UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 755-ii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

EDUCATION AND SKILLS COMMITTEE

 

UK e-UNIVERSITY

 

Wednesday 21 July 2004

SIR ANTHONY CLEAVER and MR JOHN BEAUMONT

Evidence heard in Public Questions 139 - 346

 

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Oral Evidence

Taken before the Education and Skills Committee

on Wednesday 21 July 2004

Members present

Mr Barry Sheerman, in the Chair

Mr David Chaytor

Valerie Davey

Mr Nick Gibb

Helen Jones

Mr Kerry Pollard

Jonathan Shaw

Mr Andrew Turner

________________

Witnesses: Sir Anthony Cleaver, former Chairman, and Mr John Beaumont, former Chief Executive, UK eUniversity, examined

Q139 Chairman: While we are allowing people to settle down, can I welcome Sir Anthony Cleaver and John Beaumont and thank them for coming to the meeting of the Committee to discuss the UK e-University. Sir Anthony Cleaver and I know each other. He has been a formidable player in the way that he campaigns to make British business more effective and efficient. I remember his work on the Tomorrow's Company with the Royal Society of Arts. It is nice to see you here, Sir Anthony. John Beaumont, who again has had a distinguished career in Energis and elsewhere. Again, John, welcome. Basically you know why you are here and what we are trying to get to the bottom of, that is the brief trajectory of the University and why it finished in the way it did very recently. I know you, Sir Anthony, resigned at a particular time. What is the present status of the UK e-University at the moment? Are you still the Chief Executive?

Mr Beaumont: No, I stopped at the end of the first week of July and it is being wound down. There are a couple of people there today and it will be concluded by the end of July. So the students that are on existing courses will be looked after, hopefully, by the individual universities for which they are taking the courses.

Sir Anthony Cleaver: I wonder, Chairman, if I might make a brief opening statement.

Q140 Chairman: I was going to ask you that; I just wanted to know what the status was, because in my programme it says, "former Chair" and it says "John Beaumont, Chief Executive", so I wanted to be clear what the status was.

Mr Beaumont: Former Chief Executive.

Q141 Chairman: You are both former now. Sir Anthony, would you like to make a brief opening statement?

Sir Anthony Cleaver: Yes, I thought it might help the Committee if I gave a brief summary of the history, very brief, and some of the key events. In November 2001 I was approached about the position of Chairman of UKeU. I was subsequently interviewed by the three HEFCE nominated directors of the interim board, Sir Alan Wilson, John Bull and David Wallace. I was shown the PwC business plan, and I said that while I thought the project was very exciting and one that I would like to lead, I could not commit to delivering a 10-year plan which amounted to little more then a spreadsheet. The Vice Chancellors did not disagree and I became Chairman in December 2001. On reviewing what was already in place, I found relatively little of substance. By far the most valuable element was the specification for the software platform. However, no coding had been done, nor had the software provider been chosen. In terms of content, three pilot courses had been agreed with York, Sheffield Hallum and the Open University. Again, little work had been done and the universities were hampered by the absence of the software platform. On the marketing front, little existed except some market estimates that appeared to be almost entirely desk-based. The plan called for courses to start in October 2002, which in my view was unrealistic, and my first action, therefore, was to defer their start date to spring 2003. My most important task was to put together a strong management team. The key appointments were the Finance Director, a Company Secretary with strong legal background and used to dealing with complex contracts and the Chief Executive. The latter was particularly crucial to our success and I was therefore delighted that we were able to find John Beaumont, who had extensive experience of running a large internet-based operation and wide academic experience. My other key objective was to appoint strong commercial non-executives. This was achieved by the middle of 2002 with the appointment of Keith Bedell-Pearce, ex-Director of the Prudential and Chairman of the Student Loans Company, Richard Hooper, a veteran of the Telecoms industry with BT and now Deputy Chairman of OFCOM, and Rob Rowley, ex-Finance Director of Reuters and now Deputy Chairman of Cable and Wireless. From the beginning it was clear that to succeed we had to get three things right: the platform, the courses and the marketing. John Beaumont immediately focused on the platform, where we put out a tender and eventually signed a fixed price agreement with Sun in July 2002. The platform went live in March 2003. The second key area was the courses. We wrote to all the universities asking what courses they could develop for us. We were offered nearly 70 courses by 29 universities. We then selected the most promising in terms of the international market, choosing 15 courses to be available from October 2003 and a further ten from February/March this year, which leads me to the most challenging area: marketing. From what little marketing information we inherited and our own initial analysis, including discussions with the British Council, our first target markets were in the Far East. Fortuitously, I was also Chairman of the Asia Pacific Advisers for Trade Partners UK and was able to draw on their contacts in that part of the world. In Beijing, Singapore and Kuala Lumpur on my first visit we talked to the ministries of education and determined how best to proceed. While there was clearly a huge opportunity in all three countries, it was also very clear that each country required a different approach, different pricing and local partners. In other words, the original plan, based on the single price world-wide marketed directly by UKeU with no local support, would simply not work. Consequently, we recruited a man with significant experience of working in the Far East and set about building a team of local agents in the target countries. In conclusion, I would like to cover two issues: private sector funding and the provision of information. The private sector funding issue was reviewed regularly by management and the Board. Experience and our contacts told us that we would need a track record before we could raise money. In autumn 2003 we said that we did not envisage being successful in this area until autumn 2006. At the same time, we did everything we could to cut back our funding requirement so that the plan we submitted at the time of the PA report showed a total requirement of £57 million to break even compared with the £90 million plus of the original plan. I felt, however, that it would be more prudent to assume a total of £70 million. In terms of our relationship with our public sector funders, it is important that you are aware that the monthly management report and the full Board minutes were sent directly to HEFCE and the Holdco every month, ensuring that they were fully apprised of our progress, and regular meetings were also held. In conclusion, I strongly believe that UKeU had a sound future and, if allowed to continue, would have delivered great benefits to the UK in the expanding global market for higher education, and I very much welcome this opportunity to answer your questions.

Q142 Chairman: Thank you, Sir Anthony. To sum it up in a nutshell, you think this abrupt termination was quite wrong and could have led to a very successful business. That is what you concluded by saying. Why do you think HEFCE did what they did then?

Sir Anthony Cleaver: I find it very had to understand, and it was a complete surprise to myself and the non-executive directors when their Chairman and Chief Executive walked into the meeting and said "Our Board has taken a decision", and we said, "Could we discuss this?", and they said, "No".

Q143 Chairman: It was non-negotiable?

Sir Anthony Cleaver: We said, "Is this negotiable?" and they said, "No, it is a Board decision and we are not prepared to discuss it."

Q144 Chairman: There is some view that you were... We will be coming to look at the marketing strategy in a little while, but in terms of the business plan, if you look at the history as it has been provided to us, it seems uncertain. You have already said you were not very happy with the original PwC business plan. Why was that? Could you tease that out a little bit more?

Sir Anthony Cleaver: Yes, because it showed a very rapid increase from a standing start to - I cannot remember the numbers because we discarded them at the beginning. I have them if you would like them, but it was of the order of say 10,000 students in the first year, and that was a year, I could perhaps remind the Committee, in which, at the point of time that John Beaumont arrived, we had not even got the software out to tender let alone written. One had to produce the platform, the universities had to produce the courses to run on that platform and we then had to recruit students. So it was clearly an impossible plan. What we decided we should do was to gain understanding of the market as fast as we could and as we understood it so we constantly revised the numbers, which is why month after month the monthly management report which went to the Board said, "Based on our current feeling, these are the numbers we will aim at", and we constantly aimed high because we thought that was the right thing to do.

Q145 Chairman: If there was not a satisfactory business plan when you arrived, when did you get a satisfactory business plan?

Sir Anthony Cleaver: We were constantly refining our understanding both of the market and of what universities could and would do and of the way in which we could develop the business. So I would say that we were constantly revising the business plan. In the autumn of 2003 when we were asked for the business plan, what we actually provided was a copy of our model. We had developed a model of the business into which we could put the arrival of a new course, the prices that we were going to charge and the number of students we thought we would get and from that immediately developed the impact of the business; so this was constantly evolving. I think it is important to understand what we are talking about here is a Start-up, and a Start-up which had to operate in many international countries, with multiple partners in the UK, and which was given less than two years to success. I know of no Start-up that could have achieved success in that time.

Q146 Chairman: But, if I can ask John Beaumont, you came in?

Mr Beaumont: Yes.

Q147 Chairman: You would have been aware there was not a business plan that people had accepted as a business plan. Would not one of your first actions have been to say, "We must have a revised business plan that everyone knows about and is aware of"?

Mr Beaumont: What we did was take the original PwC business plan and in a sense update it for three things: (1) the new time schedules of when courses and platforms were going to come, (2) removing some modelling errors that we found in it, and (3) do more detail, because the original plan only did annual cash flow, and, given the peakiness of cash requirements and the importance of knowing where the funding was coming, we did monthly cash flows. So we updated that original plan by the April/May 2002. What that showed was a change from the PwC plan of year one students 3,500, the new numbers were 340; PwC second year was 12,600, the second year of our remodelled plan was 5,638. Clearly that was just a modelling arithmetic exercise, and in discussions, particularly with Holdco, we said the only way we will be able to get a real projection is when we start to take the first set of students and get to see what the response is to the courses, because in a sense you are creating a market for wholly on-line services; and it was agreed with Holdco that the first real business plan with some numbers that were based on actual results would be November 2003, and then, with those numbers, the 2003 for year one was 1,225 but in the second year going up to 4,660. So initially we had to just do modelling and make assumptions talking to different people, and then we started to use hard numbers that we got from the initial courses in the latter part of 2003.

Q148 Chairman: Two more things on this introductory. Holdco - who did you talk to in Holdco?

Mr Beaumont: There were quarterly meetings of Holdco, chaired by Sir Bryan Fender, and I would give a quarterly update as a report to that meeting and go along to the meeting and answer any questions about the progress of the business. Holdco was a group of 12 people; it met quarterly and probably on average about six or seven people turned up.

Q149 Chairman: Chaired by Sir Bryan Fender?

Mr Beaumont: Chaired by Sir Brian Fender.

Q150 Chairman: How often, or at all, did you meet any ministerial contact in the Department for Education and Skills?

Mr Beaumont: We met the Minister for Higher Education probably every six months, so Mrs Hodge and then Mr Johnson, and then giving them updates. If asked by DfES for any updates, we would obvious reply very promptly.

Q151 Chairman: Where did you meet?

Mr Beaumont: In their office.

Q152 Chairman: In your office?

Mr Beaumont: In their office.

Q153 Chairman: In their office?

Mr Beaumont: Yes.

Q154 Chairman: Across here?

Mr Beaumont: Yes.

Q155 Chairman: At the original budget the figures that we were given were that the original allocation to HEFCE to do this was £63 million?

Sir Anthony Cleaver: £62 million.

Mr Beaumont: £62 million.

Q156 Chairman: £62 million. How much of it was spent?

Sir Anthony Cleaver: At the time that we left.

Q157 Chairman: Yes?

Sir Anthony Cleaver: It was, I believe, £34.9 million.

Mr Beaumont: And of the £62, ear-marked for UKeU was £55 million, there was £3 million for the e-China project that we managed and £1 million for an e-learning research centre that was across the universities of Manchester and Southampton.

Q158 Chairman: That was extra?

Mr Beaumont: That was within the £62 million.

Q159 Chairman: So what, Sir Anthony, was the £70 million and £90 million you mentioned in your introduction?

Sir Anthony Cleaver: I will try and make it as clear as I possibly can. We believe that we had £55million committed.

Q160 Chairman: You have just said it was £63 million committed?

Sir Anthony Cleaver: No, that was including these other projects that were ring-fenced. So we believed for the normal operation of UK universities we had £55 million. That was our understanding. We saw it as our job as the thing progressed and it became clear that private funding was something that I fully believe we could have obtained in time, but we needed to have a track record with several thousand students and so on to do that. For that reason, what we tried to do was to rein back the budget. If I could slightly modify what you may think you heard earlier. We did produce a formal business plan in April 2002 and we have got a copy of that here, and that was submitted and we then updated it from time to time, but, at any rate, we saw it as our role, therefore, to reduce the spending, as far as we could, consistent with continuing to grow the business effectively. We tried when we got to the 2003 budget in the November to see what we could do with 55 million, and we found that if we were going to continue at same speed we needed 57 million. I have to say, after many years of experience in business, the concept of 57 million 55 million looks very close to me when we are talking about something as complex as this and several years ahead. We therefore said, in our view it would be prudent to assume it would require 70 million, but the plan actually shows 57. I would have expected, for example, had we had proper discussions, that it would have centered on: "Can you actually manage for 55 million?", and we could have done something for that.

