Profile: Miles Hedges, FD, Open University

Any impressions that the Open University is dominated by hirsute professors wearing leather elbow patches on their corduroy jackets are quickly dispelled upon entering it’s ultra-modern base in Milton Keynes.

This is the 21st century after all, and the university has moved with the times.
Finance director Miles Hedges, elbow patch-free in a navy pinstripe suit, is a good example of the transformation that has taken place.

The Oxford University graduate and ICAEW accountant has embraced, over his 30-year career, how the role of FD has changed in universities. “They weren’t FDs back then, universities had finance officers to look after the books. Now the role of FD in universities is much more strategic. I spend a relatively small proportion of my time looking backwards, instead, the vast majority is looking forwards. I cannot change the past, but can only hope to influence the future.”

Hedges influences strategy, provides detail of how decisions will impact upon financial performance and looks at ways to advantageously position the university.

A big part of the finance function’s recent responsibilities was to measure the impact of the previous government’s policy on removing £100m from its costs by ceasing grant funding for students with an already-attained equivalent or higher qualification.

“90% of the impact was felt by universities teaching part-time students – the Open University comprises a third of that sector, which will give an idea of the grant funding loss we faced, phased in over a period of years. That was a policy that had a
disproportionate effect on the part-time sector and this university,” says Hedges.

He adds that the OU was “quite successful” in having the policy ameliorated in terms of it impact, “but for us, modeling its effect over a period of years was an important part of the finance function, enabling us to understand the impact and then represent it to civil servants”.

But there are sterner financial examinations ahead for the sector, if you pardon the pun.

New universities minister David Willetts has just announced a further £200m in cost savings, on top of £449m efficiencies outlined by the previous government, pre-empting Lord Browne’s review of university funding. Predictably blaming the previous incumbents, Willetts said that Labour had left the university funding system on “financially shaky grounds”.

“There are universities struggling to make ends meet. Some have been prudent, but others have planned an assumption of ever-rising budgets,” Willetts told the BBC.
The “uncertainties” are certain, at least as far as the OU is concerned. A cut in funding might be offset by lifting the barrier for student fees from £3,225 per student a year.

Increasing the fee will depend on what the market can take, warns Hedges.
“It changes the nature of the relationship with your customers,” he explains. “If the cuts in grant are so great that the fees cannot compensate – because of a cap for example – or because the market won’t bear it, we have to understand the impact: could we raise fees, what would that do to student demand? What other options do we have? Can we help students if fees go up?”

At least the OU has its “lending bank”, which was set up because OU students don’t have access to the Student Loans Company, with a “few tens of thousands” of students repaying their tuition fees.

The OU wants the government to recognise that part-time students are a net gain to the Exchequer, where full-time students “tend to be a net drain”.

The OU has 78,000 full-time students, out of a quarter of a million in any one year. Its income was £421m for 2008/09, of which £233m came from grants and £141m from tuition fees and education contracts.

So the university, with finance playing a “full part”, entered into one of its biggest ever pieces of research – not for the public, but instead to understand internally the impact of potential changes. “That was probably the single most important piece of work we’ve done in the last decade, and it was all about ‘what if?’”

In what sounds like an artefact that Indiana Jones would search for Hedges introduced his colleagues to the “funnel of doubt”. Thankfully, he hadn’t stolen a precious object from the British Museum, instead it was finance’s way of allowing the board to understand all the risks that lay ahead of them.

“It’s a simple graphical representation over four years of the total value of things that could go in our favour, and value of things that could go against us.”

While the impact modeling for other universities would have been broadly similar, the OU’s efforts were very particular because of its part-time, off-campus student base.
The different student base is just one aspect in how the OU’s business model differs from other universities.

The OU has huge warehousing and distribution operations – to push out material to students – and tutor support is hired in.

A grand total of up to 7,500 tutors are hired, dependent on the number of students. They support through the internet, email or by phone. Limited face-to-face contact is available as well.

Campus-based universities are limited by the number of rooms and academic staff they have at their disposal.

“We have a greater scope for economies of scale compared to campus-based universities,” says Hedges.

“So, we might spend £700,000 on developing a chemistry module but, once developed, that’s it. Whether we have 1,000 or 5,000 students studying it, it doesn’t change the
fixed costs of development – but we have a marginal cost on hiring tutors,” he explains.

“We have a student advice and guidance centre, which other types of business would describe as a call centre.”

Universities have dominated Hedge’s life, although his career isn’t necessarily vocational.

After Oxford, Hedges followed in his father’s footsteps – he was a Grant Thornton partner – by joining Deloitte Haskins & Sells.

Assigned to an audit group, Hedges found himself in a very familiar setting. “My first audit was back at Oxford University. I was paid to spend the next term back in Oxford and I thought, ‘I can cope with this’. My next client after that was Eton.”

Working in back office can make staff removed from what their efforts are going in to, so Hedges goes to one graduation ceremony a year, “at least”.

“We make a huge difference to a lot of people. At the ceremonies you have middle age mothers with children in their early twenties – a typical picture – but with us it’s the children congratulating the mother.

“For me it’s about the real difference we make to students, and reminding yourself why we’re doing what we’re doing. We provide opportunities that no-one else can.”

Time to split

PwC won back its audit role at the Open University four years ago during a re-tendering process led by the OU’s finance director Miles Hedges.

“They were the incumbent firm, doing an excellent job providing me with assurance, as well as with our audit and finance committees.”

But the university’s lucrative tax work, originally undertaken by PwC, was hived off.
Hedges looked to split its audit and non-audit work, as non-audit fees had climbed above those for its audit. Its tax affairs are complicated because of its student membership outside of the UK. Now KPMG undertakes tax for the OU.

“Audit firms are now barred from providing advocacy services on behalf of audit clients when in a tax situation – to jump firms at that stage would be really difficult… so we took the decision to separate it,” says Hedges.

Finance function

The OU’s finance division is about 115 strong. It incorporates purchasing and procurement function, commercial/legal services, as well as accounts, financial reporting, treasury management and insurance. Traditional finance staff represent around two-thirds of the total figure.

Public benefit

For financial reporting, universities have been exempt from reporting under the charity SORP, by way of being treated as an exempt charity. This exemption was removed under the Charities Act 2006.

But, as of 1 June, in England, the Higher Education Funding Council became a charity regulator on behalf of the Charities Commission.

As a result, universities will for the first time report in a similar way to charities in terms of how they deliver a benefit to the public.

“Some aspects of universities reporting will be more similar to charities, but only in respect of what I would call… less numerical disclosures in the operating and financial review,” says Open University finance director Miles Hedges.

This shouldn’t prove a major problem for universities, as their public benefit is clear, as is their funding model – not necessarily the case for other charities.

“The fact that some charities have to charge high fees and therefore access to the widest range of the public is restricted, shall we say. They have to make specific efforts to show that they’re providing public benefit. For universities, where fees charged are a minority of the income they get from teaching – it’s much easier [to show].”

Hedges is also a non-executive in a charity and appreciates how university reporting is “cleaner and less cluttered”.

“As somebody who’s involved in the audit committee of a traditional charity, I would like to think you could come up with a slightly less cluttered set of primary statements for charity reporting.

“It’s difficult enough for me as an accountant to grapple with them. I understand the pressure the Charity Commission is under and the desire to make sure that legal compliance is demonstrated in the financial statements, but I think there are better ways of doing it.”