THE UNIVERSITY OF YORK FINANCIAL STRATEGY. Summary

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1 THE UNIVERSITY OF YORK FINANCIAL STRATEGY Summary Context The University has experienced a long period of continuous growth and success. It has funded the capital needs required by academic growth through a diverse mix of cash surpluses, capital grants from government donations and borrowing. Income to support research, teaching and knowledge exchange is similarly diverse, with a mixture of government grants, commercial activity, and research grants and contracts. As well as continuing to invest in growth, the University must also develop and refresh the existing estate. In addition, financial plans and budgets must accommodate investment in new processes, staff development and organisational change. Departmental and corporate budget planning must be aligned to objectives and must be able to adapt to a volatile external environment. Objectives 1. Our financial planning will encourage efficiency and effectiveness in the use of our resources 2. We will maintain sustainable cash flow and improve our trading surpluses 3. We will manage risk effectively with robust policies and practices 4. We will contain our exposure to elements of the cost structure over which we have restricted control, including energy and payroll costs 5. We will manage our borrowing arrangements to enable growth, contain debt service cost and limit exposure to movements in the cost of borrowing 6. We will continue to maintain diverse income streams against a changing landscape of funding arrangements, including lower UK government financial support and growing dependence on new sources of income, particularly internationally 1

2 THE UNIVERSITY OF YORK FINANCIAL STRATEGY 1. Executive summary The University is a capital and people intensive operation that has identified the need to grow to achieve critical mass at both the corporate and departmental levels. At the same time there is a continuing need to refresh the existing capital base much of which is nearing the end of its design life. The university also places a high premium on the importance of investing in its people, courses and infrastructure. This preserves its attraction for the best staff and students and sustains the University s reputation for excellent research and teaching. The University s investment in its human and intellectual capital is met by funds set aside from departmental operating budgets. It is the intention to strengthen these by combining improvements to the University s resource planning processes with effective exploitation of newly enhanced opportunities for income generation. The capital funds required to meet the remainder of the University s current development plan have been estimated to exceed 107m 1 and will be invested within the next four years. Thereafter, up to 25m pa could be required both to refresh and replace legacy assets and to support real annual growth in the region of 1%- 2%. This target will be met from improvements to the University s operating cash flows. To create the headroom to accommodate change and development and the investment required to meet the physical demands of a growing University attention will focus on the efficiency and effectiveness with which the University uses its existing resources. Improvement will arise both by refocusing existing programmes and, where appropriate, by redeploying some existing spending streams. In other cases development will require fresh funds and have a potentially significant impact on the University s overall need for financial resource. As well as improving sustainable cash flow the University will seek to improve its trading surpluses. Though currently strong by past standards, in the short term these are set to decline under the combined weight of higher depreciation and debt service costs - both associated with enhanced rates of capital spend. With debt close to its planned peak the cost of borrowing is also close to its maximum but depreciation will continue to increase both as the average age of fixed assets falls and as a growing emphasis on research equipment shortens the average replacement cycle. 1 Planned spend for period 2011/ /15 2

3 In the longer term the University expects its financial resources to strengthen as the new student funding regime embeds. Any additional funds will be used both to accelerate the programme of capital renewal and to strengthen the teaching and research operations. Reinforcing the University s standing as a top research university where teaching and research activities are mutually dependent will remain the top priority. Lastly, attention will be paid to managing the risks inherent in the University s financial and development strategy. New sources of income have substantially increased operating cash-flows but higher debt means higher debt service costs and leaves correspondingly less room to absorb adverse developments in operating performance or funding. Growing dependence on fee income, particularly overseas fee income, has strengthened net revenues but also introduced new elements of uncertainty and we continue to be exposed to cost pressures salaries, pensions over which we have limited control. Finally, we are now facing the uncertainties attendant upon reductions in government revenue funding of teaching and research and of capital replacement and renewal. To meet these various challenges the University s financial strategy has been fashioned to deliver against the following objectives: a) Improve the efficiency and effectiveness of our resource allocation processes so as to achieve enhanced operating cashflows that are sustainable and sufficient to support planned levels of capital expenditure and debt; b) Improve the efficiency of capital utilisation so as to reduce the financial challenge of capital renewal and contain depreciation; c) Contain exposure to significant elements of the cost structure over which we have restricted control pay and pensions or which are inherently volatile energy; d) Strengthen our competitive position in relation to key but potentially volatile sources of income overseas and, more recently, home student fees; e) Rebalance income generating activities to compensate for reductions in Government funding of both teaching and research; f) Manage our borrowing arrangements to contain debt service costs and limit exposure to movements in the cost of borrowing. 2. Introduction As a charity the University differs from conventionally commercial enterprises by having principal activities teaching, research and knowledge transfer - that are seen as being for the public benefit and desirable in their own right. As a consequence many of the economic benefits of the University s activities accrue to the community at large rather than to the 3

