9 December 2005

To	Heads of HEFCE-funded higher education institutions Heads of universities in Northern Ireland

Direct Line	0117 931 7300
Direct Fax	0117 931 7203

Circular letter number 33/2005

For further information contact Heather Williams, tel. 0117 931 7113, e-mail h.williams@hefce.ac.uk

Dear Vice-Chancellor or Principal

Completion of the Joint Costing and Pricing Steering Group’s programme of activities

1. This letter reports on the conclusion of the programme of activities by the Joint Costing and Pricing Steering Group (JCPSG), and the evaluation of the second phase of the JCPSG project by its sponsors – the UK funding bodies, Universities UK and the Standing Conference of Principals (SCOP).

2. In July 2005, the JCPSG completed its eight-year project to develop effective costing and pricing approaches for HEIs, and to encourage their implementation and use across the HE sector. The JCPSG has produced its final report, in which it reflects on the development of costing and pricing as two of the core business processes in HEIs. This is available on the web at www.jcpsg.ac.uk/.

Benefits for the sector

3. The most influential area of the group’s work has been the development of the Transparent Approach to Costing (TRAC) as a robust and effective costing system based on the principles of activity-based costing. This has been implemented in all UK HEIs, enabling them to report high level cost data on their principal activities, and in doing so has secured the confidence of government departments that the sector is managing its resources effectively and is able to demonstrate accountability. This has generated considerable benefits for HEIs, both in terms of additional funding, mainly for research, but also in terms of HEIs’ understanding of their own cost data and its integration into management processes.

4. The further extension of TRAC to allow the forecasting of full economic costs (fEC) at activity and project level, and the acceptance by government of this method as the basis for cost-based pricing, has been of considerable importance. As a result of these developments, not only should research and related activities become sustainable over the next few years, but HEIs will also have a new, more realistic ‘ruling price’ to guide their further development into market-based and valued-based pricing.

5. The JCPSG, led by Professor David Westbury, has been crucial in steering the development of TRAC fEC.

Independent evaluation

6. In April 2005, the sponsors of JCPSG commissioned an external review of its second phase (August 2002 to July 2005). This assessed the effectiveness of the JCPSG in terms of whether it had met its terms of reference, fulfilled its aims, and delivered its objectives in support of the aims. The consultants were also asked to evaluate the adequacy of the JCPSG’s exit strategy.

7. The work was carried out by Deloitte during May and June 2005 – before the formal end of the JCPSG project. It involved gathering feedback from JCPSG members and other stakeholders to inform an initial assessment of the project and its scope, followed by in-depth interviews with HEIs and an electronic questionnaire. The report is available on the web.

8. Key findings were as follows:

The work of JCPSG had been of a very high standard and appropriate to the needs of the majority of the sector.
It had dealt with a number of challenges such as tight timescales and an ambitious remit, but had nevertheless demonstrated great progress in many areas.
The JCPSG had satisfactorily met its terms of reference, with particularly high levels of satisfaction in a number of areas:
1. Quality of support and guidance material provided.
2. Quality of personnel involved and the level of personal interaction with individual HEIs.
3. Provision of the helpdesk facility in supporting the implementation of TRAC fEC and the standard of service offered.
4. Provision and co-ordination of the self-help groups.
The JCPSG had achieved the majority of its aims and objectives with regard to costing and cost-based pricing, evidenced by the feedback from HEI respondents that significant progress had been made. However, there were still some wider internal issues for HEIs to consider in order to fully embed good costing and pricing practices. These included the full economic costing of teaching activities, and the development of expertise in areas such as commercial management and market analysis to facilitate market-based pricing. Such issues are by their nature heavily influenced by the local circumstances in which each HEI operates, so their full implementation is likely to be a lengthy process for which each institution must take the lead responsibility.
The remit set by the JCPSG was ambitious, in order to encourage a high standard of achievement across all HEIs. Although a significant proportion of respondents confirmed that aims had been achieved, many felt unable to judge whether the sector as a whole had achieved the progress aspired to. Specifically, this related to the aims for HEIs to integrate costing and pricing into management processes; to use market-based pricing; and to adopt performance measures to quantify the benefits of improved costing and pricing..
The JCPSG’s exit strategy was generally recognised throughout the sector as being appropriate to most HEIs’ needs as they progress with embedding costing and pricing practices after the JCPSG programme ends. In some cases there was limited awareness within HEIs of roles and responsibilities for supporting good practice after July 2005, though this was in part due to the timing of the review (before the end of the JCPSG project) and work was still on-going to put in place final arrangements and to communicate them.

9. The consultants’ report also recognised a number of significant wider achievements and impacts of JCPSG’s work which cut across the whole programme - in particular, the development of TRAC fEC and the widespread acceptance of the TRAC methodology as the basis for cost-based pricing in higher education activity. Research Councils are using TRAC as the basis for the funding of research projects from April 2006; and the Treasury now expects all government departments to meet the full economic costs of the research they commission from HEIs. These developments are securing additional funding for higher education, and have increased the understanding and uptake of market-based pricing within the sector.

Support for the future

10. The consultants signalled that the period following the cessation of the JCPSG would require continued buy-in by senior management teams in HEIs. This is essential to ensure that HEIs can continue to reap the benefits of good costing and pricing practices, and to develop the knowledge and skills required by their staff.

11. The report suggested four themes for improvement which could be considered by the HE funding bodies and the new Costing and Pricing Group of the British Universities Finance Directors Group (BUFDG). The themes are summarised as:

Ensuring that HEIs are fully aware of ongoing costing and pricing activities that the sector needs; and the roles, responsibilities and actions required to ensure complete engagement and buy-in to the process.
Improvement of internal communication within HEIs, and the capacity of senior management teams to deliver and embed costing and pricing processes that are integrated with the institution’s financial and academic decision-making.
Ongoing support from within HEIs to ensure recognition of key areas (such as market- based pricing) as locally driven, commercially sensitive activities; and the management and monitoring of performance.
Continuing the provision of high quality training.

12. HEFCE has asked the BUFDG Costing and Pricing Group to view the report and its recommendations, and to assess whether there are areas to take forward that are not already covered by the work of the group, the BUFDG Training and Development Group, the Leadership Foundation or other sector groups.

13. In September HEFCE published a joint statement by the HE funding councils on the arrangements to support HEIs with embedding fEC from July 2005. This set out the role of the BUFDG Costing and Pricing Group in supporting HEIs and the existing costing and pricing self-help groups. It also established the group as the forum through which potential changes to the TRAC guidance will be identified and debated, and for agreeing changes to the guidance. The funding councils will remain responsible for commissioning updates to the TRAC guidance on the web-site.

14. In publishing this statement the funding councils took account of the feedback to the consultants on the JCPSG’s exit strategy, and responded to many of the concerns about future roles. HEFCE’s statement is on the web.

Potential future developments of TRAC

15. HEFCE is currently consulting with the sector on its review of the teaching funding method (HEFCE 2005/41). One of the proposed changes is to use more information on costs in assessing the funds HEFCE allocates for teaching, with the aim of helping to ensure the efficiency and sustainability of the sector over the coming years. A report by JM Consulting and PA Consulting considered the viability of a more cost-based approach to the funding of teaching. It proposes using TRAC as the basis for a consistent national framework for collecting cost information to support HEFCE funding policies for teaching. Further information about the consultation can be found on the HEFCE web-site.

16. Finally, on behalf of HEFCE, I would like to thank all the members of the JCPSG during its eight-year life for their contribution to the success of the project, and to Professor David Westbury for his leadership of the group.

Yours sincerely

Sir Howard Newby
Chief Executive