Leadership Foundation

06. Commercial operations

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Introduction and aim

This briefing note considers commercial operations. These include the operation of campus-based services and facilities, most notably student accommodation; commercial services to private clients; and international work. The purpose and operation of these activities is often very different, but all impact in different ways, and degrees, the successful operation of the institution.

The scope of commercial operations

Higher education institutions engage in commercial operations - activities managed primarily on a commercial basis or for commercial gain - for different reasons. Typically, commercial operations cover:

• Campus services and facilities
• Commercial services for private clients
• International student recruitment and developments

An institution may manage and run its own commercial operations, contract them out to a third party (outsource), or operate a joint venture with another party.

Campus facilities and services

Institutions provide a range of campus facilities and services, typically including catering and student accommodation. These services are often run by institutions (or a third party provider) as commercial operations; even when the services supplied to students and staff are at cost (ie the price to the user only recovers their cost of supply). They are normally expected as a minimum to break-even in order to remove the risk of any cross-subsidy being provided from the institution’s core funding for teaching and research. As commercial operations they often have a very different style of management to the institution’s academic activities, and are usually, if run by the institution, headed by a professional service manager with relevant specialist knowledge and expertise.

Contracting-out non-core services

For services viewed as non-core, many institutions consider whether to contract out the service (outsource) to a third party provider. Catering is one example where outsourcing has frequently occurred, with institutions inviting commercial contract caterers (of which there are a number of large national players) to tender to run the food and refreshment outlets on the institution’s campus(es). Similarly, for a number of institutions commercial bus companies operate dedicated bus services.

External providers are normally used where a specialist service provider is able to provide a better value-for-money service than the institution could provide by operating the service itself. Once the decision to contract out a service is agreed, the process will normally involve the institution’s procurement team seeking and then selecting a contractor best able to offer value-for-money for the service required.

Student accommodation

The provision of student accommodation is often considered important in supporting student recruitment, with a lack of student accommodation viewed by institutions and their marketing teams as having a negative impact on student applications and choice of institution. Prospective students and their parents frequently enquire about accommodation at open days prior to the individual choosing which institutions to select as their preferred choice. As a result, many institutions seek to ensure that they have sufficient accommodation to offer to their new first-year undergraduate students, as a minimum.

Demand for more student accommodation

The growth in numbers of student entering higher education has increased the demand for student accommodation. The rising demand and the ability to use student rents to fund new accommodation has led to direct investment in new buildings by institutions, but also significant investment from private investors and developers.

Demand for better quality accommodation

As well as the volume of accommodation spaces needed; institutions should be mindful that students are increasingly expecting a better (when compared to earlier generations of students), quality of accommodation and associated facilities. Typically, new or refurbished accommodation includes the provision of single rooms with en-suite facilities, wireless broadband connectivity and use of a communal kitchen and social facilities.

Institutions with student accommodation constructed some years ago need to be alert to the need to refurbish and update facilities on a regular basis to ensure their provision remains attractive to students.

Providing student accommodation

In the absence of internal resources, institutions wanting to build and own new student accommodation need to borrow from the banks or the capital markets. An alternative is for a private sector investor to build or refurbish accommodation on behalf of the institution, requiring in return institutional ‘guarantees’. Typically, to bring forward private investment and secure exclusive use of a building the institution ‘guarantees’ to supply sufficient students to achieve a minimum occupancy level and therefore the income received by the developer. The guarantee transfers risk from the private sector investor to the institution. The term of such guarantees is normally long and may be, say, 20 years.

Approval by governors

Irrespective of whether the institution is directly investing in new accommodation or guaranteeing levels of use for private investors, governors will normally be expected to approve the decision being made. In deciding whether to support the development of new student accommodation, governors should consider the need for additional student accommodation; the cost of providing the accommodationto the user (eg is it affordable for students); and the risks associated with the funding model used.