4 University itself. At the same time the institution enjoys the benefit of access to grants and subsidies, partial exemption from tax and the freedom to plough back all its surpluses without the need to consider shareholders. Being a charity does not mean, however, that the University is not a business; its activities can be conventionally characterised in terms of inputs, processes and outputs and the efficiency and effectiveness with which it uses its resources to pursue its strategic objectives are as susceptible to analysis, management and improvement as in any commercial enterprise. Nevertheless, for Universities, making money is important not as an end in itself but as the means to support and develop teaching and research. This emphasis breaks the conventional commercial connection between means and ends and creates a potential inconsistency between what is seen as strategically desirable and what can be practically achieved, given the resources and opportunities available. The main objective of the University s financial strategy is to close the gap - if any - between the resources needed to satisfy the corporate strategy and the financial means available. Financial strategy therefore must focus firstly on translating the corporate objectives into a quantifiable financial target; secondly on assessing the capacity to generate the required resources; thirdly on the means of accessing any additional funds that may be required; and finally on proposing and supporting ways of improving the use of existing resources so as to increase desirable outputs and, potentially, to access additional resources. All this must be done in such a way that the Institution s exposure to financial risk remains manageable and, in particular, that the financial strategy is sustainable and robust in the face of uncertainty and, ideally, leaves sufficient headroom to respond to strategically relevant opportunity. In summary the purpose of financial strategy is to support the University s strategic objectives whilst maintaining an appropriate balance between ambition and risk. 3. Financial Strategy 3.1 Building on strength Over the last two decades pursuit of the University s strategic objectives has found physical expression in the growth of existing departments, in the creation of new ones, in the development of the Science Park and in the refreshing and replacement of legacy building stock. These developments have been driven in part by the need to achieve critical mass but also by the potential, conferred by the University of York brand and a growing reputation for excellence, to build a modern university with a breadth of relevant, high- 4

5 quality offerings. The burgeoning strength of the University has also delivered important financial benefits; successive improvements in RAE performance have added to revenue while the spread of the University s reputation for excellent teaching and research has seen overseas fee income increase fivefold. These developments have been critical to the University s ability to cope with rising costs, particularly staff and premises related costs, and have also supported a steady improvement in the financial contribution of the academic departments. In the most recent period the University has also begun to benefit financially from the introduction of top up fees for teaching and from full economic costing of Research Council funded research. Together, these items have so far added around 14m to the University s yearly income and have been central to the decision to commit to the development of its campus extension programme. Favourable changes in the University s revenue streams account for the bulk of recent improvements in financial performance these improvements will be amplified as the new student fee regime evolves. In the longer term, however, their main value will be seen to reside in the enhanced power and discretion they give to those managing the University s income. The University now has new and material options regarding pricing, markets, products and courses and these should significantly increase the ability to absorb incipient cost pressures, develop new initiatives and create surplus for investment. As a result much future development will be conditioned by concepts such as pricing, value added, customer satisfaction and product mix. 3.2 Recognising threats Strong though past revenue growth has been, until the recent introduction of top up fees and FEC the income from the core, home undergraduate teaching and research activities barely covered their recurrent cost. And while the University has been able to compensate and, to an extent, improve its situation by developing sources of income with higher marginal revenues it has always been difficult to generate sufficient surplus to replace and extend plant, buildings and equipment by relying on this source alone. The chronic insufficiency of adequate or predictable surpluses has meant that York, like Universities in general, could only develop and indeed sustain its existing capacity where it had access to significant amounts of capital grants. In this respect the University has been relatively successful so that over the last ten years over 90m of capital has come from grants and a further 50m has been committed to help fund the campus extension. By the end of the current MTP we can expect the outlook for capital grants to have changed for the worse. This is already apparent in the Research Councils approach to funding following the introduction of FEC. Now, and more importantly, pressure is 5