Q161 Chairman: But you just mentioned 90 million. What was that?

Sir Anthony Cleaver: That was in the original PwC plan.

Q162 Chairman: Was it?

Sir Anthony Cleaver: Yes. So we constantly reduced the cost of this as we went through.

Q163 Chairman: So really you thought you were running the staff up over a number of years, you thought you had the £62 million as really ball park - what you could expect to have got from HEFCE - and, before you got anywhere near that limit, they pulled the plug on you?

Sir Anthony Cleaver: Yes.

Chairman: Good. We have got some basis on which to work.

Q164 Mr Chaytor: Sir Anthony, you have written a fairly forceful letter to the Chairman of HEFCE about this issue and in the letter you claim that the PA consulting review was wrong or misleading on over 100 points. Can you tell us on how many of those points was it unequivocally wrong? Which were the most serious inaccuracies?

Sir Anthony Cleaver: I think honestly to do that I would have to go through and deal with the individual items. I have here the annotated version of the PA plan which we sent back to HEFCE, and I am very happy for the Committee to have access to that. My biggest concern over the PA report was that they did not talk to the people I particularly asked them to talk to, i.e. the commercial non-executive directors. It seemed to me that insofar as what they were focusing on was risk, those were the people who sat on our Board, saw the information and from their broad commercial backgrounds were in the best position to take a view on that. The other point that I would make is I do not think there are any risks outlined in the PA report that were not covered in our own risk register. I ran the company according, I think, to the very best principles of commercial corporate governance. One of the things nowadays that good companies do is to have a complete risk register. We started that as early as the end of 2003 and we carried on reviewing it quarterly, and that was, of course, also available to anybody who was interested in it.

Q165 Mr Chaytor: But those are criticisms of process rather than of fact. Can you tell us where the report was wrong in matters of fact?

Sir Anthony Cleaver: For example, some of the names of the people that they quoted were attributed to the wrong organisations. There were those sorts of errors which in some senses--

Q166 Mr Chaytor: The inaccuracies are inaccuracies of comparatively minor detail. Is there anything substantive in which the report was inaccurate?

Sir Anthony Cleaver: Not in the fundamental sense in that, as you see in the letter, I do not know whether you saw the covering letter that I sent to HEFCE with our response to the PA report, but in that I said that the general thrust is that this is a high risk venture, and that is something that we have known from the beginning. What we are doing is mitigating those risks as fast as we can.

Mr Beaumont: There was very little analysis of the platform and the Pedigo league approaches that could be supported for the universities. Really all that was looked at technically was the infrastructure to provide a service, and I think it would have been more pertinent to look at the scope of the platform because that was the major asset that was being created.

Q167 Mr Chaytor: But that is again an omission?

Mr Beaumont: It is an omission, yes.

Q168 Mr Chaytor: Could I clarify one thing. You have said - you say it in your letter and you have said it in your opening statement - that you presented regular reports to HEFCE in terms of the business plan and constantly revised the business plan at regular intervals, but the report says that you did not publish your business strategy. Sometimes it may be an issue of being too late to continue, is it not, but could you clarify this? Are you saying that you did, as far as you are concerned, publish a business strategy in addition to giving regular reports on the revised plans as things developed?

Sir Anthony Cleaver: We published a business plan and there was a narrative with that business plan.

Q169 Mr Chaytor: Would you describe that as a strategy?

Sir Anthony Cleaver: Yes, I believe anybody reading that would say: what are they trying to do in marketing? They are trying to go to these countries; they are trying to get these sorts of students, and so on. That, it seems to me, in the context of this sort of business, is what I would expect to see.

Mr Beaumont: It is also consistent with the original three objectives that HEFCE stated.

Q170 Mr Chaytor: But the report criticises you for setting an impossibly ambitious business model. Would you agree it was too ambitious?

Sir Anthony Cleaver: No, I think our objective was always to go as fast as we could, for the sort of reason that brings us here today. We understood that the pressures on funding in higher education are enormous and that they would wish to see a return as soon as possible. I also had another major concern. This is a huge international opportunity for UK Plc and I felt that we needed to get there. What I found in all the countries I went to - I went to Singapore Malaysia, Taiwan, the Philippines, Hong Kong, Vietnam, Korea - in all those countries I found same thing - the Americans are there and the Australians are there with various e-learning opportunities. None of them compare with what we had potentially, none of them have something that pulls together a national capability, which was unique, and I felt that this was something we had to drive as fast as we could; and the way that you do that, in my experience, is you set targets that are ambitious and, at the same time, you set a business plan underneath financially which is one that you believe that you can achieve; and that was the process that we followed, but our understanding changed constantly. I found, for example, on two visits to neighbouring countries one of them had just issued a new ministerial edict that said, "For e-learning we want no local involvement. If somebody come here and offers a course, we want it to rest on the quality of their provision back in the home country and the support and the accreditation that they have there." In the next-door country they said, "You appreciate we are not going to allow any e-learning unless there is some local support provided so there is a spill over benefit to us." Both of those I understand as tenable ministerial positions, but nobody was able to tell me that either of those existed until I went.

Q171 Mr Chaytor: But in retrospect, and if you were doing all this over again, would it have been wiser to go for more quick winners in your business plan rather than operating in a fairly segmented area of the market alone. Maybe your targets were too ambitious?

Sir Anthony Cleaver: We did not know at the beginning what quick winners would be. Again, part of the objective of the trips was to understand the subject areas, for example. I think you have seen stated, we focused on seven areas eventually which were important. Again, to get a quick winner the course has to be available, the university has to be ready to support it and provide the quality of teaching. We were just on the brink of getting the first courses that we could honestly say were what we really wanted, based on our own marketing understanding. So, for example - and, of course, this was not known to PA because they did their work back in December/November and never came back and asked - it was not known to HEFCE because they would not talk to me between December and February. We were on the brink literally the next week of signing an agreement with City University for their MBA. I have no doubt that that would have been successful, it was already successful internationally with Bank of China, and that we saw as one of the key planks. We were in the final stages and had signed the first agreement with Cambridge University for a course called "English at your Fingertips". Wherever I went I found that, whatever their stage of development in education, they wanted English. Korea is probably the best example. On my first visit to Korea I met the Minister of Education. His opening words to me were, "You do realise, Sir Anthony, that we have 17 cyber universities in this country", and I said, "I think that your infrastructure here is well-known to be in advance probably of anywhere in the world, but are there things that you need?" He said, "Well, of course we need English. We as a country are not strong in English and internationally that is financially detrimental to us", and so on. What we had developed with Cambridge, I think, would have met that need. So we were just on the brink, I believe, of being able to provide what was really needed and hence get the volume.

Q172 Mr Turner: I found two possible break-even dates, one from your original business plan, which was 2006, 2007, that is the plan produced in 2002, and the other of 2007, 2008, which is the plan you produced in November 2003?

Sir Anthony Cleaver: Yes.

Q173 Mr Turner: Did you inherit any kind of estimate of when the scheme could break-even from Price Waterhouse Coopers?

Sir Anthony Cleaver: There undoubtedly was a break-even date in there. I think it was... It was one of those two years, I believe, but I am not certain.

Mr Beaumont: I do not think our first change to the Price Waterhouse plan made any fundamental changes to the break-even date. I can check that.

Sir Anthony Cleaver: So it was probably 2006/7.

Q174 Mr Turner: On your sort of background, Sir Anthony, have you experience of establishing a business of this kind, one which is wholly dependent on public funding but is a risk business?

Sir Anthony Cleaver: Depending on public funding, no.

Q175 Mr Turner: Do you think that the members of Holdco understood the risk?

Sir Anthony Cleaver: I find that very difficult to answer. I met Sir Bryan Fender roughly once a quarter and I certainly talked to him in this context, and Sir Brian, as you may know, is Chairman of a company that trades in intellectual property, which is a very risky area, so I think it was reasonable to assume that he had a fair understanding of those sorts of issues. I cannot talk for the other members of Holdco.

Q176 Mr Turner: Could you answer the second question, in respect of the HEFCE Board?

Sir Anthony Cleaver: From what little I saw of the HEFCE Board I would not anticipate any great understanding of commercial affairs or risk, and I think from the Chairman's action and his comments in his letter, it is quite clear that he did not understand the operation of a commercial company. To be surprised that the directors resign when they are told that somebody else is going to take the decisions from now on and they would therefore be left with the liabilities strikes me as astonishing.

Q177 Mr Turner: Can I put a suggestion to you which you can then respond to. It seems to me you can either say that the people who did not understand the risk were putting up a good deal of money but had no clear appreciation of how long it would to take deliver a return on that money and subsequently got cold feet when they did not see the return as quickly as perhaps their opponent, or there is another explanation. If you have got another explanation I would like to hear it, but what would you say to the first explanation?

Sir Anthony Cleaver: I think the first explanation is plausible. I think that probably what happened was that having had a vision, which, as you have heard, I subscribe to totally, "There is a huge international opportunity. We ought to be exploiting it", and so on - and I think that was absolutely right - I think they then set about implementing it and, as you saw, it took two years from the vision to appoint me and hence start the operation. So that perhaps tells you something about the difference between the commercial world and the pace at which these things move, but that is fair enough. I think then they obviously hoped that we would be able to demonstrate very rapidly that we were absolutely on track with the original plan, etc, and from my very first meeting I said, "The original plan we cannot deliver, but we will deliver as fast as we can." I fully sympathise with the fact that HEFCE must find themselves under enormous pressure with all the universities concerned about funding. I also Chair a higher education institution and I know exactly how the pressures are there, and I am quite sure therefore there will always be people who said, "Do we really need to continue putting this money here when we have got people with immediate problems closer to home?" My conclusion, sadly - and I think I put that in my letter to David Young - is that either one should have given this the chance to succeed or you should not have started it. I think, having started it, they owed it to us to give us long enough to show that we could be successful, and another year would clearly have demonstrated one way or the other an effective league cost, relatively little.

Q178 Mr Turner: Despite the concerns which you expressed at your meeting in November 2001 you accepted the estimated break-even point at 2006/2007. I am not quite clear when the Price Waterhouse report was written, but you did so in the context of it having taken 18 months to appoint you from the point at which they were handed this?

Sir Anthony Cleaver: Because I thought that we were going to drive the timetable from then on rather than them, and I thought that we should do it as aggressively as we could, and the break-even that we were talking of achieving, as you have heard, was in any case to be achieved on a smaller number of students than in the original plan, so in that sense it could be said to be less ambitious.

Mr Beaumont: The original Price Waterhouse business model was 2000.

Q179 Mr Turner: 2000?

Mr Beaumont: Yes, but there were some subsequent reports done as well.

Q180 Valerie Davey: We have talked essentially up to now about the process and the business plan. What about the product that you were being asked to sell? Do you think enough work, Sir Anthony, had been done or did you recognise the nature of the product that you were actually being asked to sell?

Sir Anthony Cleaver: I think the one part of our inheritance, if I can put it that way, that was very good was the specification of the product. I came to this, and I made no pretence at the time and I make none now, not as an expert in e-learning. I did not know what the characteristics were that were required, and so on. I obviously expected to acquire people, and I did, who had that understanding. But I very rapidly, of course, as I talked to people both internationally and in this country, tried to find out what was available already commercially, why are we developing a new platform and what are the key characteristics of this platform. I very rapidly formed the view, and it is one that I still hold, that there was nothing available anywhere which was comparable to this. In particular, the underlying philosophy, importantly, was 'learner centric' - I am sorry if that sounds like jargon, but it was aimed at what is the experience for the student and how can we make that as effective as possible? Mostly learning historically has been a cottage industry; it has been an enthusiast in an individual department who has developed some stuff because he wants to get his notes and his course out there, and that is perfectly valid and useful. This presented an opportunity which was taken by the team that HEFCE assembled in the period before we arrived to stand back, take the best expertise in the UK from people like the Open University and so on, and say, "If you were starting from scratch, how would you design it? How would you put it together and what features would it have?" What we set out to build was that. It also, incidentally, had to cover areas that the existing system simply did not cover. We needed, for example, to be able to enrol students remotely on-line, we needed to be able to take payment by credit card internationally, etcetera. So there are whole elements of the system that are totally different from what you would require an in individual university dealing with your own students, and so on. In terms of our success in achieving that, this was a very complex piece of software. Again, I have to say my many years, too many years perhaps, have been spent on large complex IT projects, so we had no real illusions on that, and what we eventually did was to say what do we have to have as a minimum in order for this to function, which is what we got by 2003 for the first courses. We then had subsequent releases which added facilities, enhanced the performance, and so on, and that was still an on-going process. I would not pretend for a moment that what existed on the day we resigned was a satisfactory ultimate product, it still required more work doing on it, and I really cannot comment on what has happened since.

