October 2010

By Andrew Lees, a consultant with Expense Reduction Analysts

The business of education
I doubt there would be many readers of this magazine who would disagree with the statement that independent education in the UK is a serious business. It accounts for an estimated £7 billion of consumer spend per annum and caters for the educational needs of almost 1 in 10 of the school-age population. As such, it represents a significant sector of the national economy and, as with all other sectors of commerce and industry, is not immune from the effects of wider economic fluctuations and recession, as bursars and other senior school managers will be only too aware.

In fact, the outlook for independent schools is double-edged. On the one hand, there is a huge opportunity in the growing target market represented by a burgeoning professional class that is dissatisfied with a largely demoralised and highly regulated state sector which may itself have to cut back in years to come.
At the same time, however, the number of independent schools entering the market itself is growing and there is now the added threat of state-funded Academies and free schools offering many of the traditional benefits of non-state education without the fees.

And therein lies the challenge, of course: fees. They are the primary source of income for all independent schools but also the factor that stands in the way of many otherwise willing customers. Obviously, any business must balance the cost of its product against what its competitors are charging and what the market is willing to pay but this is the area in which independent schools have traditionally fallen down. For the past 30 years, fees have steadily risen in excess of inflation and now, as the credit crunch and ensuing recession have taken their toll on household budgets, pupil numbers have unsurprisingly begun to fall and school closures have increased.

A case in point, as I write this, is the 115-year old St Ursula’s School in Bristol, which is only re-opening for the Autumn term thanks to a bailout from the LEA, which has bought its land and buildings and will now lease them to Oasis to operate an academy. The School had just 160 pupils on the books when administrators were appointed in August.

As the most recent Independent Sector Report from mtmconsulting points out very succinctly, “independent schools’ rolls have not kept pace with the expansion [of the market place], largely because they have failed to control their costs and have become progressively more unaffordable.”
So, how do school managers tackle these cost pressures in order to keep fees affordable and exploit a market which, according to the research by mtmconsulting, is 2 million strong in pupils.

Cost management
The answer – not as obvious as it initially sounds - is a strategic, forensic and rigorous process of cost, purchase and supplier management.
Many headlines about spending cuts in private and public sector organisations of late have focused, and will continue to focus, on jobs and headcount. But this is not the only way to achieve efficiencies, particularly in schools where teachers are such an important asset in delivering the end product. In contrast, the article that caught my eye recently was a report issued by the Department for Communities & Local Government in which it published all government expenditure over £500 made during the last year of the previous administration.

There was some fascinating detail about what might appear, on the face of it, to be fairly mundane and low value expenses such as taxi fares (£635,000) and catering costs (£310,000). But, of course, what the DCLG has realised, is that it is these seemingly inconsequential areas of spend that can have such an impact on budgets when trying to make savings. To put it into really cold, hard business terms, the opportunity lies as much in the bottom line as the top. In other words, managing costs such as those identified in the DCLG report, is a more efficient way of improving your budget situation than cutting staff or embarking on a recruitment drive for more pupils.

If you still need convincing, think about it in these terms:  on a typical industry profit margin of around 8%, a business would need to generate sales of a quarter of a million pounds to make the same bottom line impact as cost savings of just £20,000.

Principles of cost management
As illustrated by the frequent default approach to job cuts, there are many misconceptions about what’s involved in undertaking a strategic cost and supplier management review. One of them is that it is simply about reducing expenditure when, in fact, it can throw light on a range of other purchasing and supply decisions – such as whether the products and services you’re buying are actually the ones you need; and whether the terms of contracts you may have signed up to some time ago are still relevant to your organisation today.
Some of the golden rules include:

• Create a cost conscious culture – one in which everybody within the organisation is responsible for challenging costs. Make staff aware that savings go straight on the bottom line and lead by example – don’t allow the Head to travel by first class if you’re asking the rest of the staff to photocopy double-sided.

• Analyse, don’t presume – only through a detached, line-by-line analysis of expenditure will schools fully understand their true operating costs and the nature of their relationships with suppliers – rather than relying on received assumptions about where the money goes. This sort of analysis will throw up challenging but valuable questions about what you are spending and why.

• It’s good to talk - proactive cost management doesn’t have to mean jettisoning existing suppliers or undergoing lengthy tendering processes to appoint new ones. Suppliers will invariably respond favourably to requests to refresh service level agreements or pricing structures if they believe it will help them retain a valued client  and significant savings can be achieved simply by overcoming the ‘contract fatigue’ that inevitably sets in when relationships have been sustained over several years.

There’s no doubt that independent schools are businesses and, in order to survive in the face of unprecedented financial pressures and a rapidly changing educational landscape, they need to take a business-like approach to the way they manage their expenditure and supplier base. If they do, the opportunity exists not only to survive the economic downturn but to grow through it and put themselves in a stronger market position for when the good times return.

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