6 also beginning to arise from the Government s efforts to deal with an unprecedented budget deficit. Grant funding may not be entirely at an end but we may nevertheless see a return to the past practice of treating capital funding as a residual; an approach that encourages the funding of periodic initiatives but is too constrained and unpredictable to support planned programmes of renewal and development. Tightening of the State funding environment merely adds to the pressures already faced by institutions. These include an apparently inexorable rise in pension costs, pay settlements that have seemed unrelated to Universities ability to pay and an increasing exposure to markets where success is dependent on the ability to demonstrate a competitive advantage. Ultimately the immediate funding pressures should be more than ameliorated by the raising of the fee cap to 9000 but there will nevertheless be some further squeezing in the transitional phase and greater competitive pressure will create new financial challenges in the future. 3.3 Dealing with the future funding requirement The current phase of the University s development plan covers the six years from 2006/7 and at its completion in 2012/3 will have seen student numbers increase by over 30% and capital investment of over 250m. The funding of this growth has centred on the exploitation of additional and stable sources of recurrent income, on securing grant funding for capital investment, on using borrowing to accelerate capital investment and on using third party funding to mitigate the call on the University s own capital. The university has also applied significant elements of its additional income to improve pay structures, invest in staff development and improve support functions. In the new MTP and into the medium term the investment priority shifts from growth to capital renewal and the required level of capital spend will return to the lower levels seen in the recent past. At the same time, however, the outlook for further grant funding is at best uncertain and the capacity for further borrowing is limited. As a result future investment will be significantly more dependent on internally generated funds supplemented, where appropriate, by third-party funding. This development was anticipated when the previous strategy was set and significant comfort was derived from projections that showed OCF growing strongly initially and then becoming sustainable at the new levels. The expectation has been borne out; since 2004/05 OCF has risen more than fourfold reaching 22m in the current year. This is a strong and encouraging performance but the impending growth of debt service costs means that free cash flow, which until the present has largely paced OCF, will now decline somewhat to around 15.5m. 6

7 Though high by historic standards 15.5m of free cash flow still falls some way short of an estimated 26m required from 2012/13 onwards 2. In the longer term as government finances recover, part of the difference can be expected to be covered by grant income - perhaps 5m pa - and it should also be reasonable to assume a passive improvement of up to 10% in the efficiency of new investment. Some of this, however, will be offset as the replacement cycle shortens to accommodate increased spending on research equipment. Overall and assuming the maintenance of current levels of performance, an initial annual funding gap of 4m- 6 seems likely to emerge soon after the end of the current MTP period. Closing this gap will be the main focus of financial strategy over the next few years. Alongside a potential shortfall in capital funding the financial strategy will also deal with the increasing pressure on the trading surplus that will arise from the combination of higher interest charges and higher depreciation. At present both these factors are masked by technical factors but as successive completions increase the stock of depreciating assets, their negative impact will increase so that without the potential net contribution of additional fees our business model would be unlikely to support trading surpluses much above 2% within the decade. The weakness of the trading result appears less significant when considered in the context of the strong OCF but it nevertheless highlights the vulnerability of the University s published results to relatively small fluctuations in operating performance. The University s exposure to such fluctuations tends to be mitigated by the diversity of its income sources but some of these, notably overseas fees, make a high marginal contribution and have a potential to impact results disproportionately. 3.4 Addressing the gap Recent changes in the University s budgeting, planning and resource management processes have placed it in a relatively strong position to respond to the challenges it will soon be facing. Markets have also begun to change in ways that increase the payoff to be had by shifting resources to address new income-generating opportunities. In combination these factors create scope to gain greater advantage from efforts to manage costs, improve resource allocation and refresh and improve products and services. In addition, while the need to replace legacy assets brings significant new demands, it also creates opportunities to look at new ways of organising the delivery of key activities, principally teaching and research. Such innovation will help to raise standards and improve competitiveness but will also create opportunities to reduce operating costs and, perhaps most importantly, improve the efficiency of capital utilisation. 2 This figure allows for steady replacement or upgrading of the remainder of the University s legacy estate over the next ten years and for continued capacity growth of around 1-2% pa 7

