Tailoring For a New Suit: The Inevitability of Competition

By Sean Johnson (Managing Director, sean@appliedinspiration.co)


In a recent Wonkhe blog, Iain Mansfield, addressing the issue of creating a taxonomy for value for money (VfM), made a statement that caught my attention: “The existence of a graduate premium does not demonstrate productivity gain or value for money for the state.” His submission provided a valuable read for a thinking approach to the conversation about value for money.


To my mind, value for money is not simply a taxonomy exercise to create descriptors for value for the various competing or aligned stakeholder groups.  While the taxonomy discussion is largely the preserve of commentators, like myself, or those with an observational or academic interest, it reminds me that regulation has a place in addressing market failure, and with respect, no level of definition will mask the intended impact of the regulation on the marketplace for higher education, and further down the buyers’ supply chain.


So rather than wading into this quicksand of taxonomy of value for money, I have unpacked the drivers of value intended by the legislative and regulatory framework. At its core, the legislative framework provides a relatively common approach to opening up the competitive elements in a sector as a means of ensuring a higher return on investment to “the public” and a more level playing field between buyers, in this case students and sellers, i.e. higher education institutions (HEIs). While the terminology may offend some, once students were compelled to pay fees it ensured that the sector was going to have to operate in a more market-like manner.


Drawing on some basic strategy 101 using Michael Porter’s Five Forces Model[1], legislators have sought to drive up competitive tensions and rivalry between “firms”, i.e. HEIs, FE colleges and other so-called alternate providers. A range of mechanisms have been introduced to accommodate the lack of market forces. The premise, which is sound, is that the concentration of power in the hands of a relatively small number of suppliers has provided significant market power to suppliers at the expense of the students as purchasers and the Government as co-investors, on behalf of the “taxpayers”.


The Higher Education and Research Act 2017 and its subordinate Regulatory Framework is basically an economic tool seeking to redress market failure. To demonstrate, relying on the simplicity of Porter’s model, the market for higher education can be viewed through the lens of the interaction between buyers and sellers; the availability to alternatives of the same product (degrees, etc); alternative education products which would also serve their need (intellectual and occupational fulfilment); and the intensity of rivalry between competitors. This interaction of factors traditionally manifests at the pricing setting level, with the level of competition in the market assisting in “self-regulation” of prices.


As we all know, pricing is regulated and capped, albeit this is now under review. I am surely safe in saying that the result of the review will not be a free market, for so long as students-as-buyers and government-as-investors cannot evaluate the value in the supply chain, it will remain regulated. Accordingly, the self-regulatory capability of the market in regulating prices shifts to the costs of production of a unit of higher education, with the assistance of additional balancing regulation and politicians being the ultimate arbiter of what a fair price should be. This is not the market in action.


Clearly, the HE sector cannot be a fully functioning market, and for so long as higher education, all education for that matter, remains a tool for social engineering by the political forces of the day, there will be some degree of inherent market failure.  The consequence of inhabiting this twilight-zone of being neither a fully/solely public funded (a bureaucracy), nor a functioning commercial market, results in the potential for the manifestation of non-market behaviours, such as rent-seeking. Rent-seeking occurs where one party to a transaction can extract a larger amount of value than the other party to a transaction, and can go as far as pricing-gouging, even in a price regulated market. An example of rent-seeking is where sellers in disaster zones increase the price of their scarce goods, e.g. water, taking a super profit in excess of the value provided to the buyer. Price-gouging is where the increased price verges on, or exceeds, what is ethical.


In short, irrespective of how it is dressed up politically, the regulation of the sector is designed to eliminate or reduce the rent-seeking which is inherent in industry sectors with only a loose connection to the market. The rent-seeking behaviours manifest where informational opacity, or lack of transparency in the costs of production, i.e. how fees and funds are used, leads to managerial opportunism whereby larger gains are acquired or accrue to the seller. The term is often associated with contracts where one party seeks to use the lack of transparency to either reduce the price paid or the cost of production and pockets the benefit without disclosing to the other. In widening participation this can be associated with the term “the cost of doing business” and the potential for cross-subsidisation of areas which are not provided for in the Access Agreements, as opposed to areas where this would be legitimate.


