Monthly Archives: June 2018

Have our universities lost their purpose and become value extractors?

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It was reported on the BBC this morning that fewer than two in five students think they are getting value for money from their courses. This is based on a survey of 14000 students. The students want more teaching time. They want more contact with the teachers in return for their £9250 a year.

York University - Value Extractors

Graduates outside the university library at York

What is going wrong?  One response was quite alarmingly complacent. The spokesman said that things were getting “better” as 38% of students were satisfied with the value for money vs 35% last year. This is a statement that seems to miss the point about the 62% who are dissatisfied.

This reminded me of my son’s recent experience at York University and his reaction to what he was offered and how the institution related to him. He liked his teachers, he wanted more input from them. He received about 5 hours a week input. But he felt the university was more preoccupied with new buildings and a massive plan to expand the capacity of the university. Today the Universities Minister Sam Gyimah, warned universities about generating courses just to put bums on seats

My son also noticed the very high salaries paid to the top management who remained invisible to students and he felt did not contribute much. (The vice chancellor received £293,000 last year, so it needs 32 students fees cover this alone).

So what is wrong? Why are so many students dissatisfied or frustrated? I wonder if the government and the new professional management has created a whole new breed of value extractors who have lost sight of the purpose of the universities. The focus seems to have shifted from quality research and education to expanding the numbers and generating income to fund the expansion.

I believe the future value of our universities is the research they do and education they provide to students. Both of these are a public good that benefits the whole of society. This is their purpose. The fact the students report dissatisfaction with the education should be a major cause for alarm. The students have pointed to one thing that would raise quality and that is more contact time.

My daughter had a different experience at Cambridge. The students at Oxford and Cambridge are more satisfied as they get double and treble the contact time offered by other universities. This is largely funded by Alumnae grants and donations. But again their higher satisfaction indicates that contact time matters.

My definition of value is based on what value the universities add by what they do, the research and education. This is very different from the value definition provided by ministers and the universities. This is just about the price that students can charge for themselves when they leave. The value is about the higher earnings that the students will enjoy in later life. Interestingly, the Institute for Fiscal studies is going to produce a report on how different courses and universities deliver on this.

This distinction is important.  A value-adding brand or organisation starts by focusing on its purpose which should be based on what it can do to help its customers (in this case teach them well). A value extracting approach just looks at the numbers and says what is the least I need to put in to get the highest price and quickest return.

The problem for the value extractor is that the customers tend to rumble what they are up to and look elsewhere. There were 4% fewer applicants for university places in 2017.  In contrast, a value adder attracts more customers and keeps the ones they have. They create long-term value.

I hope our universities are paying attention, we need them to work for our country.

What is the purpose of business? (part 1)

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What is the purpose of business

Photo by rawpixel on Unsplash

In business “purpose” is initially expressed in terms of making a profit or maximising shareholder value. Business is considered a purely financial entity. Is that right or should a business do more than that?

Maximising shareholder value was the defining objective for many business leaders and became very popular with top business executives in the 80’s and 90’s. Later it was then criticised for making businesses focus just on the short-term results demanded by Wall Street and The City.

There has also been much discussion about businesses having a purpose beyond money. Some people argue that business needs this. Paul Polman of Unilever talks about the idea that businesses must create long-term value. To do this Unilever has a 10-year sustainable living plan focused on environmental impact, removing gender bias, ensuring suppliers are sustainable, caring about public health and nutrition. Even though these initiatives may not maximise short-term returns, they will ensure Unilever creates long-term value. So, in the end, Paul Polman provides a financial justification.

Some brands convey they have a purpose beyond money. Disney defines itself as existing to “Create Happiness” Sony talks about “providing customers with “Kando” (i.e. to move them emotionally – and inspires and fulfils their curiosity). This influences everything they create and do. This kind of mission and purpose is designed to ensure their products and services will attract customers, that they can motivate and attract staff and the business creates real value for customers, staff and shareholders.