8 The estimate of the funding gap assumes that the University will continue to be successful in funding non-core activities by accessing third party capital off balance sheet. This assumption is central, for example, to the ability to provide additional student accommodation and may become essential if legacy stock is to be replaced in an efficient and timely fashion. 3.5 Improving operating performance The combination of challenges facing the University means that the sustained generation of enhanced cash-flow and operating surpluses has now attained a degree of priority not seen or, indeed, required in the past. It is also one of the main reasons for the prominence of the Better Management (BM) programme with its focus, in the academic departments, on the achievement of contribution targets and in the support areas, on value for money and improved cost control. This element of strategy also entails a sharpening of the University s financial planning and management processes since the increased importance of achieving target levels of performance demands better information generally and an enhanced capacity to anticipate and respond to emerging problems and opportunities. Until recently the BM process has been mainly focused on enabling the academic departments to adapt to budgetary devolution. Attention will now shift to assisting departments to improve their contribution by improving the relationship between income generation and resource allocation. This approach will require new metrics for evaluating efficiency at the departmental level and better market intelligence and oblige the University to review the way in which departments are supported, risks are shared and capital allocated. Combining its responsibility for target setting and supporting performance improvement, the BM team will also find itself playing a central role in monitoring the balance between the Support and Academic Departments. This task will be informed by external benchmarking and reflected in a systematic review of key processes. Feedback from the team s activities will also provide a context for Planning Committee to monitor and assess the impact of governance arrangements on the efficiency and effectiveness of departmental resource use. Much of the emphasis on improving efficiency and effectiveness will be centred on freeing existing capacity to improve performance, particularly in teaching, and to address opportunities for additional income generation. Integral to this process is the notion of optimising the balance of activities that use common resources so as to maximise contribution. This could, for example, entail seeking net savings by rationalising elements of a department s teaching portfolio, reviewing the balance between teaching and research or shifting student recruitment priorities to favour markets where premiums can be charged or prices can be adjusted to handle cost pressures. 8

9 Cost pressures will also need to be tackled directly; the continued escalation of any element of cost as a proportion of income is unlikely to be sustainable and there can be no justification for creating plans that contain no means of containing costs that have the potential to rise faster than the ability to recover them. 3.6 Improve capital efficiency Alongside an increase in the net contribution from additional fee income, the largest scope for closing the funding gap lies with improving the efficiency of capital utilisation. At present the University employs over 2.50 of capital assets 3 to support every 1 of revenue from core activities. Around 40% or 230m of such assets are likely to have to be replaced or substantially refurbished over the next ten years. This creates a significant funding challenge but also offers a major opportunity to make savings by rethinking the way in which activities are organised, housed and managed. A 10% improvement in space utilisation, for example, would reduce the funding pressure by over 2m pa and 30% would eliminate it. Savings could also be achieved by emphasising refurbishment and recycling of existing buildings to new uses. These, however, would need to be considered alongside the impact on the potential to improve efficiency and the revenue implications of switching the use of revenue generating assets such as residences. Alongside improved space utilisation, new buildings are almost certain to be cheaper to operate whilst also offering opportunity to address the wider aspects of the sustainability objective [2]. Particular attention will be paid to energy consumption and the cost of long-term maintenance. Given the likely size and scope of the capital renewal programme the decision to refurbish or replace assets will have a material impact on the University s reported results. The default assumption is that buildings will be replaced rather than refurbished both to maximise the potential benefits and to contain depreciation charges. The long-term maintenance provision, currently running at 2m will need to be revisited to ensure that it properly reflects the lower maintenance needs of new buildings. 3.7 Generate new sources of income The University currently earns about 53m a year from non-core activities that range from letting residential accommodation to students to providing technical services to industry. The growth potential of these activities varies, some are growing while others, such as conferencing income are apparently in long-term decline. The assumption for the new planning period is that income from non-core activities will at least maintain its current share of the University s overall turnover. 3 At estimated current replacement cost [2] All the University s new buildings are being constructed to satisfy the BREEAM very good criteria 9