Commercial services for private clients

Some teaching and research activities are undertaken at the request of a private client. Clients often normally seek access to specialist knowledge or expertise available from the institution or use of facilities or equipment to meet a specific organisational need. Institutions usually charge commercial rates for the services provided. Typical services provided cover:

• Research or consultancy to address a client’s needs
• Access to, and use of, specialist facilities or equipment
• Provision of bespoke training programmes or short courses

The delivery of the services may involve the use of existing teaching or research facilities or staff, but can involve significant additional investment by the institution in specialist facilities (eg a conference centre or executive development suite). Any significant investment decisions should be given appropriate consideration, including an assessment of the associated strategic and financial benefits and costs.

Knowledge exchange

Commercial services for private clients are part of the third stream (to distinguish them from core teaching and research) or the knowledge exchange spectrum. Knowledge exchange includes a broad range of activities, involving knowledge or assets available from the institution being exchanged with external organisations or communities. The work is frequently seen as important for the development of an area, region or the national economy and linked to the so-called ‘knowledge economy’: the use of high-level knowledge to produce competitive goods and services to enable organisations and countries to compete in the global market place.

The knowledge economy

Higher education is seen as central to the knowledge economy and the national jurisdictions in the UK have used public funding to encourage institutions to develop their knowledge exchange activities. As a result, the scale of activity has grown. Many institutions have developed significant knowledge exchange operations, including central service hubs, often working in conjunction with local (local economic partnerships) or national (Technology Strategy Board) bodies to develop new activities to support economic or business development. As part of this work some institutions have developed and operate incubation facilities to support start-up businesses, including ‘spin outs’ from the institution (eg from the research base) or businesses started by the institution’s graduates.

International developments

An area of very significant growth for UK institutions has been international student recruitment and partnerships. Although offering important benefits in terms of the cultural diversity within the student population, a major driver of the growth of international student recruitment has been financial. International students have been an important way for institutions to increase and diversify their income streams, and on occasions enabled them to continue to grow student numbers and income, aside from restrictions placed on home and EU student numbers.

The importance of international recruitment varies by institution, but many have invested heavily in building networks of recruitment agents or partnerships with local organisations (eg local-based education providers) in those countries the institution is targeting for its recruitment. The recruitment of international students may also be linked to additional investment in student accommodation in the UK in order to enable the institution to offer an attractive ‘package’ of education and accommodation to potential applicants from overseas.

A smaller number of higher education institutions have opened overseas campuses, sometimes working in partnership with a locally-based institution. As a general rule such developments need careful scrutiny before being allowed to go ahead, not least because of the increase in the potential financial and other risks involved.

Subsidiary companies

Most institutions have subsidiary companies to manage the operation of some aspects of their commercial operations. The reasons for such developments are:

• They can reduce the potential conflict between institution’s public role in operating for public benefit, and the desire to run commercial operations for profit or to show the activity separately (eg operation of incubation facility).
• The profits of a subsidiary company are normally reduced or removed by charging the company an ‘overhead’ for the professional services (eg management time, accounting services) provided by the parent institution. This enables the institution’s costs to be defrayed, and reduces the tax charge on the company.
• There are normally tax benefits from operating with a subsidiary company, including the ability to recover value added tax (which a ‘public’ institution is unable to do) and remit profits back to the parent institution.

Where the institution is delivering the commercial services itself, the company is usually a wholly owned subsidiary of the institution. If delivery is a joint activity with a third party, ownership of the subsidiary company may be shared. Governors should expect to examine and comment on the business plans for any subsidiary the institution is operating and to regularly monitor its performance against agreed outcomes. Members of the governing body may also be asked to become directors of a subsidiary company.

Questions to consider

• Are you clear about what activities are run as commercial operations?
• Is there a clear rationale for the way commercial operations are organised?
• Is the institution seeking to increase the quantity of student accommodation?
• How is any planned increase in student accommodation to be achieved?
• Is there a need, and are there plans to, refurbish the current student accommodation to keep it current?
• Have the plans and investment in international student recruitment and developments been reviewed? Do they stand up to scrutiny?
• Do governors see the business plans for subsidiary companies and review their performance?

September 2014
E: david.williams@lfhe.ac.uk
W: www.lfhe.ac.uk/governance
@LF4HE