The post-secondary education sector plays a critical role in making the UK an attractive global destination for business, world-class research and talent acquisition, driving economic growth and prosperity. Broadly speaking, the sector is a notable national success, with real international impact. However, the landscape is complex, competitive and undergoing increasingly significant disruption driven by regulation, technology and labour market tensions. This disruption is changing the contours of this landscape and challenging the financial sustainability of many providers. In addition, providers face heavy criticism and/or neglect from all parties – students, unions, Government and MPs along with the media.   

We interviewed senior leaders across the sector for our The State of the State 2024 report to better understand how university and college leaders were addressing these challenges. They all recognise that significant reforms to strategy, delivery model and even identity will be required to chart a course to future financial sustainability and ensure more supportive position from critical stakeholders.  Leaders indicated their interest in the forthcoming election outcome and will be encouraged that both parties are keen to develop the post-secondary education sector.

In this article, Deloitte’s Laoise Flanagan and Matt Robb explore the challenging post-secondary environment and opportunities for universities and further education colleges across the UK to thrive in the ever-changing educational ecosystem.  
 

Challenges facing the further and higher education sector:
 

1. Fees are flat and costs are not. With static tuition fees and funding and rising costs including salary inflation and high pension contributions, universities and colleges are facing ever tighter budgets. Many have also pushed out capital investment in real estate and digital capabilities, and this deferred investment is now appearing as higher maintenance costs and challenges in supporting student experience and efficiency in enabling services. 
2. The sector is increasingly competitive. With increasing competition within the sector, and more alternative providers entering the market, universities and colleges are finding the market tougher. Many of the alternative providers, including those which are privately-owned, have focused on specific subjects, learner segments or delivery models and are taking share in their niche from generalist universities and colleges.  To remain competitive, it is critical that all Universities deliver a high-quality student experience to attract and retain students and a series of highly ranked Universities are not delivering this which is beginning to be noticed.
3. Playing the right role in local economies. All those interviewed were passionate about the contribution that their institutions made in their regions, including working with other education providers, and say their place-based impact is critical. Challenges remain in finding the right mechanisms for a system wide view within regions, and while progress has been made in many areas, there is a recognition that still more needs to be done, especially in those areas with less established fora. 
4. Government & OfS imposing costs and creating market headwinds. 
   a. There have been significant regulatory changes that added cost (e.g. mental health service provision, net zero commitments) and in other cases regulatory changes which have created market headwinds (e.g. changes in the visa processes for international students). In the case of FE colleges, removing access to commercial banking facilities without notice, deprived the sector of access to capital required to restructure, reform or invest in opportunities. 
   
   b. Some regulatory changes were seen as positive by interviewees, e.g. the UK’s Lifelong Learning Entitlement, though at this stage it was hard to know what that opportunity would look like, whether the underlying regulatory infrastructure would be in place (e.g. credit recognition) or how best to position for it. 
   
   c. Most wanted a clearer and better coordinated skills strategy, which was felt to be missing, with existing coordination mechanisms (e.g. LSIPs) having mixed impact. More broadly, the febrile debate around immigration was distorting any sensible discussion about skills in the workforce and the role of training and immigration.
   
   d. Beyond this, HEIs being embroiled in political ‘culture wars’ – especially in relation to freedom of speech – was considered deeply unhelpful.

What are Education leaders doing to address these challenges?

Responses to these challenges fall into four main categories:

1. Better ‘business as usual’.
   a. Cost reductions: This is the broadest category of activity, which covers everything from ‘salami slicing’ cost from across the institution, to a more profound transformation of back and middle-office services. Leaders reported to us that ‘cutting cost across the board’ had mostly reached the limit of usefulness and that further cuts would impact effectiveness. The move to technology and data-enabled transformations of all kinds of services was well underway, but leaders reflected that the success rate of these kinds of programmes was mixed. Furthermore, some HEIs have found it difficult to embed programmes like this due to the cultural and people change required to deliver the best outcomes – the challenge of change management in the sector is a key area to be addressed. Finally, more strategic cost reduction was well underway: rather than slicing cost from unprofitable course areas, HEIs are now much more likely to reshape curriculum, closing courses and even whole departments to better reflect demand and contribution. Although this has reduced losses and allowed HEIs to invest in the things they were good at, they often generated adverse responses from affected academic staff and often other stakeholders. 
   b. Improved teaching and research: All leaders reflected on the need to innovate here against a backdrop of pedagogical fragmentation, large numbers of students exiting school below level 3 and gaps from the COVID generation. Most acknowledged how difficult it was to maintain priorities here in the current climate. There was a clear drive to orient courses more towards employability, though the challenge of engaging employers was acknowledged. AI should be more prevalent - perhaps in the challenges above AI is rising on the agenda, leaders were looking at developing plans to use AI to improve pedagogical effectiveness.
2. Innovative growth options. The underlying demand for post-secondary education at all levels remains strong domestically and internationally. There are two main challenges in meeting this demand: ensuring domestic student growth is profitable with fixed fees and addressing the fragmentation of demand cost-effectively. The use of third parties to recruit international students and offer online courses was pervasive, but there was widespread acknowledgement that this was engendering a financial dependence on international students that entailed real risk.  It was suggested that innovative growth options could be accelerated by a more strategic use of data, including the insight to use data to drive better targeting, diversification and prioritisation of the right prospective students (targeting the top, and bottom lines) and also using data to understand students at retention risk, which directly impacts the top line.  Beyond this, HEIs were often deeply engaged in and committed to their locality, trying to develop specific economic clusters. Taking the North West region as an example, the establishment of the Fuel Cell Innovation Centre by Manchester Metropolitan  is a great example of how a University effectively plays into the place-based strengths delivering a real impact in harnessing renewable energy. Manchester College’s role in the upskilling and reskilling the city and region’s residents to fill current and future skills gaps in rewarding careers.  Although these growth strategies were felt to be important contribution to the local economy, they can take years to really have impact and require sustained investment which has been difficult to make in the current financial climate.  
3. Balance sheet optimisation. There were four main activities interviewees covered here: raising debt, deferring capital expenditure, managing pension liabilities and being more creative with real estate. However, three of these were regarded as already running out of headroom: deferring capital expenditure was increasingly seen as storing up problems for the future (and some legacy deferrals were creating additional problems now), the debt markets can be cautious of the sector and changes to pension liabilities can concern the workforce.  Most universities recognised that there were opportunities with real estate portfolios but were concerned by considerations of ‘selling the family silver’. There is widespread recognition that post-secondary institutions are seeking expertise in how best to optimise inefficient real estate portfolios.
4. Mergers and alliances. Consolidation was considered to be ‘inevitable’ by many of the leaders we spoke to, based on the need to achieve economies of scale, especially in technology. Furthermore there was a change in sentiment as this inevitability moved from being ‘theoretical’ to practical and current. Several referenced existing attempts to merge institutions, and all acknowledged that this was well out of the comfort zone of HEIs. There was also much more debate on the possibility of shared services across the sector – an area which had previously been ruled out by many governing bodies.  

What could government do to support the sector? 

As the sector tentatively awaits the outcome of the upcoming General Election, Leaders recognised the limited financial room to manoeuvre given wider public spending challenges and the fact that other issues will often take priority. Nonetheless, four things that government could do to support the sector were identified that implied limited financial outlay.  

1. Review the role and approach of the OfS. The current model feels vulnerable to political pressure (e.g. over freedom of speech), increasingly costly and bureaucratic (e.g. on mental health provision) and unable to lead a conversation about the future structure of a sector that can deliver world-class research and teaching whilst being financially sustainable.
2. Create a skills strategy covering domestic education, upskilling and immigration. Align the various parties (local authorities, employers, providers) around local strategies for skills. Stabilise immigration rules based on the needs of the economy and society rather than short-term political imperatives. Use this to drive the narrative on the value of education and qualifications at all levels, rather than undermining the value of degrees. 
3. Restore the ability of FE colleges to borrow on commercial terms – providing greater flexibility for the leadership teams of FE colleges to make strategic decisions on growing their FE offering based on the labour market demands of their location.  This will also enable colleges to make medium-long term investments which strengthen their ability to meet the growing local demand for places in their towns, cities and regions.
4. Support the further consolidation of the sector by providing transition funding for those institutions who are exploring wider options. Government can play a critical role in the future of the Education sector, by demonstrating commitment to and investment into sensible consolidation approaches which allow organisations to thrive and make an impact on the UK. 

By addressing these considerations and seizing the available opportunities, further and higher education providers can “shine as global Britain’s gem”. Through innovation, collaboration, and a commitment to providing a skilled workforce, the education sector will continue to thrive, provide first-class student learning experiences, meet the needs of employers, and contribute to the long-term success of the economy.