The regulatory framework seeks to redress this through a range of mechanisms, but all are based on the premise that greater levels of competition between HEIs will force the reduction in the costs of production of education. This will reduce the public having to increase their subsidisation and, given the public backlash on fees, the potential for price escalation. Thus, the debate about value for money and what does one, or many, get for their investments.


The obvious cited example of rent-seeking is the issue of remuneration of vice-chancellor and/or senior executives. The alleged opacity of the costs of production have, it is assumed, resulted in increased salaries that are disproportional to what they would be in a functioning market where transparency was higher.


While vice-chancellor salaries have become the proxy for discontent at institutional transparency, and I note a new chapter for redress was recently unveiled by the OfS, other indicators of value linked to the costs of production of education include graduate employment outcomes, and teaching standards. The Teaching Excellence Framework (TEF) is clearly a mechanism to increase the level of transparency, leaving aside the contest as to whether it is actually accurate, it certainly has been given plenty of attention. A short anecdote; I spoke to a parent who was taking their 18-year-old to visit a Russell group institution recently and he thought he promotion of TEF Gold meant they were good at teaching English to foreigners.


Unfortunately, many of the alleged “offenses” arising within the sector are based on the loose use of anecdotes, but they do collectively point to a lack transparency, or ignorance in the marketplace for education. They also point, more concerningly, to the reliance on proxies for quality such as the university brand.


Returning to Porter’s model the lowering of barriers of entry to new providers enabling easier entry to the sector, together with the signalling of a tolerance for institutional failure, is an obvious approach to putting competitive pressure back in to the market.


The encouragement of more substitutes for a higher education or degree through alternative pathways to skills focused employment outcomes, through an apprenticeship also …… The introduction of the apprenticeship levy, T Levels and University Technical Colleges are all regulatory interventions to increasing options for buyers and put pressure back on the HE sector. This said, I am not ignoring the other political and economic drivers underpinning the enhanced focus on employment and skills that these interventions serve.


As mentioned earlier, the interaction between buyer and seller in higher education manifests in a purchasing transaction where the value delivered and received operate on different time scales. The course is delivered over three to four years, say, with payment upfront. The post-graduation benefit is unknown for many years and also requires a significant intellectual co-contribution. The use of employment data is used a proxy.


The value for the public investment, including the positive externality benefit of education, is also exceptionally difficult to compute, but it is hoped to manifest in, for example, the upward movement of the GDP in years to come. With the price set on entry and no recourse for “defective” products, particularly in the absence of a fluid credit transfer market, the transaction is one that begs for intervention. However, a response that relies on increasing informational transparency between buyer and seller, is not enough given the complexity of the transaction, and hence the combination of interventions.


Having concluded that the market requires intervention, driving increased competition between HEIs, and between HEIs and the other competitors in adjacent sectors in the wider education market, together with a price cap, and a potential price reduction, means that institutions have few places to enact reform. The obvious place to address is the business of production across their institutional business value chain. This is squarely an efficiency forced approach.


HEIs’ must: Produce a better product; create a brand that will differentiate your offer to an identified and willing target market; deliver it exceptionally; evaluate what worked while remaining deeply sensitive to the demands of all your stakeholders; and repeat the above, while reducing your costs of production at every step. Improve institutional productivity at the systems and IT level, and the human action level.


Alternatively, wait for the proverbial “other shoe to drop”, with the post-18 funding review, and sadly, the delivery of guidance from the political elite. However, it appears somewhat inevitable that irrespective of what pearls of policy are dropped from above, doing more with less will not be escaped by anyone.


My advice: Get out the scissors and start cutting your proverbial cloth to fit. For those requiring upskilling in organisational process and programme redesign, a new course will be offered by an enterprising FE college or professional development provider near you.

[1] Porter, M.E. (1980) Competitive Strategy Techniques for Analyzing Industries and Competitors