The business of vocational education – revenue streams and models

So today I really wanted to talk about some more specific items rather than theoretical positions.  What is often called where the rubber hits the road, and the obvious place to start is around the idea of revenue streams and business models.

Before I go any further I want to reiterate something I have said many times before.  There is always a lot of discussion around the topic of the cost of education, which is often framed by the statement ‘ education should be free.’  Now while I would hold it as a fairly self evident truth that education is a social good and that the ability of people to access quality educational outcomes should not by necessity be contingent on their own personal ability to pay for those outcomes, what is sometimes lost or can perhaps mislead people when this statement is used is the undeniable fact that there is always a cost associated with the delivery of these outcomes.  Someone, either the government, an organisation, an employer or an individual has to pay for the costs associated with the delivery of educational outcomes.  So with that said let’s move on.

Revenue streams

Realistically when we look at revenue streams within the delivery of vocational education (and I would argue education in general) there are only two types.  I will look at both of these types and the issues and advantages they have and then move onto the kinds of models which we have seen grow from these streams.

Government supported.

Those with a keen eye will notice I have used the term government supported rather than government funded in the title of this section.  The reason for this is simple.  In terms of what I am talking about here I want to include not just direct funding, say through entitlement programs or apprenticeships, but also also things like VET FEE Help, which is often considered fee for service, and targeted or one off government funded programs which have training as a component.  The reason for this is simple there is a common denominator across all government supported training, this denominator is the simple fact that how this funding is allocated, its level and even it very existence is utterly at the whim of government.   We need look no further than this year to see the issues which reliance on government supported revenue streams can have.  Changes to models in most of the states have irrevocably altered the landscape, with particularly in Victoria a significant number of providers either struggling or leaving the market because their funding contracts were not renewed.  We are in fact seeing the ramifications of removal of funding (albeit for different reasons) from a provider currently playing out with Dawkins/Vocation debacle.  The freezing of VFH payments at 2015 levels also had a similar effect where even quality providers have struggled to maintain their businesses as a result of the changes.  So given these issues what are the advantages to delivering government support training?  Often the big sell shall we say, is enrollments. people, and by people I mean potential students seem more likely or willing to enroll in these sorts of programs.  There is a consumer attraction operating for providers who are able to offer government subsidised positions in training courses.

Fee for service.

For the sake of this discussion I am going to take fee for service training to be any training for which there is not some component of government support.  This would therefore be where an individual, organisation or employer directly contracts or pays a provider for the delivery of an educational outcome.  It is an interesting side note I think that in the world of organisational learning and development fee for service training is the norm rather than government supported training.  There is a view, quite strongly held by some that fee for service training is the more secure and safe basis on which to build a training business. Now while I do not by necessity disagree with this as it is clear that there are definite advantages to fee for service training there are also still significant risks.  While the advantages are things such as generally higher levels of revenue, less time spent on reporting and other administrative activities and in general more flexibility in terms of the range of qualifications which can be delivered, it needs to be remembered that as with supported training, while it is less susceptible to the vagaries of government it is susceptible to the vagaries of business, particularly where providers deal with only thin segments of the market or where the market is highly competitive.  I know of a number of companies who were exposed heavily to particular market segments, one to the mining sector and one to government who had 60-90% of their business disappear overnight as a result of the GFC.  In one case the business has survived but is now a much smaller entity than it once was and in the other they have folded altogether.

Business Models

So with these revenue streams in mind we can then look at the various business models that have arisen as a result of them which will then eventually allow us to consider which of these models or others might be the most ethical and sustainable.

Rapid growth model (The VET FEE Help Model)

This type of business model exploded over the last few years since the introduction of VET FEE Help driven by government support, the ability to charge significantly higher prices due to that support, commencement payments and significant enrollment numbers driven by brokerage.  This perfect storm created an environment where an expansionist business model could thrive in a way that it had not been previously able to.  Organisations enrolled large numbers of students, which generated significant commencement payments from the government supported program (VFH) took that money, a significant portion of which technically should have been used to support the students learning experience and ensure that educational outcomes were met, and ploughed it into the expansion of the business, primarily in order to increase the size of the business to be able to then enroll more students, to access more payments and further expand.

