Universities Finance Seminars: Pricing, Marketing & Contribution Analysis

1. Brian Plowman Director Develin & Partners, Ash House, Fairfield Avenue, Staines, Middlesex TW18 4AB, UK Tel: 01784 224207 brian.plowman@develin.co.uk www.develin.co.uk Universities Finance SeminarsBRITISH UNIVERSITIES FINANCE DIRECTORS GROUPPricing Decisions, Marketing & Contribution Analysis UFS

2. Develin & Partners Approaches we implement: • Activity Based Management • Business Process Management • Value Based Management • Performance Measurement • Change Management • Information Systems Strategy • Overhead Effectiveness • Organisation Strategy

3. Typical past clients: (Broad spectrum) • Abbey Life Assurance • ABB Kent Meters • ACCO Europe • AEA Technology (Harwell) • Allied Domecq • Allied Industrial Services • Alstom Gas Turbines • Amoco • Anglia Polytechnic University • Aspen Business Comms • Automobile Association • Avesta Sheffield • Bahrain Telecom • Bank of Ireland Mortgages • Banque Industrie Franaise • BARMAC • BBC Production • BBC World Service • BBC Worldwide • Benfield Motors • BET • Boehringer Mannheim Limited • Boots International Healthcare • Boots the Chemist • Boots Store Planning • BP Chemicals • BP Exploration • BP Oil • BAe Systems and Equipment • British Aviation Insurance • British Rail • British Telecom • BT Conferencing • BT Mobile • BTR Graphics • Building Research Establishment • CCH Editions • Cendant Business Answers • Century Group • Cerberus • Chalmers & Mitchell • Charities Aid Foundation • Charter Consolidated • CI Bakeries • CIC Banque (Paris) • CLS Packaging • Clyde Shipping • Comag • Co-operative Bank • Co-operative Retail Services • Copystatic Systems • Costain • Department of the Environment, Transport and the Regions • DHL Worldwide • Dominic Group • East Midlands Electricity • Enron • Equifax • Estonian Railways • Factory Mutual International • Fisons Pharmaceuticals • Fleet Air Arm • Forth River Purification Board • Franklin Mint • Glostal • Granada Hospitality Services • Granville • Grattan • Guardian Newspapers • Guardian Royal Exchange • Gunstones Bakery • Hazlewood Foods • H P Bulmer • Hepworth Refractories • Hollow Extrusions • Holt Jackson Book Company • How Engineering Services • Hydrographic Office • Ilford Films • Jersey Milk • Kao Infosystems (UK) • Kleinwort Benson • Kuwait Investment Office • Kyle Stewart Limited • Lab of the Govnt Chemist • Le Riche Group • Leeds Permanent Bldg Society • LIFFE • Livpl Victoria Friendly Society • Lloyds Bowmaker • Lombard North Central • London Electricity • Lucas Aftermarket Operations • Lucas Automotive Electronics • Lyons Tetley • Meggitt • Mercantile Credit • Metal Castings • Ministry of Defence • Muraspec • Murray Lawrence • National Savings • National Starch • NatWest Bank • Nokia Telecomms • NORWEB • Ohmeda Limited • Pearl Assurance • Perot Systems • Pilkington Barnes Hind • Pro-Bel • Prudential Assurance • Prudential Home Service • Prudential Portfolio Pyroban • Quadrant • Rhone Poulenc Rorer • Ross Breeders • Rover Group • Royal Automobile Club • Royal Bank of Scotland • RTZ Pillar • Saudi International Bank • Schroder Unit Trusts • Scottish Courage • Scottish Environment PA • Severn Trent Systems • SG Hambros • Simpson Lawrence • Sir William Halcrow • SmithKline Beecham • South West Water • ST Microelectronics • Staveley Industries • Stryker (Howmedica International) • Sun Alliance Group • Sun Life Assurance • Syntegra • Tate & Lyle Sugars • Texaco • The Mercers Company • The Post Office • Toad Innovations • UK Paper • United Utilities • University of Leeds • University of Manchester • University of Surrey • Vertex Data Science • WH Smith • Wace Group • Waitrose • Walter Alexander • Wella • Whitbread • Wholesale Fittings • Yellow Pages • Yorkshire Electricity • Zeneca Pharma • Zurich Insurance • Typical clients in the HE/FE sector: • University of Leeds • University of Manchester • University of Surrey • City University • Anglia Polytechnic University • Buckinghamshire Chilterns University College • Edinburgh Telford College