Q181 Valerie Davey: But student distance learning is, as you are intimating, complex, and you have just said it needed that research with students, but you are now telling us, as I understand it, that the research had not been done in career or anywhere else to find out what students actually did want if we are going to do it immediately, not developing pilots in this country and beyond, but straight into Korea. Where is the link up between what is a product which we do know something about via the Open University and individual universities and this completely new platform doing something rather different?

Sir Anthony Cleaver: I am sorry, I obviously created a misunderstanding by something I said earlier. I think there are two different elements that we are talking about here. In terms of the product and the facilities, we were confident from all the discussions we had, everybody we talked to, that what we were producing met the need in terms of the capability for the student to do what they need to do, to ask questions of the tutor, to submit material, to have chat-rooms available to talk other students, to cooperate on projects, and so on. All those facilities we understood; everybody we talked to said, "Yes, that is good; that is what we need." What I said we did not have was the understanding of the market in terms of the course content. The three courses that we inherited, none of them would have been in the top ten or 15 courses that we needed in terms of the market. I think they were there because the universities concerned had material and were willing to experiment with it, and all credit to them for doing that, but, for example, the York course is a course in public administration and management. While there are elements of UK experience and process that are relevant to other countries, obviously a lot of it needs to be tailored to local experience. What we found, therefore, was that to take the course as standard we got 20 or 30 students per enrolment. Over time what we have discovered was that there was a clear need for many courses for what is called 'blended learning'; in other words personal support as well as the course. At exactly the time, I think in the week before the HEFCE decision, we persuaded York that it would be sensible to commit to providing some on-site tuition in some places in order to get more students, and Singapore immediately signed up for 15 places because they had that. So we were learning the whole time what does the offering have to be in each country on each course in order to be successful.

Q182 Valerie Davey: But could the Open University and the British Council not have told you that from day one, and should not the report on which you were basing your business plan have understood that from day one?

Sir Anthony Cleaver: The first two calls that I made before any of my colleagues were appointed were first on Helena Kennedy at the British Council and, secondly, on the Open University. So I took all the advice that I could get initially and we retained contact with both those organisations all the way through. Neither of them had the answers. The British Council had not been concerned in detail with e-learning in that way. Their job, they felt, quite properly I believe, was to facilitate individual universities and other British organisations to gain access to the market, not actually to drive the market themselves. So we did take their reports, we took as much input as we could get from them, but there was not the detailed information on specifics that you actually need to make courses successful.

Q183 Valerie Davey: Last question. How many people that were directly responsible to you had experience of e-learning, distance learning in this way. This is an educational project you are selling. This is not the norm of a business set up to deal with a boxed product?

Sir Anthony Cleaver: Absolutely.

Q184 Valerie Davey: This is a relationship between students and teachers. This is something which is markedly, we hope, British in the way in which we are doing it. We think we are the experts at this kind of thing, that we have an incredible lead in it which we had hoped clearly, all of us, in a visionary way, this particular e-University was going to develop, and I think one of the reasons it failed was that we did not have this expertise, but did we, on board?

Sir Anthony Cleaver: I think we had as much expertise aboard as was available nationally. As I said, John here had wide internet experience and had previously been an academic, which I thought was an almost unique occasion in the UK; we had on board David Unwin, who was our learning programmes director; he came straight from being Pro Vice Chancellor at Birkbeck, my old establishment, and there he already had an e-learning course underway for which he had been responsible and where he had been involved in the development. The marketing man who looked after the Far East had been working for an organisation that sold educational on-line products from Singapore. We had at the next level down a Chief Architect who had extensive experience, had been involved with the TALL project at Oxford and again had as much e-learning expertise, I think, as anybody I knew in terms of the architecture of the system, and so on.

Q185 Mr Gibb: I am not quite clear about whether you were happy with the software platform by the time you left. You made a comment and said, "It was not a satisfactory ultimate product". Would you clarify where you were on the software platform by the time you left?

Sir Anthony Cleaver: I will defer to John, if I may, who is closer to that.

Mr Beaumont: We launched with the original version in March 2003 and we had a number of updates that were planned, adding additional functionality. We were also taking feedback back from students and academics about changing the existing functionality. The April time slot 2004 is when we had the next big upload, which was going to be a significant re-write and therefore the HEFCE decision in February did affect how we did that. Already though, from late 2003 in turn, as part of our risk management, we had plans to look at, if we were not happy with the new major upload, what we would do to continue the development to satisfy the students and the academics needs.

Q186 Mr Gibb: So it still was not right?

Mr Beaumont: No, and I think though looking forward, e-learning is evolving and the needs of students and academics creating the content continue to evolve. I think for the next two to three years one would expect to continue to have to develop a platform to satisfy those needs. I think it would be wrong to assume that you had a finished product any time in 2003, 2004.

Q187 Mr Gibb: What contribution do you think this made to HEFCE's decision to pull the plug, the fact that (a) you had adopted a new platform instead of an existing platform, and (b) that it still was not ready?

Mr Beaumont: I do not know the basis of the HEFCE decision, but I think we had a fit for purpose platform in operation from March 2003 and therefore it was not affecting student numbers in a sense; so I do not think there was that aspect. The original reasons for going the platform route ourselves, which HEFCE supported, still stood. We had to be able to capture the different approaches of the different UK universities, particularly high inter-activity between students, and I think, secondly, it had to be scaleable and scaleable both in a technical sense but also in a commercial sense. A number of the universities that had experience of e-learning (Robert Gordon's Ulster) came to us to say they would like to come to our platform. I think they were concerned about an exposure as they scaled up e-learning commercially as the software cost to them would have increased in that way.

Q188 Mr Gibb: Is that a factor, the cost, that HEFCE would have worried that these costs were exacerbating?

Mr Beaumont: If we had been allowed to continue, the benefit to UK HEIs would have been a first-class platform at a very good commercial rate because they would have shared the cost.

Sir Anthony Cleaver: Let me just add a rider, if you do not mind, which is simply that towards the end of 2003 HEFCE put out a consultation on an e-learning strategy for the sector going forward. We felt that the best way to respond was for us to respond in partnership with JISC (Joint Informations Systems Committee) of the universities and the learning and training, the MPSN, which is also in the sector. We submitted a joint entry to that and understood that it was probably the most suitable response that they had. What is going to happen now, I do not know.

Q189 Chairman: Can I push you a bit more on the platform, looking at the platform, not quite understanding what that was, but also why such a considerable amount of money was spent. I think your deal with Sun Microsystems was £20 million.

Sir Anthony Cleaver: Slightly less than that.

Mr Beaumont: Slightly less than that. I can get you the exact figures, Chairman. By the end of April 2004, which clearly it has got two years of audited accounts and one year of unaudited accounts, we spent 9.2 million on the platform, we had also had 2.4 million of operating cost. We mentioned that we had a fixed price contract with Sun Microsystems for the full version of 9.5 million. We had at that time paid 5.5 million for it.

Q190 Chairman: So it is not 20 million?

Mr Beaumont: I do not know where the 20 million figure comes from.

Q191 Chairman: There was some suggestion that seemed to come out of the last oral evidence that we took that Sun Microsystems was getting a pretty good deal, that it was rather generously in their favour, this contract. Is that right?

Mr Beaumont: I think when we arrived the idea that Sun Microsystems was a strategic partner was very important, but to have had an open-ended contract would have been very much in their favour. The fact that we were able to get a fixed price contract for specified functionality I think was a fair result, and I think it was fair to both UKeU and the education sector but also to Sun Microsystems.

Q192 Chairman: But people do say, and have said, that you got fixated about having this super-duper, all-singing, all-dancing platform when it was not necessary. You could have got on with the job, as Sir Anthony said, as a Start-up. You wanted to get onto that market quickly; you could have done it much more quickly if you had not had this ambition, first of all, to have this fantastic platform?

Mr Beaumont: I do not think we were fixated with the platform. I think the way we approached it was to try and understand the local market needs and then to see which courses in the UK universities would be able to satisfy those needs. You needed a platform as a means to an end. I think if you looked at our organisation only a relatively small number of people were concerned with the platform per se, and an important aspect, whatever the platform was chosen, was a twenty-four by seven service to students anywhere in the world; and if one had been providing a service across, let's say, our 15 platforms for 20 universities, that would have been incredibly difficult if not impossible to do. So to have a central core platform, whichever it was, was a sensible approach.

Q193 Chairman: Is this investment salvageable? Can it be used by UK universities still? Is all this investment just going to go to waste?

Mr Beaumont: I think the way that the HEFCE decision was made and implemented, it is probably unlikely, sadly, that the platform will be widely used. This sort of software--

Q194 Chairman: Could you repeat that?

Mr Beaumont: I would be surprised if it was able to be widely used.

Q195 Chairman: Why is that?

Mr Beaumont: It is not a simple application, people would need to be trained on it, people would need to know how to support it, and to really just wind down UKeU in the way it has been, it is highly likely, in my opinion, that sadly that asset will be lost.

Q196 Chairman: So HEFCE is making no attempt to maintain the platform or a core group of employees to maintain it?

Mr Beaumont: No.

Q197 Chairman: Not at all?

Mr Beaumont: No.

Q198 Chairman: One thing that comes over from the evidence, and we ought to move on now to marketing, is that when you started this whole operation you had total enthusiasm for the UK e-University sector; everybody wanted to be on board?

Mr Beaumont: I am not sure that is the case. They were asked to put a pound in and I think all but four did, and I am not sure that shows real commitment of an institution. What we did find, as Sir Anthony has said, was in many institutions there were a lot of very enthusiastic academics, but to get e-learning of quality and scale you need the whole institution to support it; it cannot be just a side-line taking 20 to 30 students per intake. So in the summer 2002 we wrote to all vice chancellors to find out and determine what the real interest was. I think by the time the HEFCE decision was made we had a large interest from enough universities to definitely provide a rich portfolio that would have been successful.

Q199 Chairman: It was portrayed to us, perhaps not head-on, but we got the feeling under questioning that there was a suggestion you had started off with a lot enthusiasm and that had waned. You lost support and there was talk on the streets about--

Mr Beaumont: No, I felt that we had got more support from people who recognised that this was a serious part of a strategic option for their university. Going into the quality distance e-learning on scale is not something that you add on to a small department.

Q200 Chairman: So you are happy with the relationships with your supply chain?

Mr Beaumont: With the ones that we had contracts with we were happy we had significant support, yes.

Sir Anthony Cleaver: Could I comment there, if I may, and try to help?

Q201 Chairman: Certainly.

Sir Anthony Cleaver: I think the analogy between the corporate position and the individual university position and the position on an individual course is interesting. The challenge with e-learning is that it involves investment up front in each case. We reckoned that to develop a Masters course, for example, for e-learning from scratch probably costs of the order of a million pounds. This is a heavy investment for a university to make, which is why in the original model there was the opportunity for us to provide funding, which they then repaid, in order to help them get started in this way. The benefit, of course, comes that once one has developed that asset then one can take on more and more students with relatively little additional cost and you get the benefit over time from volume. The same in a sense is true with the company. We were making the upfront investment of developing the platform, developing the understanding, and so on, with the expectation that numbers and the revenue came in subsequently. As far as the universities were concerned, I think we had the whole spectrum of views. You took the point, I think, earlier that a pound may not be a huge investment: some universities were very enthusiastic but about e-learning but felt, "We have got our own platform in a limited area. We are keeping abreast of what is happening. We are going to wait and see before we move to these people." Some people said, "We just do not think that is part of our model. Of course, it will come in time, but we can afford to wait and let other people get on with it." Other people said, "We already have, for example, a very significant international student body and we see this as a way of expanding and extending that", Middlesex University probably being the prime example of that. So we had a whole range of views. I also think it fair to say if you have got around 150 university higher education heads within that, you are going to have everything from the very cautious to the ambitious and very adventurous, and a lot of them, therefore, were simply playing 'wait and see', and I do not blame them in that context.

