseminate new knowledge, but at a rate at which it could be digested for young people before they themselves began to contribute to the established knowledge of the next generation. The hectic rate of change in information processing technology in recent years has meant that this process is being superseded and we are in a much more chaotic environment when the very concept of established knowledge, even in the rigorous 'hard sciences', is open to question.

A second result of the information technology revolution is its direct effect on higher education itself. In its elemental form, higher education is simply a part o f the knowledge industry. But the dispersal of knowledge, and its relatively easy access from almost anywhere, means that institutions which depend on being knowledge specialists must themselves expand and diversify if they are to retain their market share. Their best hope for survival is to be explicitly recognised as information interpretation centres which help people to interpret the plethora of information that is now available to them. This means being at the nodes of complex networks where, once again, multi-dimensional diversity is a prerequisite o f survival.

Finally, at a more operational level, the complex institutions which universities are now becoming can only hold together with the help of sophisticated management information systems

92 GARETH WILLIAMS

which enable all the activities of an institution, and the interactions between them, to be ade- quately monitored and regulated. This is only possible in highly computerised management systems.

All these developments present formidable 'challenges to the academic or managerial staffof universities. Stress will continue to be a feature of academic life for the foreseeable future. Strong management will Continue to be necessary. The ability to attract funds, and to break into new markets, will continue to be one of the main de- terminants of influence within the university. Universities which grasp this nettle will become more genuinely autonomous. They wiU not be beholden to governments, changes of government, funding agencies or centralized quality as- surance agencies.

That is one of the reasons why I regret the government decision to reject part o f the Dealing Committee's proposals on student fees. I regret, in particular, the Teaching in Higher Education Bill, which, when it becomes law, will prevent universities from setting their own fees.

The government should not set the level of university fees. It must decide the level of support it is willing to provide to student~ Broadly speaking, equity demands that all students receive the same subsidy. 4 Certainly, the amount available to each student needs to be means tested and sup- ported by an adequate loans scheme. But beyond that each university should decide what it needs for its own service specification and charge ac- cordingly. A university or college that does not offer value for money will not attract students. The government should ensure, through grants and loans, that no student is deprived of the opportunity to study at any university he or she is qualified to enter. It should also use its resources to help promote activities that are in the long-run national interest but which, because of market

imperfections, are unable to maintain themselves without support from public funds. The government is also justified in using its resources to 'steer' parts of the system in the directions it considers to be appropriate. It may also have a quality control function. These are quite large enough tasks for government. Apart from these, it should cease to consider that it has a responsibility for all the details of the whole system.

Concluding Comment

Universities in most Western countries now oper- ate in a fiercely competitive market-place. The competition will become more severe as the information technology revolution gathers speed and other sources of knowledge and learning become ever more widely available. Governments are unlikely to become more generous, they have too many other claims. It will become more and more apparent that the main benefits o f higher education accrue to individuals.

British universities have become used to diversity of financial sources and mechanisms in recent years, but I doubt whether the process is anywhere near ended. Increased diversification of funding is just one of the pressures to which they will continue to have to respond. Universities must be both in the forefront of worthwhile change and havens of intellectual stability in a turbulent world. To achieve this they must not be dependent on any individual source of funds. British universities have discovered since 1980 that the instability of government funding can be even greater than that of the market-place. They must have the opportunity of generating some surpluses so that they are cushioned to some ex- tent against passing whims and changes in fash- ion. Diversified funding calls for financial management expertise of a high order and a flexible and very diverse academic profession. But it can lead to healthier institutions and, ulti-

4 The principle may, of course, be modified on the grounds of national priority if there are some subjects which are deemed to be unable to produce as many grad.uates as the nation 'needs' unless students receive above average levels ofsubsidy. It may also be that public policy requires special priority to be given m certain categories of student- for example to ensure that young people from poor families, who have the ability, should not be prevented from attending courses at Cambridge University for financial reasons.


mately, higher average quality o f service to students and socie W.

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advantages and disadvantages of diversified funding in universities

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