Now while there is nothing intrinsically wrong with this model or approach, it is contingent on the actual delivery of the education outcomes which are part and parcel of the government support. I think most people still feel the anger and the ramifications which followed on from when it was discovered that in some cases these rapid growth model businesses were producing completions rates in the low single digits

Funded delivery model

This is a model which has been adopted in a number of areas, one area where it has and is used a lot is in the community services sector and in particular by not for profit organisations.  This is a model which seeks to develop a scope of delivery which maximises the access the provider has to programs which attract direct government funding. (rather than support) The costs associated with a student entering the course are kept as low as possible, which then allows, hopefully, volume of enrollments across the range of courses to offset the costs associated with delivery.  Given that this model is popular within the NFP sector the drive for profitability is generally less and there is also usually lower overheads produced by thinner staffing models and often training being part of a larger business.  Under for profit models however, as with the Rapid growth model, there is a need to continue to generate enrollments across the suite of programs offered in order to maintain both sustainability and profitability.  It is in general difficult for providers delivering under these models to expand without external or organisation investment, or through debt raising.

Fee for service niche model

A significant number of providers in the fee for service market apply a niche market model to their delivery in order to limit costs and to enable a targeted spend in terms of marketing and positioning.  This model often sits at both the top and bottom end of the market in terms of qualification level with providers tending to either deliver high level qualifications or their own accredited courses where while numbers are small, associated fees can be quite large due to low competition.  Or at the other end they tend to deliver low level (often short course programs like white card, RSA or First Aid) where while competition may be significant, volume is very large and recurring, so that even a small margin on low cost programs multiplies out to significant revenue.

Everything to everyone model (The public provision model)

This is a model where the provider has a massively large scope, spanning foundational and certificate I programs through to very high level programs, across multiple training packages, with the vision shall we say of being able to cater for the needs of any student regardless of their choices in terms of study.  While the other models I have spoken about above generally apply to the non-public side of the education market this model is or has been the model in which the public provider has operated also since the beginning.  It is important however, as I said early on in these pieces that regardless of models we should expect our public providers to operate as businesses, at least with regards to providing the best possible ROI on investment and value for money in terms of costs of delivery, given that by in large most public providers would cease to be able to operate without the support they receive from their respect government owners.  Problematically given that they are owned by various governments essentially they are seen as having to provide services across markets and areas where there is little or no chance of breaking even let alone creating even a small profit margin.  There is significant tension between the ability of these providers to naintain cost effective delivery and ROI and the demands placed upon them by their governments.  Of course the argument is that the purpose of a public provider is to ensure that services are available in markets where without significant government support such provision of services could not occur.  Additionally it is also argued that often there are other social assistance requirements which public providers have, which increase the tension between their delivery of programs and the costs associated with the delivery of those programs, particularly, though not limited to administration costs, which if we look at various reports and budget submissions may be as high as 60 cents in every dollar of funding in some cases.

It is important to note that I have here only covered, in broad strokes some of the models which exist in the sector, primarily to see how streams of revenue impact upon the kinds of models of delivery which exist and how those models in turn utilise the revenue streams on which they are most focused.

 

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About pauldrasmussen
Paul Rasmussen is one of Australia’s most widely read Vocational Education and Training Commentators. He provides deep, unbiased analysis and insights not only on topical issues, but also on the underlying structure and policy which supports the industry. His writing and analysis has been praised for its uncompromising and thought provoking style and its ability to focus on the issues of real importance to the sector. He has advised various government departments and ministers, training providers, public and private organisations, not for profits and small to medium enterprises on the VET sector and the issues and opportunities facing it. He is one of Australia’s most awarded learning professionals and a regular speaker at a range of conventions and forums. His extensive experience in vocational education, and learning and development coupled with formal qualifications in philosophy, ethics, business and education management allow Paul to provide a unique view of the road ahead and how to navigate it.

3 Responses to The business of vocational education – revenue streams and models

  1. Lisa Jones says:

    Paul- A good article about a key issue. My experience is that the reactive nature of our sector tempts RTO managers to ignore long term income forecasting and risk management… which as your article points out – (regardless of their target income streams)- is at their peril. What do we read into the lack of engagement about this topic ???

    • pauldrasmussen says:

      Lisa,

      You make a really interesting observation as I know of quite a few RTOs even some who are quite large who would struggle with being able to come up with figures like actual revenue generated per student and income/cash flow forecasts. One of the reasons behind this is that often funding patterns, particularly those delivered through the states tend to at least historically be relatively short term. Even longer term contracts usually require some form of recontracting every 12 months or so. This pushes managers into a short term view of revenue as they fear that the income stream could be removed at anytime. The same applies to fee for service, particularly where the provider needs to continually find new clients in order to maintain its cash flow. You are right though this short term thinking hurts everyone involved.

      There is of course another reason which may be behind this behaviour and thinking at least in some cases, the lets make as much money as we can now and hang the consequences.

      • Lisa Jones says:

        Yes I agree – and in this context (that remains unchanged) – why why why isn’t there far more emphasis on every RTO having sound financial forecasts and undertake the needed analysis? and regularly!

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