Chairman: I would like to move now to marketing and product strategy and Jonathan is going to lead on those.

Q202 Jonathan Shaw: Mr Beaumont, you said that the platform is not being maintained at present or there are no intentions to maintain it.

Mr Beaumont: That is my understanding.

Q203 Jonathan Shaw: Have you had a conversation with HEFCE to say that it should be maintained?

Mr Beaumont: Between late February and early June, we put what it would take to actually keep the platform, take away the marketing staff, take away the other staff and just have the operational staff and put together those figures and sent them to them.

Q204 Jonathan Shaw: So, they received those?

Mr Beaumont: They knew that information.

Q205 Jonathan Shaw: What were those figures? What are we talking about here?

Mr Beaumont: You are probably talking somewhere between £2 million a year for pure operation, that is not doing any enhancement but it is making sure that it is there working 24/7

and the sort of development that was planned would probably be about another £2 million, so top would be about £4 million a year.

Q206 Jonathan Shaw: But the lights have been turned out effectively?

Mr Beaumont: Yes, as I understand it.

Q207 Jonathan Shaw: Sir Anthony, you have listed in the chronology that you have provided for the Committee the events for the plug being pulled on the e-University the different courses that you had arranged or planned to launch. We have doctors.net, the City e-MBA, English at your Fingers which you have referred to and also Middlesex Top-Up, the Business Information System which you have just referred to at Middlesex University. Presumably, these institutions spend some considerable amount of time and effort getting these courses together.

Sir Anthony Cleaver: Normally, that would be the case, yes.

Q208 Jonathan Shaw: They have invested a fair amount of money.

Sir Anthony Cleaver: If I go through the range of courses, some of them are different. Cambridge clearly will have invested in developing English at your Fingertips. CASS(?), I suspect, were largely using material they already had from their MBA. As I said, they were already working with the Bank of China and so on. So, their investment would have been less and, in any case, we were only just signing the contract from them to go live in October. So, how much they had spent other than negotiation on the contract and understanding one another I do not know. Doctors.net was a rather interesting and I think hugely exciting opportunity. I do not know whether the Committee have ever heard of it.

Q209 Jonathan Shaw: It sounds like a soap opera.

Mr Beaumont: It is a small private sector venture which set out to provide updated information mainly from the Royal Colleges for GPs in the UK. My understanding from them is that there are around 113,000/115,000 GPs in the UK and, of those, around 80,000 have, at one time or another, signed on to doctors.net and some 20,000 to 30,000 use it regularly. It provides, for example, a module on diabetes and, if a doctor decides that he needs to get the latest view from the Royal Colleges on diabetes, he can sign on and do it. The way in which it is funded in the UK is largely through support through the pharmaceutical companies and so on who have effectively sponsored it, so it is a service that is free to GPs. Through a personal connection, I heard about this and talked to their chairman and we thought, here is an opportunity to take this abroad. What about making this available in India, for example, which is one of the places where we talked about doing it? There was huge interest there where we were looking at a relatively small fee, maybe £50 per doctor, but getting it funded in order that 20,000 or 30,000 doctors would sign up.

Q210 Chairman: That is not a learning course, that is an information system.

Sir Anthony Cleaver: They are interactive modules; the doctors are tested on whether they have learned from it. It is educational; it is coming from UK higher education ---

Mr Beaumont: For certain of the Royal Colleges, there is a continuing professional development requirement, so there is assessment and so forth.

Q211 Jonathan Shaw: The Department for International Development will presumably ---

Sir Anthony Cleaver: We also talked to DfID in this area. It is another example of having built the platform. There are other opportunities to exploit it which take it wider, which we were looking forward to exploiting. In their case, they had spent time discussing with us and working out how to put it on to our platforms - they had their own platform in the UK etc - but they would not have spent a huge amount. I have not been involved obviously in any of the subsequent negotiations.

Q212 Jonathan Shaw: HEFCE identified marketing and inadequate marketing research as one of the causes of failure. Sir Anthony, you have described to the Committee in your evidence how you went round the Far East talking to various government ministers etc. How do you respond to that?

Sir Anthony Cleaver: As I have said, (a) it is an evolving market everywhere and (b) I do not know where you could have gone to get the sort of expertise that we actually needed and I think we developed understanding as fast as we were able to do. Certainly I found in some of the places, Kuala Lumpur, Hong Kong and so on, where I made three visits over the time and, each time, it was clear that we were more credible. When I first went, all I really had was, "This was an ambition from the UK; we have three pilot courses, none of them are written yet; we are going to write a platform and it will be available and so on."

Q213 Jonathan Shaw: So, you were a salesman with not very much in your case.

Sir Anthony Cleaver: Absolutely.

Q214 Jonathan Shaw: Apart from what, charm and connections?

Sir Anthony Cleaver: A few connections, a bit of experience perhaps and so on, but I felt that it was important to do it. When I came back six months later and was able to say, "The first version of the platform will go live on this date; these two courses are available now", they said, "That is interesting, let us talk about this and what we really need is English" or whatever. So, one was developing it. I would just like to counter the idea that perhaps this is some sort of fantasy that we enjoyed and that actually this does not exist. I would be happy to let the Committee have a copy of this. This is a brochure from Assumption University of Thailand set up by them specifically to provide e-learning. In it, we are featured, together with Middlesex University, as two of the four providers. They list the courses that we were providing and they say, "Professor Dr ..." and I cannot pronounce his name "and his team will offer e-learning to 100,000 students per year." That is the scale of the opportunity that I believe exists. He may be, like me, being ambitious in his targets, but their expectation was that a quarter, roughly, of their students would come from UK e-University students. We needed less than 20,000 students in order to have a profitable operation.

Mr Beaumont: Just to put the market analysis into perspective, I went to Thailand to an e-learning conference in January 2003 with some people from HEFCE and, at that time, there was a lot of interest in what e-learning could do in Thailand at a time when it was illegal because wholly online courses were not allowed. We had to get Ministry of Education approval along with the Assumption University to be able to get into that position. So, if the market research had been done any time in 2002 in any detail, they would have found massive found for quality higher education but not a legal delivery system and a capability. Talking through what could be done in quality and demonstrating some of it around January 2003, we were able to progress like that. The other area of marketing, given that September 2003 was the first intake of our courses, what we were finding as feedback was, has that particular programme run before? Not, has it run on campus before or by traditional distance learning but has it been wholly online because we would actually like to be in the second intake or the third intake? One of the universities that we had partnered with that had had the experience was the University of Ulster; they came to us to help with their marketing; they already had the educational expertise and were using a different platform, but it was the marketing, and, for a course that had already run and for which there was a market, biomedical science, and for which it was driven by a five-star department, they were expecting and had experience of 100 students a year. We got 183 in the first intake in the first part of the year when we were marketing in more countries than they were reaching. So, I think the issue of marketing really was about being very specific in understanding local needs and then trying to address them in a very focused way.

Q215 Jonathan Shaw: Have any of the Vice-Chancellors of these institutions contacted you since the plug was pulled?

Mr Beaumont: Yes.

Q216 Jonathan Shaw: What did they say and who contacted you?

Mr Beaumont: I think real disappointment and "how can you help us in a transition?" Some universities did not have another platform, so "how can we keep the students that we have with you going?" There was a lot of pragmatic interest. I think while there has been a lot of discussion about the failure of UKeU, a common theme has been that we were not given the time to succeed.

Sir Anthony Cleaver: I have not had any direct contact in that part of the agreement that HEFCE insisted on is that we would not comment publicly etc and I felt that I could not add any view. Anything I said could have been misinterpreted or led to a commitment that HEFCE were not prepared to make. I did not feel able to say anything positive.

Q217 Jonathan Shaw: We have had a confidential memo - we do not know who it is from - from the staff who worked at UKeU and they have said that the advice from the marketing directors - I understand that you had two marketing directors - was not properly listened to. They were not on the board. The ideas were left to yourselves. Are you aware of that? Are you aware of any discontent within the staff ranks?

Sir Anthony Cleaver: Aware? I think that is one particular way of expressing it. As we went through, of course all the time there were debates about, what do we really need? In my experience, marketing directors always need, quite understandably, everything which you can give them, every support. They would like the courses that are lower priced; they would like more of them available; they would like more support paid for in order to help marketing them and so on. It is a normal process that one has that interaction. I think the area which took longest to try and address was the question of blended learning. I think it is true to say that, from the beginning, the marketing people said, "Over time, we really are going to have to do more in terms on-site support" and that is where we have worked with the universities, so that at the point in time when things finished, we had just got agreement with Middlesex University and they were accrediting four countries that would have been accredited by now with local support capability to provide blended learning.

Q218 Jonathan Shaw: When did they start saying that it is blended learning for the future and that people do not just want to look at a screen, they also want to meet with people?

Sir Anthony Cleaver: Some people said that from the beginning and what we learned over time was, I think it would be fair to say, at the undergraduate level, the need for blended learning is fairly normal and fairly clear. At the postgraduate level with specialist courses like the Ulster biomedical course and so on, most people already have the experience and many of them are actually in work using the Internet all day and so on and find it easier to work that way.

Q219 Jonathan Shaw: It was very important to understand the customer and what they wanted in order for this venture to succeed. So, would it reasonable to assume that given it was so important, you would put someone like a marketing director on the board or did you know better?

Sir Anthony Cleaver: I do not think it is a question of knowing better. We did not have, at the time, somebody we felt it was appropriate to put on the board.

Q220 Jonathan Shaw: You, Sir Anthony, described the people that you assembled for this project and it was a very impressive list. Did you try to find someone who you could put on the board? Was that the missing piece?

Sir Anthony Cleaver: I think that, had we had such a person, it would have strengthened our position and we were in the process of looking for just such a person at the time things changed.

Q221 Jonathan Shaw: Is the fact that you did not have that person which was crucial to the success of the project perhaps why HEFCE came to the conclusion about the marketing that they did?

Sir Anthony Cleaver: I do not think that HEFCE had any understanding; nobody from HEFCE ever asked me about the marketing in that sense, who was doing it, what structure we had, how they were approaching it and so on.

Q222 Jonathan Shaw: Did you tell them what you were doing in terms of your quarterly minutes that you told us about?

Sir Anthony Cleaver: Absolutely.

Q223 Jonathan Shaw: So, at no point did HEFCE say during their regular meetings with you ... Was it quarterly meetings that you had with them?

Sir Anthony Cleaver: No. With HOLDCO John had quarterly meetings. I met with Howard Newby normally once a month at my request for around half an hour, at which point I gave him an overview of where we were, what we thought the current issues were and so on.

Q224 Jonathan Shaw: In any of those meetings during the time that you were in your positions, did HEFCE or the holding company or Howard Newby say to you, "For goodness sake, this marketing is not working. What are you doing about this?"

Sir Anthony Cleaver: Quite regularly when I talked to Howard Newby, we would end up discussing student numbers and saying that was the key issue and saying that we both recognised that that was the key issue, to which my response was that first of all we need the right courses, we need time to get those in place and the arrangements in place and then I believe we will see the student numbers, but obviously we were disappointed at the numbers that we had. We would have liked bigger numbers because that was the easiest demonstration of the progress we were making.

Q225 Jonathan Shaw: Who selected the products? Who chose them?

Mr Beaumont: The courses?

Q226 Jonathan Shaw: Yes.

Mr Beaumont: The initial three pilots were done by ---

Q227 Jonathan Shaw: I know about those but what about the others?

Mr Beaumont: We were the ones that contracted the remainder.

Q228 Jonathan Shaw: Who chose them? Was it you? Which individual? It is alleged that it was the two of you, that it was all down to the two of you.

Mr Beaumont: No.

Q229 Jonathan Shaw: These are important points.

Mr Beaumont: When courses were taken to the operating company board for approval, I would get a sign-off from a number of people in my management team. Firstly, the finance director who had looked at the numbers in a joint business plan with the university on the student numbers and so forth and the cost of developing the course and the cost of replenishing it. I would have a sign-off from the director of learning programmes from an academic perspective because there is the whole quality assurance aspect that went into the Committee for Academic Quality and we would also have a sign off when we had the director of business development and director of marketing and sales, both of those.