10 There is also a significant potential to secure development profits and/or long term investment income by exploiting aspects of the development and redevelopment of the University s estate. The campus extension alone incorporates more than 11Ha of developable space with commercial approval. This space will be developed by attracting activities that can interact with the University s research base and will also accommodate a level of provision for providers of relevant support services. As well as exploiting commercial development space, the University will market interests in other development opportunities such as student residences, recreational facilities and conference facilities. Optimal exploitation of the University s development opportunities could deliver capital gains to be measured in the low tens of millions but will require a comprehensive plan for the use of the university s entire land-holding. This requirement will be addressed as part of the Estate Strategy. 3.8 Further improve revenue generation from core activities Revenue from core activities will continue to be dominated by fees from teaching and income from research. The balance within these areas can be expected to shift in response to significant changes in the mix of income from existing sources and the emergence of new ones cuts in government expenditure, for example, will put core funding for both teaching and research under pressure. At the same time there will be further opportunities to develop income from CPD, consultancy and, potentially, the exploitation of intellectual property. Such opportunities can add to the options available to academic departments but will require coordinated support if the potential is to be fully realised. Research revenue will continue to be dominated by grants from the UK research councils but this source will become increasingly competitive. Action will be required to strengthen the University s competitive position both to protect research council hit rates and to develop alternative areas of research funding. Again, coordinated support will be required. Teaching income should be materially and favourably impacted by the introduction of the new regime for funding UK-based under-graduates. Present indications suggest that this development will more than compensate for the reduction in HEFCE support but will be accompanied by a radical change in the competitive horizon as well as a rise in students expectations. The change will also help to rebalance the fee income portfolio by reducing the relative importance of fees from overseas students. The latter source of income will, however, continue to grow and will remain an important contributor to the University s bottom line. Generally, future development of income from under-graduate teaching will entail an enhanced emphasis on quality and place 10

11 a premium on investment in the university s competitive strengths and on further geographic diversification. Fee income from post-graduates is also a notable current strength and a material confirmation of the quality of the university s reputation for research. The new fee regime will increase the financial burden shouldered by graduates and could adversely affect the demand from post-graduates. Future development of the R component will also be significantly influenced by levels of support from funders and will probably suffer from Government economy measures. It is clear that the University community benefits culturally and operationally from a large and vibrant cadre of post-graduates. In the new environment, it may be necessary to divert some resource to support this group. At the same time we might assume that graduates will become increasingly aware of the need to differentiate themselves in an increasingly crowded market place. To this end the University should find itself wellplaced to provide an attractive distinction to non-york graduates and departments should be encouraged to explore how best to address this market. 3.9 Access third party non-debt finance Third party non-debt funding is intended to reduce the constraints that would otherwise arise from having to use limited borrowing capacity to fund both core capacity and ancillary capacity. Although an effective way of reducing the balance-sheet burden of development, the use of third party capital can nevertheless be relatively costly in P&L terms. For this reason transactions will focus on balancing cost with potential benefits. The latter will include realising the capital value of any land utilised, transferring risk, and, where appropriate, seeking improvements in operating efficiency. In cases where there may be significant upside potential that cannot be recognised in the initial transaction the University may also co-invest on a limited scale. The University must also be mindful of the potential for changes in accounting standards to frustrate planned arrangements and even to bring existing off-balance sheet funding back onto the University s balance-sheet. The conditions governing the University s existing borrowing arrangements provide specific protection against retrospective changes that would otherwise lead to a loss of borrowing capacity but the University will nevertheless want to avoid appearing to be significantly more heavily geared than its peer group Borrowing Though borrowing has been central to the recent increase in capital expenditure this will not continue at lease for the immediate future. The projections of the University s free cash generation assume that borrowing will peak at around 150m at which point 11