There are agencies set up to help brands find their purpose and use it to transform their business and go beyond just profit and financial goals e.g. Purpose, Caffeine, Brand Pie.

My friend Simon Tuckey talked to me yesterday about the fact that the reputation of corporate business with the wider public is at an all-time low. Business leaders need to address this and one way to do that is to demonstrate how the wealth they create and the activities they perform help to the wider community through finding another layer of purpose.  This could be supporting charities or local community initiatives or new business initiatives that are seen to contribute (add value) rather than just take (extract value) from society.

I have struggled with much of this discussion about purpose. On the one hand, having a purpose that is not just financial makes sense and is intuitively attractive. I have long thought that businesses are like people. We all know as individuals, if we purely behave selfishly, we find it harder to achieve what we want. One aspect of this is that people with purpose are usually more attractive and are more likely to attract followers than people who seem to have no purpose and just drift.

For a business entity, similar rules apply, if they solely behave selfishly and purely financially then it defeats the goal to maximise financial returns. Then customers turn away, people do not want to work for them and this means investors find the investment less attractive. As a result all businesses, to differing degrees, invest in their reputation with customers, programmes to attract and reward and care for staff and programmes to manage and enhance their corporate reputation.

But businesses are selfish, financially motivated entities which have to perform financially to survive. So sometimes, this discussion of purpose can get out of control. I believe that businesses should not distract themselves with a purpose that is not connected to its financial purpose, nor one that is unrelated to the core activities.

Business must have a purpose that is financial. Paul Polman alluded to this when he says that he wants to create long-term value

My next post (part 2) will describe why this matters and how this works.

What we measure matters – how to measure value?

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I talk a lot about value adders and value extractors. This distinguishes between those organisations and brands that create value for customers vs those that focus on extracting as much value as possible from existing customers.

I just finished reading Mariana Mazzucato on The Value of Everything. She is an economist who discusses the idea of value creators and value extractors and applies it to the wider macroeconomic context.  She looks at how classical economists like Adam Smith and Marx defined what creates value for the economy and contrasted this with those who extract rent or value from the economy. They identified producers who create things and create value e.g. a factory making cars) vs those services or extractors who just extract value or rent from the surplus profit that was made by the producers (e.g. the bank, the lawyers, the landlord). This implies value is created by creating something.

Mazzucato then explains how neoclassical economists have changed our assessment of value so now we don’t make this distinction. Now measurement of value now purely looks at what someone is willing to pay for something. That price defines its value and its contribution to the economy.

Mariana Mazzucato The value of everything

GDP used to use at the classical view and reflect the value of what is produced. Now neoclassical view prevails and GDP measures value purely on the basis of price and what people pay for things and not what an investment actually does or what goes into it.

So GDP includes banking, asset management, investment banking but excludes government investment in valuable infrastructure, education and healthcare. This government investment has no price and is treated as a cost. The value of this government investment is excluded from GDP.

Yet these investments are essential so that the producers, the tech firms, the banks and others can go about their business. Mazzucato points out that many businesses that claim to have created value, could not have done so without massive government investments in infrastructure, internet and science research.

The implication is that GDP overestimates the value of some services such as asset management and investment banking and underestimates the value provided by governments. She then goes on to criticise many financial services firms for the methods they have used to extract value. She demonstrates they have been so brilliant at extracting value that they have not had to make any productivity gains in the past 50 years. In the meantime government and producers have been consistently making productivity improvements under pressure from limited tax revenues or intense competition.

Mazzucato goes on to argue one of the problems is what we measure. If GDP were measured differently then we would make different decisions about how to grow the economy, we would value production and the provision of valuable consumer services and government investment more highly than we do now. And we would place less value on industries and businesses that extract value.

I took three things from this.

  1. It matters what we measure, it affects our decision making
  2. What businesses need to do is create real value for their customers, it is the engine of growth, it is the engine of profit
  3. Real value comes when you provide something that solves a problem or address a need for your customers.

There is quite a bit more to this argument and I will be discussing this in future blogs