4. HE is big business

5. Key messages and actions that follow • An example of a pricing policy which an HEI might adopt is one that aims to set prices that cover actual costs and make a surplus on any activity, the level of surplus reflecting what the market can bear. • It is recognised that an institution may not be in control of prices for certain services, since most HEIs operate in a variety of markets with often very different constraints in pricing • The increased awareness of the costs of different activities and different units that has come about as a result of the Transparency Review should enable institutions to have a much clearer view of which areas are financially viable, and which are not. • The pricing strategy may need to address using the opportunity to review processes and seek simplification.

6. High quality answers are needed Contribution analysis Contribution analysis

7. Key points • Meaningful information. Not buried by data.

8. Strategy is about Positioning and Capability Capability • Methods • Processes • Organisation • Technology • Skills • Culture Positioning • Products/services • Customer Needs • Competitors • Regulatory framework • Environment • Shareholders • Overseas student fees • Non-publicly funded courses • Franchised programmes • Research and consultancy • Professional courses • Major teaching contracts • Short courses • Workplace nurseries • Residences, catering, conferences, • Bars and shops • Printing and publishing • Theatre performances • Room and equipment hire Where you want to be Where you are now

9. The journey Culture Change Is everyone with us? Performance Measurement Where are we on the journey? Change Management No pitfalls on the journey Where you want to be Capability Business Process Re-engineering Reduce process costs, improve service Positioning Where you are now Activity Based Management Product & Customer profitability Portfolio mix, pricing

10. Key points • Meaningful information. Not buried by data. • Need to work on both axes: Positioning & Capability

11. Activities: The fundamental building blocks Costs * Resources Ledger Service levels * Revenue Outputs Result of activities Activities Inputs Make activities happen Cost driver volumes * Methods Way things are done Unit costs * * All these are measurable Activities are the engine of change

12. Activities Process effectiveness Using Business Process Re-engineering Costs Resources Ledger TRAC & fEC using Activity Based Costing Outputs Result of activities Inputs Make activities happen Activities Cost driver volumes Methods Way things are done Unit costs

13. Key points • Create meaningful information. Don’t get buried by data. • Need to work on both axes: Positioning & Capability – plot the journey • ‘Activities’: useful for TRAC, fEC and improving process effectiveness

14. Activities vary for different reasons Reduce costs: By changing the method Show excited customer research proposal Travel to customer Reduce (increase) costs: By changing the level of service internally & externally and identify risks (benefits) Support Enables core activity to take place Core Adds value, meets business and customer needs Diversionary Adds cost, but no value - caused by process failure Reduce costs: By making an upstream process improvement ..and by Changing customer (& supplier) behaviours Explain to customer why last project was late, report had missing sections and the invoice was wrong

15. Process view more useful than functional view Outputs (eg Student registered and fees in the bank) Inputs (eg Student shows up for Registration) Linked activities - with measurable inputs and outputs

16. Becoming price competitive (and/or fund growth plans) 51% 30% Typical starting point Overall less and rebalanced 19% Becomes C C/S C/D D Outputs Inputs

17. Key points • Create meaningful information. Don’t get buried by data. • Need to work on both axes: Positioning & Capability – plot the journey • ‘Activities’: useful for FEC and improving process effectiveness • Reducing ‘diversionary costs’ funds all your improvements (case study later)

18. Basics of ABC modelling Resources (on the ledger) Activities (found by analysis) Outputs (meaningful entities/groups/etc)

