February 7, 2018

Benefits in a superior approach to efficiency

Keith Houghton

Vice-chancellors around the country are thinking hard about efficiency dividends, organisational efficiency and saving cash.

While the cash flow of a university and that institution’s efficiency are linked in important ways, they are not identical. Indeed the withdrawal of cash can cause inefficiency rather than enhancing efficiency. Institutions short of cash can make short-term focused decisions and may not act strategically in their own longer-term best interests.

For understandable reasons, the government is calling on universities to contribute to the budgetary bottom line by moderating their growing cash needs.

The tension for institutions is they are relying on cash flow for the costs of decisions already taken, including the previous government’s decision to uncap places. Universities are not profit-seeking organisations, as with the private sector, nor are they public service organisations. This last factor may be something that is not fully appreciated by some.

Research Coaching Australia has also been thinking about efficiency. Research funded by us has examined the efficiency of the sector as a whole and within individual institutions. Our evidence shows that for many years the average efficiency has improved at a rate of 2.1 per cent a year. This is a good news story, particularly for some universities, and particularly in respect of efficiency in research outcomes. The good news story is further supported by data on improving quality in respect of research.

We have also shown, with a number of limitations and caveats, that the university sector in Australia is not universally efficient. Indeed, there is significant variability in efficiency at any one point in time, and in efficiency improvement over time.

This is true both between and within individual institutions. While some universities have enhanced efficiency year after year, others show little or no improvement over time and some have declined in efficiency.

Supporting less efficient institutions to become more efficient would unlock resources of considerable magnitude.

Usually the resourcing of teaching and research is treated as separable activities and assessments of efficiency — often linked to measures of cash flow — give an individualised picture of success or otherwise.

However, if one creates an integrated efficiency “frontier” linking total expenditures with the outcomes of both teaching and research, a substantially different efficiency picture emerges.

This approach removes any judgments or subjective assessments made about the relative importance of teaching or research activities. It is neutral as to positioning along the research/teaching focus continuum.

We find that some institutions are very research-focused and highly efficient — at or near the frontier (think UNSW, ANU), and others are very teaching-focused and highly efficient — at a different point, but still at or near the frontier (think RMIT).

At the sector level, this practical perspective leads to two questions: Why would funding be cut to our more efficient universities, given that they deliver the “best bang for the taxpayer’s buck”? A policy position that takes funding away from all institutions equally is not rewarding those institutions that are most efficient.

This makes no sense to me (and presumably for auditors-general across the country who conduct value-for-money audits). Surely the most efficient universities should be rewarded, not penalised with reduced funding.

The second question concerns the treatment of those institutions that are away from the efficiency frontier — that is, the less efficient universities. Why not support these institutions to become more efficient?

At the institutional level, the research also offers an insight into where to focus efforts to improve efficiency, in an evidence-based way. We are able to identify whether an institution is efficient in its use of academic staff and whether it is efficient in its use of the non-academic part of the institution.

Efficiency, as we define it, involves the combined outcome of both teaching and research with a given level of inputs (academic workforce or dollars spent), noting the significant cross-subsidies from the revenue of teaching to the expenses of research.

Some within universities may push back against this notion of efficiency-based policy. The economics (and econometrics) and accounting behind these novel efficiency calculations are not of the type that typically come from university chief financial officers’ (or minister’s) offices. This is not a conventional way of viewing universities, and is unlike any other analysis that we know of.

The research does not now — nor has it ever — supported a policy position that universities should be subjected to a uniform and universal funding cut. It does provide evidence for a carefully targeted review of each institution to identify possible efficiencies as well as other policy developments.

No institution is seeking to remain inefficient. Nor is a blanket policy position on cash flow helpful to improve efficiency.

There is an opportunity to achieve a more nuanced and tailored approach to efficiency improvement that recognises institutional circumstances and historical efficiency paths and is evidence-based, with data from the universities themselves.

A parallel analysis can also be undertaken within individual universities, comparing the efficiency of one academic unit (say a faculty) with others in the same institution. Following this tailored, approach within institutions may well lead to greater overall organisational efficiency.

Keith Houghton is a principal and chief strategic officer of the Higher Education and Research Group and Research Coaching Australia.