Changing Face of the British For-Profit Higher Education

In the last 18 months, the structure of the British For-Profit Higher Education has changed completely, and there is more to come. First, the Government went about culling the British For-Profit Higher Education sector with a set of sweeping changes affecting their overseas student market; these changes have been largely successful in closing down most of these colleges, and only those which had very deep overseas connections, most commonly with the owner's country of origin, or well-cultivated relationships with their university partners, have survived. Next, the Government changed the funding regime for all British universities, making the funding follow the students rather than grants to the institutions, and this has opened up an opportunity of public funding for private For-Profit institutions, the same kinds which saw their overseas market disappear in 2011. And, finally, a set of new legislation allow even relatively small colleges, with only about 1000 students on roll, to get degree-granting power, though, admittedly, this can only be achieved through a long and arduous process.

There is more to come. The next set of changes will affect the vocational education system, which feeds the Further Education colleges and vocational training companies that supplement the Higher Education sector and services, mostly, students who would want to follow a 'trade' career. The changes are on similar lines that of Higher Education funding, where the funding will follow the students rather than come as grants to institutions. This means a field wide open for competition, and hopefully, for innovation and new players breaking through the existing cosy arrangements. This opens up a further opportunity for currently beleaguered For-Profit colleges and training companies, though they must change their business models significantly to take advantage of this shift when it comes next year.

Apart from these changes inside the UK, there are other changes in the International Higher Education space, which will affect the For-Profit institutions. First, the British visa changes are having their desired (hopefully planned) effect of making the country less attractive to foreign students. Apart from rising costs and stagnant economy, the withdrawal of rights of a student to stay temporarily and work after their courses are complete has a huge negative impact: Most students in the recent years used this time to repay the education debt, and the withdrawal of these rights are now, reportedly, prompting banks in different countries to deny education loan applications citing greater risk of default. 

Second, the relative difficulty of coming and studying in Britain has increased the appeal of colleges overseas which offer collaborative British degrees. Often, this is an arrangement by which the students stay in their own countries and study for a course which is locally accredited, but also accepted by a British university for award of their degrees. Such enrolments were up 40% last year, and it is expected to go up frantically, despite the apparent displeasure of Quality Assurance Agency (QAA) of UK with many such arrangements, as the British universities fight to keep their overseas franchise. The colleges overseas also has a strong reason - differentiation from their peers - to do so; the rewards for this, the premium they can charge, has also gone up as the easy options to go to Britain disappear. [By a rough, back-of-the-napkin calculation, the annual cost of British undergraduate education, from the perspective of an average Asian student, has gone up by at least 50% with the disappearance of low-cost private education options]

This trend also has interesting long term strategic implications worth pondering about. Indeed, the government policy is based on the assumption that British Higher Education has a strong brand equity and despite the changes, students would still come to Britain to earn British qualifications. However, while the underlying assumption may be true (that there is brand equity), this may not automatically mean that the students would want to come to Britain. 2011 was the first year when the students staying abroad and studying for a British Higher Ed qualification outstripped the number coming to the UK; with the former growing rapidly and the latter widely tipped to fall this year, that gap will widen over time. It is also worth considering the fortunes of Accountancy training sector in Britain, where the country had a lead and a strong brand equity: In the 80s, a large number of overseas students studying for an Accountancy qualification came from Malaysia. In the subsequent decades, the Malaysian students declined, and the industry was mostly surviving on Indian, Pakistani and Chinese students. This year, the number will decline precipitously, as the immigration restrictions start to bite (Accountancy students are most affected, as they mostly came to private HE institutions). The Indian and Pakistani students are now going to Malaysia, which now has a strong Accountancy training sector and reputation. 

Another fundamental change in the overseas market is in the nature of the recruitment agencies, which were the prime source of students for the British Higher Education institutions. In the last decade or so, during which time the business had a very profitable run, it attracted many small entrepreneurs who converted their labour recruitment businesses ('dispatch agencies', as it is called in some countries) into education advisory businesses. The effect of these agencies on British For Profit Higher Education sector should be explored further, because, in such exposition lies object lessons on what really went wrong in the sector. The proliferation of such agencies presented an easy route to market for British Higher Ed institutions and enabled their explosive growth: However, the institutions without proper systems of accountability and oversight, where revenues dictated business policy, got easily swayed by the imperatives of their agent recruiters: In case of most For-Profit colleges in trouble, the root cause can be traced back to their relationships with agents and their failure to provide adequate oversight of the recruitment process. 

However, as the immigration rules were tightened, most of these agencies have now moved on. Most have invested the wealth they earned through this business in diversifying into other unrelated businesses. Despite its mostly negative impact, fast disappearance of the agent network (and the fact that the ones still in business have become largely ineffective) has affected the British Higher Education in general and For-Profit HE most severely, effectively robbing most of them of their only route to market. The usual marketing routes, that based on branding and marketing, are mostly alien to most British For Profit colleges, who had mostly left their brand to the agents in most markets and now have to make significant investments to turn around the largely maligned brands. For most of them, coming in the middle of a recruitment squeeze, this is an existential problem.

All the forces described above are in play right now, and this is indeed changing the For-Profit Higher Education in Britain beyond recognition. At this time, there is a lot of M&A interest in the sector, though this isn't matched by proportionate level of deals, indicating a lack of quality assets in the sector. The few deals that have happened were grossly overpriced, indicating that private equity is largely in the dark about the mechanics of the sector, and the models they are applying to achieve valuation isn't accurate yet. In summary, everyone seems to think there is a business opportunity, but no one seems to figure out where that is yet.

The opportunities should be clear to those who want to see it. The government is indeed creating space for For-Profit Higher Education, and is clearly keen on small specialist colleges. These colleges do not necessarily have to be elite or semi-elite, but it is expected that most of them will fall for the pricing-equals-reputation mindset (the efficacy of this is questionable, but this is a discussion for another day). Most of the winning institutions in the marketplace in five years time will be new, rather than built on M&A activities, as the premium bubble or the baggage of failed business models would eat away any new investment and sap the energies of the management teams. Besides, how does one create a small, specialist high-value college on the remains of a generalist, undifferentiated, demand-absorbing (at the bottom end of the price and/or talent spectrum) institution, within a relatively short span of time? 

We haven't seen much start-up activity yet, but considering the landscape looks like the Internet industry in the middle of the dotcom bust, we should see new and disruptive start-ups, with global/local business models and commitment to educational innovation (away from the current strategy of pretending to be an university), winning in the marketplace. This moment will come once the dust settles in the industry, around the end of this year, when the new regulatory regime as prescribed by the government fully falls in place, the winners and losers of the For-Profit industry are sorted out and when the Public Education system begins to crumble, with the universities showing their vulnerability for the first time with dipping demand at home and abroad. This is also when the investment bubble in Higher Education will also be exposed, and the current wave of M&A interest, which is following its usual 5 or 10 year cycles, which is crowding out the space for innovative start-ups, start to dissipate, just like it did after the dotcom crash. Indeed, some ventures will take off earlier, and these will be the first-mover winners of the game; and, indeed, there will be some better funded second acts, coming into existence in 2013, which will divvy up the market.

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