12 net annual debt service costs including capital repayment will be about 7.5m. At this level the University would have around 25m of remaining borrowing capacity but would be reluctant to use it both because of the additional debt service burden and the need to maintain headroom to cope with any adverse movement in the value of the University s estate. Stabilisation of the borrowing portfolio has left the University with a mix of medium term and long-term debt about 60% of which is amortising, the remainder being repayable as a lump sum in % of the debt is hedged but it is current policy to allow the remainder to float. The arrangements for interest rate management are kept under review by the University s Treasury Group which is mandated to make tactical changes designed to keep the overall cost of funds within affordable limits Risk management The University s financial strategy is focussed on ensuring that its strategic objectives can achieved sustainably. Financial strategy therefore reflects a sound understanding of the balance between what is possible and what is prudent and explicitly provides capacity to deal with the unexpected. It also incorporates a realistic assessment of the Institution s current and latent capabilities including its ability to access funds. Overlaying these assessments is a mature understanding of the Institution s appetite for risk and a sufficiently extended planning horizon to support a responsible approach to the acceptance of long-term obligations. The University s key risks centre on its need to invest to remain competitive in both the teaching and research environments; on the need to sustain a business model built around research-led teaching and on the need to maintain headroom to cope with the unexpected. In financial terms these resolve into an overriding imperative to reach, sustain and potentially improve its OCF targets. This is under-pinned by the underlying requirement to sustain income generation and to manage resources so as to deliver income in an affordable manner. The targets that the University has set itself in the current and emerging MTP as well as those implied for the longer term are a sound reflection of existing performance and trajectories and incorporate a substantial degree of protection associated with the uncertainties surrounding the impact of the new fee regime. At the same time they have been set in an environment that offers both significant challenges and opportunities. Success will therefore depend more than ever on the University s ability to read and understand the dynamics of its environment and to become agile enough to ensure the best possible use of its resources and opportunities. 4 The University targets 5.5% as an affordable level. This level must also be compatible with an OCF to debt service cost ratio of at least 2 times. At present the University s average cost of funds is [5.25%] and the OCF to debt service cost ratio is >2. 12

13 This is a shared corporate endeavour. But in the financial area specifically effort will be concentrated on supporting improved decision-making within academic departments and on working to ensure that resources devoted to support activities are appropriately aligned with the operational needs of the front line departments. Finance will also collaborate with Planning to ensure that corporate financial plans are robust and include adequate provision to allow the Business to adapt to unexpected change with the minimum of disruption. Overall, the activities of the Finance function will enable the University to plan and invest with more confidence thereby protecting its ability to sustain momentum. The University will also be better placed to identify and resource investible initiatives that are beyond the capacity of individual departments or which they might consider too risky. It will be seen that the University s preferred approach to risk mitigation is to organise itself both to ensure timely identification of disruptive developments and to embed a robust ability to redeploy resource to cope with change and opportunity. Alongside this the University s financial arrangements and targets will be calibrated to cope with a reasonable level of contingency as follows: As a minimum, OCF to be maintained at a level sufficient to cover two times ongoing debt service costs and to support capital expenditure of at least 12m per annum. This level to be increased over time to accommodate higher levels of capital spend and/or any future increases in borrowing An initial cash cushion of 15m 5 Total borrowing excluding share of borrowing in joint ventures to be limited to 55% of net worth including unrealised gains on revaluation Ad interim, trading profit targets to include a contingency element to cover an increase in the total cost of pensions of up to 2% of gross salary. 5. Comparison with peer institutions HEFCE data shows UoY to be comfortably inside the third quartile on all positive performance measures with the exception of gearing and liquidity. The University s income flow profile ensures that creditor balances are permanently high. Consequently, the only way to improve the current ratio is to tie up more resources as cash or to raise borrowing levels, neither of which is efficient. The intention to hold more cash against contingencies means a modestly improved balance in future but the current ratio will remain relatively weak as long as our peers continue to hold high levels of idle balances. 5 sufficient to absorb the trading effect of losing 10% of government grant and 15% of overseas fee income for a period of 18 months 13

