Challenging Lean Financial Management: An Alternative Financial Strategy for UoN.

For years, the University of Nottingham (UoN) has prided itself for its low debt levels and low cash reserves as a sign of highly efficient financial management. Yet, when the pandemic hit in March 2020 this lean financial management strategy unravelled. In order not to break the conditions of its Revolving Credit Facility (RCF), the University had to adopt drastic measures. It cut expenses by 15 per cent across the board followed by a Voluntary Redundancy scheme of unprecedented proportions. More than 400 members of staff left the institution. This has meant that workloads for remaining staff have skyrocketed and morale is extremely low.

There has to be a better way and there is.

In this post, we outline why UCU believes that UoN’s approach to its finances is risky, imprudent and unfit for a public, charitable non-profit higher education and research institution. We also introduce UCU’s UoN-Alternative-Financial-Strategy summary Mar2021.pdf .

Financial management at UoN is a form of ‘lean management’ in two important respects. First, it seeks to reduce costs by minimising interest payments on debt. Instead of drawing on long-term borrowing, it uses surpluses generated from day-to-day activities (teaching, research) to finance capital investment. Second, it seeks to hold low levels of (unproductive) cash, relying on a ‘just in time’ approach to cash flow management. In short, the emphasis is on holding minimum cash and minimum debt.

There are two key consequences of this approach. First, financing major long-term investments, without using long term borrowing, places enormous pressure on the organisation to generate immediate surpluses. This has to be achieved by maximising income generation and minimising costs. In short, labour ‘productivity’ must be increased as lean financial management drives the implementation of lean principles across the whole of the organisation.

Second, low levels of cash reserves make an organisation vulnerable to unanticipated system shocks as there is no buffer or contingency. Rather than hold large cash reserves UoN relies on RCFs to provide for its daily operational liquidity, a kind of ‘overdraft’ facility, whereby bank balances can go negative with the corresponding interest payment. However, RCFs come with stringent conditions, so-called covenants, which the University must meet. If the covenant is violated, banks can request immediate repayment of the total borrowing. If the total borrowing cannot be repaid, the institution can potentially be declared bankrupt. In short, RCFs are highly inflexible when it comes to moments of crisis (see AFS-Technical-Document_Mar2021.pdf ). 

UoN’s risky financial strategy was brutally exposed during the pandemic. In June/July 2020, UoN projected an overall reduction of £150m in income for the next academic year. Budget cuts of 15 per cent were then immediately imposed across all Faculties to achieve savings of £80m overall. The other £70m were made up of VR (the loss of more than 400 jobs); a freeze in pay increments, cost of living increases and promotions; a temporary suspension of most capital investment and some additional borrowing.

Those who thought that UoN might learn from its mistakes were sadly mistaken. Instead of changing financial strategy, the University intends to maintain and even extend its lean financial management. Indeed, it plans to carry out its ambitious investment project of about £430m, and will do so through increasing its annual turnover by nearly £200m on pre-Covid levels – namely to £880m. The only way the University can make this happen is by making the 15 per cent budget cuts permanent. This will mean further increases in workloads, which will have a profoundly detrimental impact on staff health and on student experience.

UCU Nottingham believes that there are financial alternatives, and these need to be guided by a commitment to prioritising people and not some form of ‘profitability’. We demand that UoN abandon its ‘lean financial management’ and replace it with a strategy based on careful, long-term borrowing for key investment projects. We further demand that decisions around investments be made through broad consultation amongst staff and finalised in a democratic decision-making process that involves the university community (universitas) as a whole.

And, finally, we demand that the University agrees a budget for 2021-22 that reflects the principles and approach set out in UCU’s Alternative Financial Strategy.