19. The purpose of ABC is to make this link So we must find out... …and why We know: So we can determine: How much activities cost What drives activity costs What resources cost The cost of outputs Selling Manufacturing Filing Training Paying suppliers Planning etc such as No. of customers No. of products No. of invoices etc People Equipment Travel Materials Buildings etc Products Services Channels Customers etc Resources Activities/ processes Activity drivers Cost objects ... in order to be able to assign costs accurately to products and services

20. Cascading costs through the model F Course 1 Course 2 Rsrch proj 3 Student 1 Funder 2 Legal Entity Sustaining Ledger items: Salary Pension Stationery Rent & rates Fully costed person Activity 1 Activity 2 Activity 3 Activity 4 Activity 5 Activity 6 C D E A B G Decide the logic & assumptions Resource module Activity module Cost Object module A Short cut to reduce complexity in the model. (e.g consolidate all ‘people’ costs) B Allocate people costs on basis of time spent on activities C Allocate other costs on an appropriate basis (eg space used, No. of people) D Allocate some activities to others (eg HR, Estates, etc) E Allocate activities to ‘products’ and ‘customers’ on an appropriate basis. F Allocate products to customers. G Allocate costs and activities to Legal Entity and Sustaining cost objects

21. Key points • Create meaningful information. Don’t get buried by data. • Need to work on both axes: Positioning & Capability – plot the journey • ‘Activities’: useful for FEC and improving process effectiveness • Reducing ‘diversionary costs’ funds all your improvements (case study later) • ABC modelling helps to deliver fEC (and every aspect of profitability in the university – case study later)

22. Cost categories: Activities and cost drivers The cost of being in business - no cost driverseg annual audit, senate Legal- entity Current cost, future value no cost driverseg New IT development, spare capacity, brand advertising Sustaining ABC Contribution line Current cost, current value - indirect eg quality control, training, IT network Internal service Front-line Current cost, current value- direct eg teaching, research, selling, customer service, cash collection Products/services, channels, customers

23. A universal law: The Hook Curve Cumulative customer contribution 100% Contribution Positive contributors Negative contributors Customers Highest contributing customer 30% 60% 100% Similar though less pronounced ‘hook’ for product contribution

24. Key points • Create meaningful information. Don’t get buried by data. • Need to work on both axes: Positioning & Capability – plot the journey • ‘Activities’: useful for FEC and cost reduction • Reducing ‘diversionary costs’ funds all your improvements (case study later) • ABC modelling delivers FEC • Contribution analysis delivers Product & customer profitability. (case studies later)

25. Poised in the starting blocks Strategy: Where you want to be Capability fEC modelling 51% 30% Positioning 19% Knowledge of activities, processes, costs, volumes

26. Key points • Create meaningful information. Don’t get buried by data. • Need to work on both axes: Positioning & Capability – plot the journey • ‘Activities’: useful for FEC and cost reduction • Reducing ‘diversionary costs’ funds all your improvements (case study later) • ABC modelling helps to deliver fEC (and every aspect of the university – case study later) • Contribution analysis delivers Product & customer profitability. (case studies later) • All functions work together concurrently on Positioning & Capability

27. Case studies Positioning

28. Key points • Create meaningful information. Don’t get buried by data. • Need to work on both axes: Positioning & Capability – plot the journey • ‘Activities’: useful for FEC and cost reduction • Reducing ‘diversionary costs’ funds all your improvements (case study later) • ABC modelling delivers FEC • Contribution analysis delivers Product & customer profitability. (case studies later) • All functions work together concurrently on Positioning & Capability • ABC analysis produces surprising insights.

29. A University 1,000 Courses Total costs: £69.4 million Total No. students 13,000 Academic staff 630 Support staff 690 2,000 Modules 3,500 Degree combinations

30. Schools, Modules and Students Students select a range of modules from various schools (create costs) Typical School Schools have their ‘own’ students (Revenue) Sch 1 Sch 2 Sch 3 Cost of preparing and delivering modules High Cost of managing own students Low Schools develop and deliver their own modules Costs Used by Central depts Students Modules Schools

31. Definitions • Students: full-time, part-time, international, regional, mature, disabled, … • Customers: students, companies, HEFCE, loan companies, regional partners, … • Products: modules, pathways, sets, fields, advice, guidance, accommodation, awards, chaplaincy, sporting facilities, ... • Resources: academic staff, admin staff, managers, buildings, facilities, networks, computers, library, ...