14 Financial strategy sees the comparative strength of our OCF being improved. High levels of capital expenditure mean that borrowing levels will remain relatively high and for the medium term, any surplus cash will be used to strengthen liquidity rather than to reduce debt. After an initial dip, the trading margin will recover to around the sector average though this needs to be seen in the context of relatively high depreciation charges and debt service costs. 6. Links to the University Plan The main focus of financial strategy is to achieve a flow of usable funds sufficient to sustain the University both in the present and in the longer term. In this sense the Strategy is mainly concerned with ensuring sustainability. At the same time an effective financial strategy must also be capable of supporting the three other elements of the University Plan, inclusivity, excellence and internationalisation. 6.1 Inclusivity In the context of financial management inclusivity presupposes development of a financial regime that supports the collaborative sharing of resources. Such a regime will operate to reduce transaction costs, whether financial or bureaucratic, to a level where these are a minimal constraint to cross-campus collaboration. The funding environment will also encourage co-operation and discourage any tendency for departments or individuals to give inappropriate priority to securing local advantage. This poses a significant challenge where financial strategy also emphasises departmental contribution as a key measure of performance and where budgeting is linked to an annual cycle. Some of the inherent problems can be handled through structural devices, such as IDCs, where there is an explicit protocol for handling resourcing and risk sharing. In other cases ad hoc solutions will be required and it is important that the BM group and Planning Committee are empowered to manage and monitor the resource allocation process so as to avoid unintended and undesirable consequences. Additionally, significant funds should be retained at the Centre to buy out any residual barriers to potentially important strategic collaborations, to pump prime projects and to fund strategic initiatives that span disciplinary or departmental boundaries. At present, including the Vice Chancellor s initiative fund, the University allocates about 0.5% of its revenue to such purposes and this figure should probably be increased. 6.2 Excellence Effective implementation of the Finance Strategy depends heavily on a collective understanding of the functional relationship between the efficient use of resource and 14

15 the achievement of the University s broader objectives. Without that understanding the application of financial controls will be seen as bureaucratic and intrusive and will frustrate attempts to create an environment in which Finance can play a truly enabling role. An important part of the Finance Strategy, therefore, is the development of a higher level of financial literacy within the University as a whole but with a particular focus on key decision-makers, notably heads of department. This process entails senior level involvement in induction and leadership development courses as well as the wider dissemination of information relating to the University s current financial position, plans and prospects. Beyond this, emphasis is also being placed on increasing the level and quality of support available to heads of department. This includes the development and provision of improved management information, simplification of the interfaces with the Finance Department, and the development of capacity to assist in the handling of large-scale collaborative research projects. Given that resources, however well-managed, will always fall short of the demands upon them it is also important that the decisions behind their deployment are defensible and transparent. This is particularly important for decisions relating to capital allocation since departments that generate resources will not always be the ones that enjoy the immediate or direct benefit of their investment. To protect the collaborative spirit and give substance to a commitment to excellence requires that the University s vision for its future is properly articulated and communicated. It also means that the corresponding plans have sufficient detail, including an adequate time horizon, for members of the University community to both to see their contribution and the support and investment they can expect to receive. 6.3 Internationality As with the other themes of the University Plan, the Finance Strategy is both dependent on the realisation of the vision for internationality and functionally important to its delivery. In terms of dependence over 16m of future annual revenues and up to 50% of cashflow can be tied back to the University s continued ability to attract good quality students from abroad. The Strategy s principle contribution to internationalisation will come from its success in ensuring the availability of resource from all sources to support the development and improvement of the University campus and its services. The former should ensure that the University can offer standards of accommodation that are internationally competitive but also that the general environment is distinctive in a way that is attractive to all students and staff regardless of their geographic origin. Resources will 15