Q230 Jonathan Shaw: The director of marketing and sales?

Mr Beaumont: Yes.

Q231 Jonathan Shaw: Why did the director of marketing and sales get a bonus?

Mr Beaumont: Last year?

Q232 Jonathan Shaw: Yes.

Mr Beaumont: There was a set of objectives that we had agreed, not only myself, the HR and ---

Q233 Chairman: Let us just stick to marketing at the moment.

Mr Beaumont: What were the criteria of the marketing director's bonus? That was put to the Remuneration Committee and, against those objectives, it deserved three per cent and that was independently reviewed externally because it was done after the HEFCE decision. I have a copy if you would like to see it.

Chairman: That would be useful.

Q234 Jonathan Shaw: There has been criticism of the marketing. Sir Anthony, you have told us that you could not identify perhaps the person that you wanted of the calibre to put them on the board.

Sir Anthony Cleaver: Could I change that? The situation was that we did not find a single person with the range of skills and the experience and level that would have merited adding a single marketing director on the board at the point in time when we were first making appointments. What we were most concerned about then was understanding the local market, which is why we specifically chose somebody who had been living in Singapore who understood that part of the world and who was able to build for us the local contacts and the local agents' association with local universities and so on. So, that was the aspect. Again, this is all a question of building the foundations first and then driving the marketing. We had just reached the stage - remember that the spring of this year was the first time that any courses went second time round and the first time for most of the courses, so we were just at the stage where we now had a portfolio of courses and we had built that infrastructure and we now needed somebody really to drive that in terms of marketing. We were ready to do that and we were in the process of dealing with that issue.

Q235 Jonathan Shaw: Do you think from the outside looking in and in terms of the number of people who go on the courses - and I take the point you were saying about what was going to happen - that it was right for bonuses to be awarded? Normally - and you have both been in businesses - it is not what will happen, it is going to be what has happened?

Sir Anthony Cleaver: Absolutely.

Q236 Jonathan Shaw: If you delivered all these thousands of students, then, fair enough, you get the bonuses but, if it is a projection ---

Sir Anthony Cleaver: Absolutely. All the bonuses were awarded against defined criteria which were set in advance and people's performance was assessed against them. For example, for marketing, one of the criteria was to have in place competent agents in a number of territories. So, if that were achieved, that was perhaps 20 per cent of his bonus and it was absolutely right that he should be paid that percentage. In the same way, the bonuses that were paid to John Beaumont and myself were based on specific numeric objectives agreed in advance by the Remuneration Committee composed entirely of non-executive directors with wide commercial experience who looked at the targets and said, "Yes, for this year, those are the things that it is realistic for you to achieve. If we achieve those, they will in turn provide the foundation on which we will build in the future." I have absolutely no qualms about either the process or the outcome of the bonuses. Incidentally, they were recorded, just for the avoidance of doubt as to visibility. The first year's bonuses are fully recorded in our annual review which was widely published and sent to all universities etc. So, the suggestion that this came as a surprise to anybody I find unusual.

Q237 Jonathan Shaw: Well, it came as a surprise to this Committee and, from my recollection, when we were last interviewing Sir Howard Newby and the Chairman of HEFCE, it came as a bit of a surprise to them.

Sir Anthony Cleaver: Perhaps I should leave you a copy of the annual review in which we published ---

Q238 Jonathan Shaw: Did they ever discuss this with you? Did they say, "Goodness me, you only have about 900 students. It is all very well you talking about English at your Fingertips and doctors.net or whatever, when you have the bottoms on the seats, perhaps you can have some money"? Did they say that to you? Did they raise any concerns about that?

Sir Anthony Cleaver: No.

Q239 Jonathan Shaw: None at all?

Sir Anthony Cleaver: No.

Q240 Jonathan Shaw: What about with you?

Mr Beaumont: No.

Q241 Jonathan Shaw: At no meeting or anything?

Sir Anthony Cleaver: No.

Q242 Jonathan Shaw: And Howard Newby never said, "Flipping heck, what am I going to say to the Secretary of State when he questions me about this?"

Sir Anthony Cleaver: I imagine what he would say is, "I put in place what I believed to be a competent board. I understand that they are operating to all best practice. I understand that they have properly constituted board subcommittees who review this, have set down the parameters and are measuring them accordingly." That would seem to me to be a very proper response.

Jonathan Shaw: When did things start going wrong between yourselves and HEFCE?

Q243 Chairman: Before we move on to that, Jonathan, as you have moved us on to the share of bonuses, I think we should be allowed to continue that. Sir Anthony, we have been listening intently and you have been very persuasive this morning. On this bonus business, I do feel that you are a very experienced industrialist, you have a lot of history right at the beginning of this and John Beaumont too. Surely you must have thought at some stage that with the bonus system, however it was worked and however independently, you were making yourself very vulnerable because the taxpayers, the sort of people that we represent on this Committee, our constituents, would look at this and say, "You have 900 students" and John's salary is £180,000 a year which is quite a generous salary I would have thought, certainly my constituents would have thought so, and then to have a performance related bonus of £44,940 ... That is a lot of money. Surely one of you would have thought, we are sticking our neck out a bit here! Perhaps you should have thought, perhaps I should not take this bonus and should wait until its really showing that it is getting somewhere. Did that not cross your mind?

Sir Anthony Cleaver: Not for one minute because I believed and I still believe that we were succeeding in developing something for the long term. Could I just address the question of 40 million or whatever the number the press choose on this occasion to use and 900 students and therefore that means so much per student. That is rather like saying, I build a hospital. After week one, I close the hospital. Therefore, the number of patients who have been through have been X and it has cost us £1 million a patient. It is a very foolish way of looking at how you build up something for the long term.

Q244 Chairman: We are well aware in this Committee that the tabloids will do that sort of thing. That is what happens in life. We do not take much notice of that. What we do take notice of is that we have to explain this expenditure of taxpayers' money as ministers do and surely one of you must have realised that it looks bad. Whether it was all done impeccably, it does look bad at the stage you were at to take £44,000/£45,000 bonus.

Mr Beaumont: No. I think what we did in the first year which was inherit not a lot of detail, get into service and offer the first set of courses over 20 countries was a massive achievement. We had to create an organisation to deliver that service and that was the objectives that were agreed by the non-executive members of the Remuneration Committee and I think that, at the end of that year, they felt it had been a massive achievement.

Q245 Mr Pollard: Jonathan mentioned the Secretary of State Executive and I remember you saying, Sir Anthony, that you met regularly with ministers. Was there any indication when you were meeting with ministers that they were unhappy about the situation that was developing?

Sir Anthony Cleaver: I think it would be fair to say that the first meeting with Margaret Hodge was very early on, I think probably the month in which John Beaumont joined. We went there to talk to her about where things stood, this was right at the beginning, and she turned to me at one stage and said, "This is a very high risk operation, is it not?" and I said, "Yes, it is but I believe that is the only way that we can build what we want to build for the future." She was very pleased when we reported six months or so later where we had got to and in fact she was at the meeting of Universities UK at which I presented to give a progress report to the heads of all the universities and, at that time, we said that we had the platform up and running etc, etc. We spoke to Alan Johnson and gave him a progress report of where we had got to and where we expected to be and we had one meeting with Charles Clarke in December last year at which again we simply gave him a progress report and he listened and said that he hoped we were getting the support we needed.

Q246 Mr Pollard: No worry from either the Secretary of State or the two Ministers of State?

Sir Anthony Cleaver: I think "worry" is the wrong word.

Q247 Mr Pollard: Concern?

Sir Anthony Cleaver: In each case, they were interested in where we were and obviously they understood that the proof ultimately was getting the number of students.

Q248 Mr Pollard: I am trying to get whether there was any drive from the DfES or from the ministers that pushed HEFCE towards the final pulling of the plug.

Sir Anthony Cleaver: That would be pure speculation and I have no evidence fort that.

Q249 Mr Pollard: Speculate. You have been quite forceful so far.

Sir Anthony Cleaver: I have no reason to believe that any impetus came from the DfES in this context. I think they would view this as something where they had agreed a certain sum of money to HEFCE in order for this thing ---

Q250 Mr Pollard: And they had to get on with it?

Sir Anthony Cleaver: And they would let HEFCE get on with it. That would be my assessment.

Q251 Mr Pollard: A short while before this, we had an experience with ILEAs where that all went pear-shaped. Do you not believe there is any carryover of that that made both the ministerial team and perhaps HEFCE themselves a little skittish?

Sir Anthony Cleaver: I think Government are very understandably generally risk averse and I think one would anticipate that for exactly the reasons you have just been referring to. You all have constituents, they all look for things to be handled properly and for public money to be well spent and effective in its use and I fully accept that it was our responsibility to do these things responsibly. The difference of opinion is that I believe we did just that.

Q252 Mr Pollard: You talked earlier on about one of your first jobs being to talk to the Open University and the British Council. It seemed to me that you were quite dismissive of that because I think you said that they were involved in individual universities but not doing anything on the e side of things.

Sir Anthony Cleaver: No, I am sorry, I hope that is not what I said and it is certainly not what I intended. The British Council did not have an e-learning offering themselves, it was not their role. They were increasingly developing higher technology capabilities in British Council offices because they found that useful but they saw their role as being to facilitate the entry of individual universities into foreign markets and I think that is absolutely proper. So, there was no extensive e-learning experience as such there.

Q253 Mr Pollard: May I just pursue that a little. I went to Russia with some of the Committee here and we were very impressed with what the British Council were doing in Russia all over the place. Going back to what you were saying, they were not on the same wavelength as you were but they were actually feet on the ground and knew exactly what the Russians required. Therefore, it would seem to me to be good marketing data that you could actually use and yet you did not seem to follow that through. Yet, you have already admitted that there was a weakness in the market when you were talking to my colleague Jonathan earlier on and it would seem to me that that is where you had stuff that was there ready on the ground, people knew what they were doing and what the Russians needed, just using the Russians as an example, and you push it to one side.

Mr Beaumont: In a number of countries we worked directly with the British Council in identifying local markets and using them to support it, so, for instance, in Brazil and China our international business managers were located in the British Council offices. In the British Council in India, where the first knowledge and learning centres were established for the British Council, we have been providing e-learning materials and how to do e-learning to the British Council there. Some of our courses in Singapore and Malaysia have gone through the British Council. In Russia we had had discussions and we were partnering with an organisation called Link which is the partner of the Open University, and they were particularly interested in English language.

Q254 Mr Pollard: I think this is a brilliant concept and I am really disappointed it is not happening. Is it revivable at all?

Mr Beaumont: I think on a number of fronts - if you look at marketing, the products and the platform - the platform I believe is, let's say, hibernating. Technically and operationally you could do that but it is not straightforward. In the other two areas there is an enormous amount of trust that has been developed with our partner in United Kingdom universities and particularly partnering overseas universities, including their governments. That is a much harder climb, and it is very sad that the massive opportunity that we have seen will potentially be missed.

Q255 Chairman: Let's stay with marketing for a moment. Your first marketing director was a top marketing person. What happened to him or her?

Mr Beaumont: We appointed two at the outset, one to look after marketing to the corporate world - companies, large organisations, both private and public sector - and he was called Director of Business Development, and then the Director of Marketing and Sales was targeting the individual students in specific territories where we had the marketing channel strategy to have overseas partners.

Q256 Chairman: One of them left quite early?

Mr Beaumont: Yes.

Q257 Chairman: Why? Which one?

Mr Beaumont: The Director of Business Development. In many respects it was a joint decision. The corporate world particularly, which again I think is a big market, want product. They do not want to talk about what is coming in six, twelve months' time. Where is your MBA from? Which modules can we take? Can we get it started next month across three countries as a pilot? In many respects the person we appointed did not have anything in his bag to do anything other than open doors about the idea.

Q258 Chairman: So the notion that somebody went out of your employ because they were giving you news that you did not want to hear about markets is not true?

Mr Beaumont: No, I do not think that is true. We all knew that the corporate selling to large organisations is much more a relationship sale, it is about longer lead times for decision-making, and that was not news to me.

Q259 Chairman: So you then had one marketing director?

Mr Beaumont: Yes.

Q260 Chairman: And that was the person who was still employed until the company was --

Mr Beaumont: Until after the HEFCE decision.

Q261 Chairman: This was the one who got a 3 per cent bonus?

Mr Beaumont: Yes.

Q262 Chairman: Was there any suggestion that the kind of information that -- was it a he or a she?