32. The Model: Highest level of cost separation Without Income £8.4 million £21.3 million With Income £35.2 million Modules £39.6 million Modules & Students £4.4 million Students Total Costs Modelled £69.4 million

33. ABC model

34. Without Income All of these categories were further broken down in the model Buildings not used. £8.4 Million Previous Reorganisations Student Services Infrastructure Sustaining Internal Research £0 £500,000 £1,000,000 £1,500,000 £2,000,000 £2,500,000

35. With Income All of these categories were further broken down in the model Funded Projects £21.3 Million Summer Schools Internal Commercial Services Conference & Catering Funded Research Student Accommodation Regional & Associate Colleges External Commercial Services £0 £2,000,000 £4,000,000 £6,000,000

36. Modules - Total Cost Standards & Quality £35.2 million Teaching Space Labs & Technicians Library Module Administration Teaching £0 £10,000,000 £20,000,000 £30,000,000

37. Average Module Cost per Student LAW ABS HCP LSS APPS Schools AL EDU CHSS UCLT UCANA DACS REGO £0 £200 £400 £600 £800

38. One module within the Law School Timetabling 105 students £289 each student MPD - Classroom Audio Visual Equip Resources Room Computer Room ASA - Academic Standards & Audit Note: All modules costed LIBRARY - Media Materials Cheltenham Campus Teaching Space LIBRARY - Readers Services LAW - Student Administration LAW - Teaching Individuals LAW - Teaching Lecturing £0 £20 £40 £60 £80 £100 £120 £140 Element Cost for Each Student

39. Avge Cost of a Module by Number of Students £1,200 £1,000 £800 £600 £400 £200 £0 10 20 30 40 50 60 70 80 90 100 120 130 Raised many questions: e.g Should modules be run with less than 10 students?

40. Avge Number of Students/Module/School 80 73 68 70 60 51 50 34 34 40 25 30 23 21 18 18 18 20 11 10 0 AL LSS ABS HCP EDU APPS LAW CHSS DACS UCLT REGO UCANA Schools

41. Students - Total Cost Financial Aid and Advice Counselling £39.6 million Student Income Collection Admissions Registration Open Access Student Assessments Tracking Modules £0 £20,000,000 £40,000,000

42. Students - Total Cost (Excl. modules) Residencies Income Collection Health Promotion Financial Aid & Advice £4.4 Million Counselling Student Income Collection Academic Guidance Careers Centre Recruitment and Admissions Registration Open Access Facility Student Assessments Tracking £0 £500,000 £1,000,000 £1,500,000

43. One Law School Student (Out of total 13,000 students) Service C&ITS - Open Access Facility Service ADMISS - Admissions 10 modules £3,383 total cost Service CPSVE - Registration Service FINANCE - Residencies Income Collection LAW Module - LWH2998A Service CPSVE - Assessment Tracking LAW Module - LWH1998A Service FINANCE - Student Income Collection LAW Module - Criminology LAW Module - IT & The Law LAW Module - Law of Evidence LAW Module - Sport & The Law LAW Module - Advocacy & Negotiation Language module LSS Module - Beginners French 2 Language module LSS Module - Beginners French 1 LAW Module - Legal History 1 £0 £50 £100 £150 £200 £250 £300

44. Full Time Average Student Costs Typical ‘EDU’ student goes to many other Schools’ modules eg Costly ‘Science’ modules £6,000 £5,000 £4,000 £3,000 £2,000 £1,000 £0 IO AL LSS ABS EDU HCP LAW APPS CHSS DACS REGO UCANA Schools Can compare with average income for students at each School