16 support cultural diversity in a way that is nevertheless compatible with the notion of the University providing a truly international living and learning experience. Adopting a financial perspective encourages an emphasis on students and, particularly under-graduate students. What is also apparent is that the most lasting and potentially most productive opportunities for internationalisation lie with research. This is already highly internationalised both in the way it is assessed and in the way it is staffed with over 25% of the University s faculty coming from overseas and over 45% of its research students. Building and sustaining the infrastructure to support truly world class research will be indispensible to the University s plans to consolidate its position as a magnet for talent regardless of its geographic, ethnic or cultural origin. 7. Implementation Implementation is focussed on 5 main themes: 1. protection and improvement of net cash generation in academic departments, 2. optimisation of spend on support functions and processes; 3. optimisation of capital investment, 4. risk management, 5. generation of income from non-core activities Themes 1 and 2 are the primary responsibility of the BM team; it is their task to deliver against the agenda outlined in section 3.5. This can be summarised as: Support HoDs to optimise their resource allocation with the object of developing contribution targets subject to achievement of their agreed academic priorities; Ensure development of sufficient diversity in income sources to protect departments against excessive fluctuations in net revenue; Identify gaps or overlaps or inefficiencies in Central University provision that undermine departmental performance, or otherwise waste resource; Identify explicit and implicit University-level assumptions and practices that unnecessarily inhibit or constrain the development of sound departmental plans; Theme 3 is mainly the responsibility of the Estates function and will be principally informed by the development of a comprehensive estates strategy. This should give explicit attention to the question of how to reduce the amount of additional capital required to support any increase in the productive capacity of the University. It will also focus i.a. on how to reduce the total and marginal cost of running the University s estate. Theme 4 is an important responsibility of the SMG and should be managed by identifying, monitoring and moderating those activities the over-or under-achievement of which would have a material impact on the Institution s ability to sustain itself financially or achieve its longer term goals and objectives. 16

17 Risk monitoring should also include a continuing assessment of the University s capacity to withstand external shocks and to capitalise on opportunity. Risk mitigation will include the maintenance of financial reserves (whether in the form of cash or borrowing capacity) and could extend to measures such as out-sourcing or sharing of non-core activities so as to reduce dependence on factor inputs whose cost cannot be adequately managed. In general, monitoring should be forward looking; alongside the evolving financial position, attention should be paid to the development of the University s principal markets and of its capacity to meet and satisfy demand in a manner that is both commercially sound and consistent with the University s vision. Responsibility for Theme 5 is currently distributed across the Estates and Finance functions. Estates concentrates on provision of catering and accommodation services to internal and external customers. This activity interacts with and supports aspects of the development of the University s core business, principally with teaching, and offers meaningful scope for actions designed to improve net income by optimising the use of capital assets and by replacing old with new. The Finance function maintains a watching brief over the performance of the university s trading subsidiaries and it is likely that new challenges and opportunities will arise as these businesses continue to develop. The largest opportunity, however, rests with the potential to extract development value and /or rental income from the commercial development of elements of the campus extension. Success in this area has significant potential to support the University s future growth and will come under increasing attention as the campus extension matures and the economy and property markets improve. 8. Interactions The following matrix maps the five themes identified above against key university entities with functional responsibility. It, or something similar, could be used to check our collective understanding of how key performance objectives are to be delivered, to identify gaps and to inform a systematic performance monitoring process. Theme SMG Selection of Key assumptions, approval of contribution targets, proposing Budget and F fcast Collation and Prioritisation of Capital reqs. Judging appetite and capacity for strategic risk, Monitoring key areas of performance. Identifying emergent risks to short and longer term performance. Directing intervention 17

18 Theme PVCR Research infrastructure, market intelligence, strategic planning Scoping and management of R capital requirement. PVCT Teaching infrastructure Scoping and prioritisation of T capital requirement Estates Capacity management, infrastructure maintenance and development Optimisation of estate utilisation, recommendati on and management of optimal procurement methods Identifying short medium and long term threats and opportunities, QC, sustain vigour of R to protect rankings and assure attraction to staff QC to improve and sustain scores and sustain student numbers Protect continuity, maintain perceived quality to attract and retain students and staff, manage compliance HR Resource restructuring Preserve competitive rem. conditions, mitigate disadvantages of national pay and pension arrangements, manage compliance Finance MI, decision support Project appraisal and modelling Registry Planning (BM) Student recruitment and support, marketing and market intelligence Proposing contribution targets, advising on resource allocation and optimisation, identifying constraints etc Identification of constraints Calibrate capacity for risk, evaluate strategic plans for consistency with financial constraints, decide on and support adequate planning horizon, develop financial models Protect and develop brand and reputation. Maintain adequate presence in key markets Identifying threats to performance, analysing under-performance initiating remedial action including reviews Carry out benchmarking, process reviews, facilitate interdeptmental collaborati on etc. Optimise performance of R,C & accomm taking holistic approach Maximise capital and revenue from comm. devpt. of University Estate Graham Gilbert Director of Finance 2 November