Mr Beaumont: He. Martin Bannister.

Q263 Chairman: -- he and his team were giving you, the kind of information that they were coming back with from the markets, was unpalatable, and therefore you ignored it?

Mr Beaumont: Not at all.

Q264 Chairman: There was no evidence at all, if we had him in front of the Committee, which we might, that the sort of information that was feeding back to you two, if it was unpalatable, you disregarded?

Mr Beaumont: The recurrent theme that Nigel and his team wanted was more business courses, particularly a flagship MBA, and we went round to make sure that we could get one from the top international business school. We were in the process of signing a Cass business school up for delivery in October 2004 --

Q265 Chairman: Sir John Cass?

Mr Beaumont: Yes, City University, and we had already got some sponsorship from the BBC for students in India for that. We had to be able to persuade the university that they wanted to do it for us; we could not go and say "We need that course, please do it", so you had to build the relationship and make sure they felt it was win/win, so I felt we were taking on board the information. The other aspect I think that was fed back quite commonly from the market was about English language constraints, for instance, I think in the original PwC list of countries Brazil was mentioned. Except for, let's say, a specialist technology course or an MBA you would have to have the courses in Portuguese, which immediately causes a problem because, let's say, it is a course in bioinformatics, the staff in the UK university would not be able to mark the Portuguese and therefore it would break the quality assurance regime and therefore you would not be able to offer the degree. So language was an issue so we were getting English language courses, and the final feedback was the blending, because the original model was wholly online, particularly for undergraduates, but as soon as you go down the blended route, because it was seen as a degree from a specific university and not UKeU, that university in the UK has to accredit any partner in an overseas country, quite rightly, for quality purposes, and that involves visits, looking at staff, and so forth.

Q266 Chairman: I do not say this in the spirit that I am trying to blame you for this but I get the feeling from what you are saying that the market was not there yet for what you had to offer. Would it be fair to say you were too far ahead of the game? That the market is not mature enough for this product, and that is why really you have had this difficulty getting the numbers?

Mr Beaumont: I think the market is there. I think there is a timing issue, and I think it is quite understandable, particularly with parents and students paying serious amounts of money for courses, that they do not necessarily want to be on the first course that is run, and when the decision was made by HEFCE, we were just starting to get what were market-driven courses and we had only one series of intakes.

Q267 Chairman: But the product range is not that inspiring, is it? Looking at it and the universities that are offering them, they are not riveting, are they? I am a governor of the London School of Economics, and we have a very strong international global brand. People like it because it is associated with quality and we provide courses that people seem to want. If I am looking at your range of products, firstly, you are a disparate group of institutions - some are well known, some less well known. With all the will in the world, if you have got some poor chap going round the rest of the world selling these products, it is not exactly a riveting bunch of products, is it, yet?

Sir Anthony Cleaver: No, and this is what you would find in any market place, is it not? In order to get the top brand universities on your roster, they want to see that it is going to work and so on. They are the people who have built an international brand already, like the London School of Economics, and they will come in once they see it is fine and working well and so on. They do not feel the need to come in at the embryonic stage, so our job was to take the best courses we could get as early as possible, get the thing up and running, and then build the quality which is what we were doing if you look at the ones we say were just coming. It will, of course, please you to know that I did lunch with Howard Davies in order to discuss whether LSE could come on board and it was something he said he was prepared to look at, but these things take time to build.

Q268 Chairman: I understand that, but you keep coming back to the three items: marketing, product and platform. There are problems on each of those. You can make excuses and say "earlier development, "have not had time" and all the rest, and I understand that, but then when I turn over, the area that I can get no agreement on at all is this bonus. You said governments are risk averse and that the government has to justify to taxpayers but I still cannot understand it. What do you describe yourselves as? Are you civil servants? Public servants? Private buccaneers? What are you?

Mr Beaumont: My role was chief executive of a company.

Q269 Chairman: What sort of company?

Mr Beaumont: A limited company.

Q270 Chairman: A not for profit company?

Mr Beaumont: No. A for profit company.

Q271 Chairman: Limited by guarantee but profit making?

Mr Beaumont: Yes.

Q272 Chairman: But not a normal commercial company?

Mr Beaumont: I felt it was to be a normal commercial company.

Q273 Chairman: Normal commercial companies are not limited under guarantee.

Sir Anthony Cleaver: I do not think we were limited by guarantee.

Q274 Chairman: What is the status of this company?

Mr Beaumont: I need to check that.

Q275 Chairman: Are you telling me you do not know the status of your company? Come on, Sir Anthony, what sort of company is this?

Sir Anthony Cleaver: This is a company owned by the holding company funded by HEFCE through their holding company, and the intention was that over time we would bring in private investors and therefore it had to conform to all the normal company requirements, and that was the way we ran it in accordance with all corporate governance, etc.

Q276 Chairman: But, Sir Anthony, you are the expert on this. Is it a company limited by guarantee or not? Is it a company that could go belly up? It cannot, can it? The only way is if the government takes your funding away, or HEFCE takes your funding away?

Sir Anthony Cleaver: It is a company funded through the holding company by HEFCE, as it says, principally financed by HEFCE, entirely financed by equity, and has no borrowings. That is the status of the company.

Q277 Chairman: And the universities only put up a pound share?

Sir Anthony Cleaver: I believe that, yes.

Q278 Chairman: So come on, John, you are not a buccaneer entrepreneur in a risky environment, getting up every day thinking "What's my bottom line going to be tomorrow", are you? That is not been your role over the last two years, has it?

Mr Beaumont: We have had targets to meet both in terms of financial and platform delivery. It is no different from the drivers I had when I was a director of a plc company.

Q279 Chairman: Surely it is different if you are lastminute.com when you are struggling to be survivors. It is a bit different if you are chief executive of that from being chief executive of this. You did not worry that you were not going to get paid next week, did you?

Mr Beaumont: I think the profile is different --

Q280 Chairman: But the risk is different, is it not? Be honest, John.

Mr Beaumont: I think the risk is about success and failure --

Q281 Chairman: Yes but, John, you are on a substantial salary that is higher than for any Vice-Chancellor I know. For most people in this country it is a very serious salary in a non-risk business and you took nearly £50,000 in a bonus and, as I have said, in marketing, product, and platform you have serious problems, so my constituents would ask "Who set a target that enabled you to get £50,000 nearly on top of your salary of £180,000?" What was the process?

Mr Beaumont: Three non executive directors --

Q282 Chairman: John, I am asking you because it is my job as Chairman of this Committee to push you on this. How can you justify, as almost a quasi public servant, this bonus?

Mr Beaumont: Objectives were agreed over a year earlier about delivery on a number of --

Q283 Chairman: Tell us about the delivery and the objectives. I am curious because at the moment this Committee is getting the feeling you are hiding behind the non executives, and common sense is to unpeel that.

Mr Beaumont: There were six areas for the 2002/2003 bonus --

Q284 Chairman: Take us through them.

Mr Beaumont: Twenty-five per cent was related to the platform and --

Q285 Chairman: Twenty-five per cent --

Mr Beaumont: -- of the bonus potential.

Q286 Chairman: To do what with the platform?

Mr Beaumont: To ensure an effective e-learning platform is delivered on time and fit for purpose.

Q287 Chairman: I thought we were paying £15 million to Sun Microsystems to do that?

Mr Beaumont: But somebody has to be accountable that they will deliver.

Q288 Chairman: All right. Carry on.

Mr Beaumont: That we launch the three pilots that we inherited and develop a more market-driven pipeline of courses - that was 25 per cent.

Q289 Chairman: That is product.

Mr Beaumont: Yes. Getting other United Kingdom universities to offer their courses for which there was local market demand. Develop a marketing strategy with direct and indirect channels and establish a suitable internal marketing sales business development set of activities.

Q290 Chairman: That is another 25 per cent?

Mr Beaumont: Included in that was to develop UKeU brand and awareness amongst the target audiences, and that would include particularly overseas. Private funding was 10 per cent, to attempt to raise private funding in line with budget assumptions recognising external market conditions.

Q291 Chairman: You did not win any of that, did you?

Mr Beaumont: No.

Q292 Chairman: So you did not get your full bonus.

Mr Beaumont: Financial management, to ensure the management of the company is in line with the board agreed budget, and to develop a robust ten year plan.

Q293 Chairman: Where is the evidence that you had a robust ten year plan?

Mr Beaumont: We updated the PwC plan and explained the markets and the strategy to implement that.

Q294 Chairman: So these were your targets set by -- ?

Mr Beaumont: -- the three non executives.

Q295 Chairman: And at what meeting did the three non executives decide that you had got sufficient of these to get a bonus?

Mr Beaumont: There was a remuneration committee meeting on 24 April 2003.

Q296 Chairman: April 2003, and that was evaluating your performance in the previous year?

Mr Beaumont: That is correct.

Q297 Chairman: And how many students did you have by April 2003?

Mr Beaumont: We only had the first course from the Open University in operation at that time, and from memory there were 55 but I would have to check that.

Q298 Chairman: Let us move on for the moment, but you can see our concerns. We are not trying to make your life difficult here, but it is of serious concern. Listening to that list of targets, to me - I do not know about the rest of the Committee - it seems that you had a pretty tame group of non executive directors who set those targets and then thought you should have won that large increase on your salary, given what you had done.

Mr Beaumont: I am not sure I would agree that they were "tame" non executive directors.

Chairman: They sound tame to me, John. Is there no one time that you thought "We are not in a risk business, we are a publicly funded organisation. Will it not make us vulnerable as an organisation at some time?", because I have to tell you, when we were listening to the evidence last time we met HEFCE, we were pretty even-minded about what they were saying. We thought "Well, this is going to be very interesting to balance with what you say when you come," but the one area that shocked us was this bonus. There were other things too, but this particularly concerns me.

Mr Pollard: And me.

Q299 Chairman: And I still cannot see that you could not have understood there would be a vulnerability of this university at some stage.

Sir Anthony Cleaver: Can I unpick some of the comments? Firstly, I think this was always a risk business; we saw it as being high risk, and the fact it is a risk business has just been demonstrated. It has been summarily closed in a way I cannot conceive would have happened to a company with normal shareholders, where there would surely have been some debate between the board and the shareholders saying "Is this the best thing to do? Could we do it rather better? Do you have information that we do not have that suggests we are making the wrong decision?" I have never known such a summary closure, so to say this is not a risk business - it seems to me it is higher risk than anything I have seen in my many years chairing public companies. So, firstly, I do not accept that definition of "not a risk company". It was a normal company, it was a company which had equity and that equity happened to go back to the state, other than the Sun Microsystems involvement within it, but it was a normal company in that sense and in time we expected to bring in private equity and ask for it to become a more normal company in that sense. So in terms of the nature of the company and the risk I am entirely comfortable that we knew where we stood. As far as the bonuses are concerned, I think this is rather reminiscent of some of the debates one hears about bonuses paid to people in public companies. The sort of thing that happens is that a target is set at one point, people are assessed a year later as to whether they achieved the targets that were set then, six months later the company runs into trouble and people say, "And this man got a huge bonus". The fact is that bonuses have to be checked and assessed at the point in time where you have reached. With 20/20 hindsight you might form a different view, but what we were trying to do was to say "We are not in this for one year, two years or three years"; we were building something which I fully believed would last for many years and would provide a proper foundation for United Kingdom higher education e-learning. In building that, you have to create the building blocks, and the building blocks that John was charged with creating that first year were, firstly, to create a platform. We had nothing. Specification only. In that year we chose the supplier, Sun, we drove the supplier to deliver as much as we could get fit for purpose and on time for those first courses, and that was achieved. I believe that was a very specific objective and that was quite properly remunerated. We were asked to put in place the marketing capability in terms of having the local agents and so on that we needed and we began to put that into place. He was asked specifically to get courses. I think it is a bit facile to take this view that we went out to all universities and back came 69 super opportunities which are directly fit for market, etc. What we got was a diverse range of things from single sheets of paper that said "We would quite like to do a course in this and if you give us a million and a half funding upfront we can develop one" right the way through to some people giving us a very proper full business case saying "We think we know this market, we believe in these countries there is an opportunity, and therefore..." and we chose from those on the range of what we could get from those 69. We did not get the ideal set of courses. We knew they were not ideal but we had to drive the thing forward and make as much as we could so that we were beginning to get funding in to off-set the expenses we were incurring. It was, therefore, entirely proper to say "You are required to get contracted this number of courses"; he achieved that in formal terms, and the remuneration committee quite rightly said "That percentage of the bonus you should receive". There was an element in there for the private funding and if you look he did not receive his full bonus, and the reason for that was that element was not achieved and therefore he was not remunerated.