45. Attributes: To analyse data in the model Public and non-public teaching: (Similarly for modules and research projects) Student A.Benson F.Natel H.Scott D.Halston C.Jones D.Ford N.Bryan T.Sparke P.Orr P.Gibbs Year 1 3 3 1 2 2 3 1 1 3 Course Mst UG UG HND Basic Mst UGUGHND Basic Study PT FT FT Tk Snd Tn Snd FT FT FT DR Tn Snd Funds LA OS Own Co Own LA LA OS LA Co Accom HoR Home Out own Out Uni HoR HoR Home Home Out own Out Uni 18 invoices unpaid, and student not registered on any courses! Income higher than UK student but costs are in excess of revenue!

46. Key points • Create meaningful information. Don’t get buried by data. • Need to work on both axes: Positioning & Capability – plot the journey • ‘Activities’: useful for FEC and cost reduction • Reducing ‘diversionary costs’ funds all your improvements (case study later) • ABC modelling delivers FEC • Contribution analysis delivers Product & customer profitability. (case studies later) • All functions work together concurrently on Positioning & Capability • ABC analysis produces surprising insights even in simple businesses. • …and as many shocks and surprises in a University

47. Case study: University Capability eg Improve processes to reduce costs & improve service Recruitment, Admissions and Registration (including marketing activities) Timetabling Assessment Curriculum Development and Management QA: Validation and Annual Monitoring Staff Development and Training …. …. 23. Key processes

48. Recruitment, Admissions and Registration Involve the people who work in the processes • Many students do not enter through the UCAS standard system e.g. entry through NMAS, ‘route B’, direct application, part-time, post-graduate. Nurses and design students all require interviews. • Admissions process viewed as slow, inefficient and uncertain • Lack of clarity of task split between centre and faculty admissions • Students faced with queues, delays and repetition • Fragmented impression given to student – may lose potential students • Fragmented and duplicate data collected throughout university • Inconsistency of processes in different parts of organisation • Persistent schedule slippage, deadlines felt to be unrealistic • Everyone involved in much diversionary chasing activity • Needs clear strategic direction – no real course planning or portfolio development strategy • Curriculum development tends to be faculty-driven rather than demand-lead • Academic planning process is not adhered to – 2 year lead time required for new courses by administrative procedures • Short product life cycle but tendency to add and never cut courses (many modules may be running uneconomically) • General consensus that too much choice is offered to students Staff know of many more issues at the detailed level so more can be improved. Ensures buy-in by the people who will be affected by the proposed changes. Curriculum Development and Management

49. Create a process perspective: Walk processes Simple enquiry? 2 Student contacts BCUC with an enquiry 1 8 Answer query / send prospectus. Answer query about entry qualifications Answer query about disabilities Answer query about accommodation Answer query / provide further detail or pass to academic Answer query / provide further detail 3 4 6 7 5 Answer query / send prospectus. Pass on names if student has shown interest in open day 15 Record in Enquiries D/base. e-mail to Faculties weekly 9 Follow-up if they wish? Seeing the impact of issues within and between departments 10 Arrange suitable facilities to enable student to attend Send out invites to Open Day and record those who attend. 11 12 Send follow-up letter - different O/D dates to non-attendees. 14 No further follow up. Student then decides to apply / not. 16 Disability Support Services Prospective Student Marketing Faculty Admin Faculty Academics Admissions Accommodation Provide information on courses Update courses on Marketing Database Update Definitive course list No Faculty D/base Yes Marketing D/base Attend Open Day 13 Example shown is ‘Handling Enquiries’ a Sub process of Recruitment The Recruitment, Admissions, Enrolment and Inductionprocess is one of the most complex processes in a university and very prone to process failures and therefore unnecessary costs

50. Analyse activities from a new perspective Forecast next year’s student accommodation needs Keep records of suitable accommodation Support Enables core activity to take place Core Adds value, meets business and customer needs Diversionary Adds cost, but no value - caused by process failure Deal with all the mismatches and unexpected numbers of students. Done with haste and incurring extra costs.