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Are schools sinking?
New EPI report launched today (17 March) leads to more questions – for example, is the era of product and service subscription increases over?
The EPI report published on 17 March shines some light on the impact higher staffing costs will have on all schools, even those set to benefit from the NFF changes. Although the cash going into schools will, on the whole, increase in cash terms, we know that higher pupil numbers, salary increases, and employment taxes will likely wipe out any gains in cash terms, let alone real terms.
As a supplier of resources into schools, how will this impact you over the life-time of this parliament? For many it will lead to reductions in spending, with our latest projection for expenditure in 2016/17 nearly 5% lower and the forecast 2017/18 leading to a further reduction of 4%. But in this article, I want to look specifically at those suppliers that provide an ongoing set of products and services requiring an annual payment.
I still hear suppliers talking of raising their subscriptions by 2%, or even 5% per annum. For some, this is how they record growth in revenue given that there is little in the way of an opportunity to on-board more schools when they have already secured market dominance. Agreed, the rises often come with new elements or features to the product or service offering, but they are revenue increases all the same.
Now let’s take the above price-expansion business model and place this into an environment where, for the first time I can remember in my 25 years of researching school spending, where head teachers really are experiencing an extended period of cash contraction in school budgets. Sure, we often hear schools talk about stretched budgets, with some slipping into deficit, but these are relatively isolated and are more likely to be due to poor planning and budget management, than a sudden lack of incoming cash from government. The difference today is that schools have already experienced a tight funding environment for the past seven years and are now going to see that extended for at least another three years. That is a decade in which employee costs and premises costs have risen, often above the average 2% increase in funding schools see in their bank accounts. That is without adding in the increased number of pupils, at least in some areas of the country.
So, in the ten-year period (seven gone and three to come) suppliers providing subscription-based products and services have increased subscription rates and expect to continue to do so. But now we see head teachers fully understanding that they live in a world of, at best, static school budgets in cash terms and quite significant reductions in real terms. Therefore, more head teachers will be saying that suppliers cannot ask for an increase, when they have no additional money coming in. The difference with annual subscriptions, is that the increases are clearer to see. If a school purchased a new chair seven years ago, it will wish to secure the best price from a selection of potential suppliers, but it is unlikely to recall what it paid for a similar chair in the distant past, be it a higher, or a lower price. In the case of an annual subscription service, it is much more likely to recall the price the previous year, even if the supplier does not annotate the increase clearly in its payment request.
The result is likely to be a greater push-back in the willingness to pay, which is likely to place real pressure on this price-expansion business model. Some suppliers, will drop price increases altogether and look at cost efficiencies themselves, as a way to maintain profit levels. Others will see higher customer churn as head teachers switch to new suppliers offering a similar (and maybe inferior) service, but at a lower cost. Either way, the result is likely to be a loss of revenue even for the most impactful and loved subscriptions.
There has been much in the media over the last few weeks about the state of our schools. An increasing number of reports suggest schools are on their knees and small investments, such as books, cannot be made from existing multi-million pound budgets. I find this negative-biased reporting requires context.
So it's all bad? Well, as always conditions and experiences vary greatly. However, the reality is that school funding remains significant and is growing (even if not on a per-pupil basis). Schools have known since 2011 that budgets going forward, will not see the substantial real terms growth recorded in previous spending rounds. The Treasury wanted to see money released through efficiencies – just as it has requested for health, defence and other departments. However, there is limited evidence that schools have put in place these efficiencies.
Head teachers continue to identity higher employee costs as a key reason for requiring more money. Reducing administrative overheads and teaching assistant support hours by introducing new software solutions and processes, would go some way to releasing more money for teachers.
The result is too many administrative staff, limited use of procurement services to reduce costs and continued expansion in salaries and supply cover. It is unlikely Government will back down and pour more billions into existing school budgets. Therefore, we will continue to see some schools with significant cash to spend on resources due to their own good management, while others (even those that currently benefit from high unit per-pupil funding) continue to under-invest in classroom learning resources.
I encourage you all to read the latest market report I have compiled for BESA, which goes some way to providing a more balanced view of the marketplace and help counter the strongly politicised commentary in the news.
Note: You need to be a BESA member to access this report. Over 900 senior leaders responded to a wide range of financial questions including funding, resource budgets and spending plans by product type - including forecasts for 2017/18.