Q300 Chairman: So the full bonus should have been how much?

Sir Anthony Cleaver: The little bonus was 30 per cent, I think, so I make 30 per cent of £180,000 £54,000 --

Q301 Mr Pollard: That is as much as my salary!

Sir Anthony Cleaver: I am sorry but we live --

Q302 Chairman: So if you had ticked all the boxes he would have got £54,000 rather than £45,000?

Sir Anthony Cleaver: Exactly. Just on the question of remuneration, and I am sure I should not mention this in this particular arena, and I do understand the sensitivities and that there are areas in life that should, no doubt, be remunerated higher, I always had great difficulty as Chairman of a higher education institution looking at the salaries we paid professors, and I feel compared with many other people in life they are significantly underpaid. At the same time, if one is trying to run a business and seeking the best people to run it, you have to pay the market salaries and I would point out that John took a significant cut in salary to join UKeU.

Q303 Chairman: But, Sir Anthony, I think where we disagree is on the difference of risk. We understand this is a risk venture in terms of new markets and all the rest. Where I differ with you is the amount of risk you two personally faced compared to a private struggling SME or company making it as a .com venture, where your shareholders will be watching very carefully your results, and if you do not sell you do not get an income, a cashflow, and you go out of business. I am trying to contrast with that. I am also trying to contrast the fact that HEFCE funds universities. You are a university. You were paying John as a chief executive more than any Vice-Chancellor I know of with a bonus system, and I do not understand why there should be a bonus systems for the eUniversity when I have never heard of one for any other university in the land, and we interview Vice-Chancellors all the time.

Sir Anthony Cleaver: No Vice-Chancellor applied for the position and the headhunters were not able to find one who would have wished to apply for it!

Chairman: That's well and good, and I hear what you say.

Q304 Mr Pollard: Very quickly, I have just refreshed myself on John Beaumont's CV and it said you were a marketeer, so there were three marketeers involved. Why then was there such a failure in the marketing if there were three of you, and you said yourself that you could not appoint somebody as director of marketing on the board, yet your chief executive was a marketeer by profession and training with vast experience. To other marketeers, why was there such a big failure?

Sir Anthony Cleaver: Our view on that remains the same as our view on the enterprise as a whole. We did not fail; we were not given the time to succeed.

Mr Beaumont: On the marketing, I do not know whether the Committee has heard from others but when we joined there was the suggestion from HEFCE that we should spend £12 million buying a marketing company. We looked at it and said we could not see how that made any sense to spend £12 of the £55 million. We had some discussions and we had professional advice in making that decision. That company came back and offered themselves for nothing, and we felt that it would still not be a good deal because there was so much inconsistency.

Q305 Mr Pollard: Who in HEFCE suggested that?

Mr Beaumont: The interim team, including HEFCE, were looking at an acquisition of Scottish knowledge for £12 million, and we put a stop to that within the first month of the two of us being there. Just to correct you, I am not a professional marketeer. For two years I was a director of marketing; I feel that in the 18 months through to late 2003 we had a really good understanding of the local market in a large number of countries for e-learning from UKeU, and that has now been lost.

Q306 Mr Turner: The assumption was that this would be a new collaborative venture between AGIs and the private sector. Accepting that you are technically the private sector but otherwise not, I assume that what the government meant by that was that some big private sector organisation would put a lot of money or expertise in, and when I say "expertise" I recognise Sun Microsystems did but they were paid handsomely for it. Was this a partnership in any sense that you understand the word, or was it you employing Sun Microsystems?

Sir Anthony Cleaver: I think the reality was that we were employing Sun Microsystems.

Mr Turner: Thank you.

Q307 Mr Chaytor: Coming back to the marketing and the programme that was offered, when did you learn that the Brazilians spoke Portuguese?

Mr Beaumont: I made the comment that one of the markets that was identified at a top level, because I suppose there are large numbers of people, was Brazil. We looked at the Brazilian market and there is a large demand for quality and higher education but, except for a very few subjects, that has to be delivered in Portuguese.

Q308 Mr Chaytor: But is this not self-evident?

Mr Beaumont: Yes, so we did not spend a large amount of time --

Q309 Mr Chaytor: But why is Brazil one of your target markets in the first tour of operations?

Mr Beaumont: We had a number of courses in the oil and gas area and Brazil was a key market there. Brazil was particularly interested in the English language courses, and we felt that there was a large number. It is also a country that has good infrastructure. Many countries do not have the internet access capability, therefore there may be a market but it is not addressable.

Q310 Mr Chaytor: But if you are living somewhere in the middle of the Amazon, why would you want to do a degree in hospitality management from the University of Derby?

Mr Beaumont: I do not think we were marketing that there!

Q311 Mr Chaytor: How many people for Brazil signed up for that?

Mr Beaumont: Only certain courses were marketed in certain target countries.

Q312 Mr Chaytor: But those courses would have had to be delivered in Portuguese so my question is did not anybody in the organisation know that the Brazilians spoke Portuguese? Could they not have found out by clicking a website or phoning the Foreign Office, and had they done that in advance would Brazil still have been in phase two of your marketing programme?

Mr Beaumont: I think it would still be in phase 2 but I do not think you would be targeting courses that needed Portuguese language, and we were not doing that.

Q313 Mr Chaytor: The same question applies to South Korea, does it not? Is it not obvious that to sell courses in South Korea, your lesson from visiting ministers in South Korea was that the big demand was not for individual courses because they had their own cyber universities; the demand was for English language, but are there not just thousands and thousands and thousands of rival organisations teaching English language in a variety of forms? How could English language teaching be a necessary or a central part of your business strategy?

Sir Anthony Cleaver: First of all, the Korean universities themselves felt there was a gap that could be filled this way. I talked to the President --

Q314 Mr Chaytor: So there was a shortage of organisations offering English language teaching?

Sir Anthony Cleaver: In the form that they wanted. They wanted English language in a form that students could learn in parallel with their normal learning at the university, and subsequently go on to take further courses in English.

Q315 Mr Chaytor: Why do not they just employ a bilingual Korean in the university and teach them? I fail to understand how this could conceivably be a sensible marketing strategy selling --

Sir Anthony Cleaver: Well, normal marketing strategies in my experience are developed among other things by going and talking to potential customers and finding out what they want, and it was the President of the Korean National University who specifically said to me "I think it would be enormously valuable if you could provide online English learning which will then enable us also to take on some of the other courses". They are interested in specific courses in areas where we are strong. Biomedical science, for example. They would like to take our post-graduate degrees in that area but in order to do it they need a greater command of English than they have, so what they want to do is to continue studying in their own language at the current level for their first degree or whatever, because of course one of the big advantages of e-learning is you can do it at your own pace and in your own location, and in parallel develop that English expertise, and that would make us more visible to all the students because they are seeing us and using our platform and so on in that way, and would also leading in to their ability to take these other courses where they saw that we had a particular offering that was valuable. So I think it does make very good sense as an integrated marketing approach.

Q316 Mr Chaytor: Was he saying, or are you, that there is nobody else providing this service at the moment? I would have thought you could click on a website and there would be any number of American companies providing English language teaching in this form? How could this be a central function of your strategy?

Sir Anthony Cleaver: This is one strand of our strategy. This was one course we were working with Cambridge on and which we were going to deliver. It was one specific strand where I have every reason to believe that over the years we would, in fact, have got very high demand from the combination of Cambridge and the English language. You mentioned the fact that there are a number of American offerings, that is absolutely true, and I do not wish to get into the political arena but in a number of countries they are very anxious not to be specifically and solely dependent on American offerings, so there are other aspects here that are important.

Q317 Chairman: But HEFCE looked at you and someone said, "But the problem is they never really did their market research very well, indeed it was patchy and sporadic and not very reliable", to use terminology from elsewhere. Everything you have said is very anecdotal. You pitched up in Korea or Taiwan and said to the Vice-Chancellor, "What about this?" and it does not add up to me to be a systematic evaluation of the market against the competition, and that was one of the criticisms we picked up from HEFCE.

Sir Anthony Cleaver: We had the PwC report --

Q318 Chairman: But that was right back at the beginning.

Sir Anthony Cleaver: -- which was covering that sort of area; we had frequent reference to the British Council wherever they had reports and we talked to them and worked with them on that aspect, but if you want to get to the specifics of individual courses, where you can supply them, who the right local partners are and so on, I do not think there is any substitute for being there and having local people there who support you and developing the relationships.

Mr Beaumont: And for every country that we entered we had a marketing entry strategy, who were our lead partners, what sort of contacts did we need with the Ministry of Education, and so forth.

Q319 Mr Pollard: Just quickly, when I ran my own small business before coming into Parliament we often had to do something that would be almost like a loss leader. Is that what you were talking about with the English courses? That is the only rationale I can follow. In a supermarket you would have butter reduced to get somebody through the door and after that they would buy some of the other things. Was that part of your marketing strategy?

Sir Anthony Cleaver: I think there was an element that that would be an easy entry for a number of people who would then go on to do other things with us, but we certainly did not expect it, nor did Cambridge, to be a loss leader in financial terms. We expected it to be successful financially.

Mr Beaumont: I agree.

Q320 Valerie Davey: Coming back to the initial concern that you had to show that something was running, valuable and would develop, surely the home market would have given you that? This is something which increasingly, as you said rightly, more post-graduates than undergraduates are looking to in order to extend their qualifications, and universities here have that experience. Was the platform intended only for the overseas market, or did it have that initial development of United Kingdom students as well?

Mr Beaumont: It could be used anywhere in the world so that would include the United Kingdom. With some of our courses they did not want us to market the programme in the United Kingdom because it might cannibalise the students taking the same course but on campus or by more traditional modes, so some of the courses we did not market directly in the United Kingdom, although if they had gone on to the website students would have known about its availability. One of the things we did learn was that a number of courses and universities, rather than just having some of the modules available by distance, wanted them to be made available to students on campus as well, and that was the sort of thing we were in specific discussion with individual universities on. What we did find was there was an interest in the platform from a number of UK universities to support their campus activities rather than distance education, because you cannot have an e-learning campus-based offering that perhaps closes in an evening or at the weekend, and we had to be 24/7 globally so could they piggyback on that. We were in quite advanced discussions with a number of universities on that front.

Q321 Valerie Davey: So perhaps we have the cart and the horse the wrong way round. Had it been developed, and I take Sir Anthony's point about the timescale, but had there been a business plan which had a securer home market from which to develop through those universities which already had a good track record overseas, that might have been an alternative way of doing it?

Mr Beaumont: If your alternative says that there would be demonstrable courses that had already been run that would have been extremely helpful, and that is why, for instance, getting the Ulster courses and the Robert Gordon courses already on their own platforms meant it was easier to get marketing in the first instance, because there was a track record.

Q322 Valerie Davey: So why was it not done that way?

Sir Anthony Cleaver: I think HEFCE were just coming to the view that they needed a comprehensive United Kingdom e-learning strategy which led to the consultation I mentioned at the end of last year. Prior to that the view was that individual universities were developing their own systems, and they should let those develop and see where they got to. Our own view was that a big part of our objective was to develop a capability for the whole United Kingdom higher education sector. The whole problem here in many cases is simply that to run the sort of service we were providing 24 hours a day 7 days a week and keep it up and running we reckoned would cost, say, £4 million a year. For a single university that is a very big investment, but spread across a range of universities that sort of service is potentially exceedingly attractive, and in my letter to David Young it is one of the things I said I hoped would be preserved because I believed that was still a possibility. I have no idea where they have got to but it does not look as though that will be the case, and I think that will be a loss.

Q323 Valerie Davey: I think there are a whole lot of sad people sitting round here today who are desperately looking now for a way forward, so where do we go from here? Given your experience, what do you now suggest? Was this inevitably going to fail in the years you were dealing with it, given some of the factors we have heard about today, or, just leaving the past for the moment, where is all that experience going to be put to good use for the future?

Sir Anthony Cleaver: If we had known that it was only going to have two years of life you would never have started. I do not think it failed; it just did not have the time to succeed. I think the strategy for the United Kingdom dimension that you were asking about is very clearly set out in our response to the JISC and the LTSN, so that you have a coherent approach so that the individual universities can do what suits their needs but they are getting a service at a good cost and a high quality. I think that opportunity should not be lost because I am convinced, not only for distance education but for campus-based education, e-learning has to be not only potentially better quality but also a lot cheaper to deliver.

Q324 Mr Gibb: Do the American universities do this kind of thing?

Mr Beaumont: Yes. From my experience there is probably more campus-based e-learning within the US system than in the United Kingdom. Somebody mentioned earlier it is still a cottage industry, so it has permeated more. There are obviously examples where it is less the case in the US and more the case in the United Kingdom. The two examples which are often highlighted in the US are University of Phoenix and e-College. The University of Phoenix has probably got the largest number of students of a private university. It is increasingly online but across the States, Canada and Puerto Rico there are over 100 campuses, so it is a very blended approach. It uses a lot of people who are in full-time employment - managers, professionals - providing courses, and it is quite different. If there was something between UKeU and US Online Direct(?) it is probably in that space. The other one which is probably nearer to wholly online higher education is something called e-College which is Nasdaq listed, set up in 1996. Their growth has been rapid only in the last two to three years. Their overall funding was probably of the order of the £90-100 million expected in the original HEFCE PwC. Last year their online courses grew by 40 per cent; they have now got about 1.4 million students, of which a good third are wholly online, the rest are a hybrid. Those are the two best examples.

Q325 Mr Gibb: Could you not have used their software platform instead of inventing the wheel again yourself?

Mr Beaumont: That had been looked at prior to Sir Anthony and I joining. I think there were probably issues of scope and functionality as well as cost. It would be wrong to get the impression that that £9.5 million fixed price contract for Sun was to allow a load of software engineers to write new code. The approach was to take the best of individual applications that were to open standards and systems and integrate them, and the power of that is that you get a future proofed architecture that allows that if new things come on you can plug them in. e-learning is going to evolve and this was very important.

Q326 Mr Gibb: Do you think it is right for a state-funded body, which ultimately you are, to have an ambition of creating £100 million a year profit by year 10? Do you think that is the role of the state sector?

Mr Beaumont: That is probably an answer that the politicians should give but the fact that the money would be new income to the universities who probably have some form of financial crisis and they are also the key shareholders is important and I think a sensible vision, creating new money from a sector that can benefit from then investing perhaps in more e-learning and more research.

Q327 Mr Gibb: But the accountability ranges are rather bizarre, are they not? You are appointed by the holding company, and the holding company is appointed by HEFCE and the chief executive of HEFCE was the accounting officer, and I was never clear when we were interviewing them last time who was responsible to whom. Do you think there is something wrong with the accountability arrangements here? Do you think they could be improved if we tried this again?

Mr Beaumont: Yes.

Mr Gibb: How? In what way?

Q328 Chairman: Sir Anthony?

Sir Anthony Cleaver: I would give a different answer. I do not know of a different way. As far as I was concerned, I was asked to run a normal company, a company that operates expecting to have to achieve profit, but in this case a start-up and therefore one that would take some time to get there. You asked a question about Sun and whether it was a partnership or not. They clearly were in a slightly different position from somebody who had not been involved in the beginning, but our main relationship was certainly one of their providing. We were a customer, if you like, and we were buying from them. Essentially this was a company that had a single shareholder, and I think there are always issues in that. When I think of the companies I chair elsewhere, there is always a different atmosphere round a board table where the investor is present also as a director and involved with it, and that of course was not the case here --

Q329 Chairman: Sir Anthony, you are famous, very famous, for your report on Tomorrow's Company, which really talked extensively about stakeholders, and it seems to me listening to the evidence today and the last evidence session that there was something going wrong with the communication between the stakeholders. You had the government, you had HEFCE, you had the holding company, you had your supplier universities -- let us stop there. I know the consumer and the community come into your analysis as well but they are the stakeholders and it seems to me you were meeting regularly Howard Newby, regularly reporting, and you do not seem to have been given any information that there were deep concerns about what was happening, and you were not picking up the resonance that there were real problems.

Sir Anthony Cleaver: When Howard said to me in I guess October last year that he thought it was time that an independent view of how we were doing was taken I said I would welcome that and I thought that was entirely sensible. He then said "We will appoint somebody" and a little while later he said "We want to appoint PA Consultants to do this" and I said that my only concern was that the people appointed would understand something about e-learning and the sector and so on. I thought, therefore, that what we would get was an informed report and it might well say "They are doing these things and in this area we can see they are missing a trick", or "They have done this wrong in this area and it could be corrected" and so on, so that was the sort of report I anticipated. When I saw the PA report and was asked to respond to it, I was disappointed, in particular in the one request that I made to PA. I only met them once, and I made one request to them: you must talk to the commercial non executive directors because they are the people who have commercial experience who are not executives who are not therefore tied in the way we are to "We are the people who developed the plan and are implementing it" and so on, and I think they will give you an objective view. I was conscious, as you would expect, that we were tested by those commercial non executives regularly at the meetings. They said, "Well, the plan is there but are you sure you can get these student numbers?", etc. They were the people doing that job and I think effectively.

Q330 Chairman: And they were not consulted by PA?

Sir Anthony Cleaver: No. I asked again when I got the report "Would they now consult them". I specifically went to see Howard and said I was concerned they had not been consulted - this was in the period January to February - and Howard's position was, "I am sorry, at this point in time this is a matter for the HEFCE board and we are not prepared to have discussions".

Q331 Chairman: And have the non executives formed an opinion since this all happened?

Sir Anthony Cleaver: They were as astonished as I was at what happened.

Q332 Chairman: But have they articulated that anywhere so we could have that as a piece of evidence?

Sir Anthony Cleaver: I think probably two of them have written to HEFCE but I think you would have to ask them, to be honest.

Q333 Chairman: Two out of the three? How many non executives do you have?

Sir Anthony Cleaver: Two out of the five I think have written, but you know who they are and so on. At the one meeting I had with Howard, which he did not wish to have but finally conceded in January, I said, "This is the thing I am most concerned about, that they have not been consulted and I believe they would give a valuable viewpoint" and he said "Well, I think we are going to end up putting three options to the HEFCE board - one would be to continue funding on the current basis, exactly as it is; the second would be for immediate termination, and the third would be for some restructuring in the light of what we now know", and I expected him to go down the third path which is what they claimed on the day they arrived they had done. They said, "We are not prepared to carry on funding on exactly this basis, the original business plan has changed, you have not met some of the things", and so on, and we said "Fine. "We do not wish to terminate immediately", and we said "Fine. "So we wish to do some restructuring", so we said "Well, that's fine, can we discuss this?" They said "No, we are putting in a man from Robson Rhodes on Monday and he will take the decisions", at which point we said "As directors can we take it the company's liabilities will be met" and the answer was "Yes", and we said "Thank you. You really do not wish to discuss this?" and they said "No, we want you to stop marketing immediately" and that was the end of the discussion. As soon as they had left the room the non executives looked to me and I looked to them and we realised we could no longer discharge our corporate responsibilities. There is no way that you can do that, be liable for things, when somebody else is taking all the decisions.

Q334 Chairman: What was the gap between the PA report coming out and that meeting?

Sir Anthony Cleaver: Two months.

Q335 Chairman: You are a very significant player in this country. As soon as you saw PA, you must have been very concerned.

Sir Anthony Cleaver: When I saw the PA report, which I can give you if you have not already seen it --

Q336 Chairman: I have seen it.

Sir Anthony Cleaver: And my response to it --

Chairman: Yes, but you know your way around this country. Why did you not go and see the Secretary of State?

Mr Pollard: Absolutely.

Q337 Chairman: Why did you not say "I fear that something is going to happen that should not happen" --

Sir Anthony Cleaver: Because my interpretation of the statement "We do not expect to continue funding as we were but we are not terminating immediately" was that we would then have a sensible and constructive discussion as to how we could take things forward to everybody's best benefit, and that discussion we had no opportunity to have.

Q338 Chairman: So the PA report came out; after two months you really did not have your usual discussions with Howard Newby --

Sir Anthony Cleaver: We responded with a letter saying "Here is our response to the PA report". It pointed out the areas where we disagreed with what PA had said, and it also put in writing the request that they see the non executive directors.

Q339 Chairman: So no one did you the courtesy --

Sir Anthony Cleaver: I got no response to that initially. I then pressed for a meeting, and I had one meeting with Howard Newby. Throughout his meetings with me he said "I do not wish to become a shadow director" and I understand that in technical terms, so I said "Well, that is fine". He said "Therefore, this is purely a matter for the HEFCE board; we will go to them. I expect we will put these three propositions to them and we will be in touch with you", and I obviously misread what he meant by "restructuring" because I think it was tantamount to immediate closure.

Q340 Chairman: So he did not really put it in black and white that storm clouds were there and you were likely to be closed down?

Sir Anthony Cleaver: Absolutely not.

Q341 Chairman: So you would not have shot off to the minister to try and save the enterprise?

Sir Anthony Cleaver: Exactly.

Q342 Chairman: Have you since sought to see the Secretary of State?

Sir Anthony Cleaver: No. At the point in time that that decision was taken we, the directors, collectively discussed what our reaction should be and decided that inevitably the various avenues would have been taken, people would have been briefed in a particular direction. HEFCE were insistent that they were going to issue the press release within 24 hours, and I knew that once the press release was issued there was no way we could save most of what we created, because this has always been something that was difficult to bring confidence abroad in what was a new venture.

Q343 Chairman: Do you think HEFCE acted in such ways that you could not get to the minister in time?

Sir Anthony Cleaver: I did not try and therefore I cannot answer but, given that one member of the HEFCE board is Sir Alan Wilson, who is the minister's adviser on higher education, I cannot conceive that a line would not have been put to the minister ahead of time.

Q344 Mr Gibb: May I just say finally that I think both of your evidence has been very impressive. I am hugely impressed by what you have both had to say about this matter, and maybe we need to reinterview some people we have seen previously, but just finally, if you had known then what you know now, is there anything you would have done differently?

Sir Anthony Cleaver: You mean when we started?

Q345 Mr Gibb: Yes.

Sir Anthony Cleaver: I would never have accepted the job on the basis that it is intended to run for two years. I was proud of having the opportunity to build something that I really felt could be a United Kingdom flagship. United Kingdom higher education does have an enormous reputation internationally, but the whole electronic thrust is moving very fast. Certainly with my involvement with Oxford I have felt from time to time that it is perhaps not moving as fast as it might in relation to some of the leading American universities who are investing heavily on an individual basis. In the same way, I felt there was an opportunity here to exploit what has been built over many years in terms of the reputation of United Kingdom higher education to ally it with a technological base that nobody else had developed because nobody else had done it on a collaborative cross country basis, and that from that we could both generate a better position for the United Kingdom. There were lots of other ideas that I tried to develop in that time. For example, one of the concerns in Malaysia, China and these other places is that it is very expensive for them to send people to the United Kingdom for three years to take a degree entirely in the UK. We like people to come here because they learn something of us and our culture; they make contacts that are valuable in the future, everybody will tell you there are government ministers in other governments who have been educated in this country, we have a particular relationship and that is very valuable. Why could we not multiply that by a factor of three by developing courses where we did two years online in their own country and then they come to the United Kingdom for the third year? That would have met entirely the Prime Minister's initiative --

Q346 Chairman: You did not have that product on offer?

Sir Anthony Cleaver: No, but it was something that I was beginning to talk to people about. I suggested it to the British Council and at the Universities UK meeting and so on, so there were huge opportunities here but we were only just in the position where we could see how to take them forward, and I share exactly the mood that I sense many of you have. I am hugely saddened and disappointed by this, and I must admit I have been angry in that I ultimately was responsible for eighty people who had joined an organisation feeling they were going to do something which was in the country's significant interest, and that opportunity has been lost.

Mr Beaumont: I have just two comments. It would have been nice to have had the chance to discuss the £55 million plan. We put to them the £57 million but £55 million was still deliverable. The only other comment would be that it is important to get as much out of what has been created because there is a massive market opportunity out there for UK universities, but it is a highly competitive market, and particularly the Americans and people in the Far East will not wait another long time.

Chairman: We have had a long session and I know some members of the Committee want to attend Prime Minister's questions, so can I say to you both that we have valued your contribution; I know we have learned a great deal, and we will go away and consider what further evidence we will take. Thank you very much.