House of Commons - Education and Skills

Select Committee on Education and Skills Third Report

4 Lessons for Government

Accountability of UKeU senior management

74. The senior management of UKeU were responsible to the UKeU Board of Directors—appointed by the Holding Company. The Holding Company Board was appointed by HEFCE. The Chief Executive of the HEFCE was the Accounting Officer responsible for the expenditure of public money, but not for the operating decisions of UKeU (although through the Holding Company, HEFCE had insisted as a condition of grant that UKeU was consistent with best practice in the commercial sector).

75. An example of the distance between the operations of UKeU, and the accounting officer is that HEFCE were unaware of the bonus scheme in place for senior management at UKeU. In 2002-03, John Beaumont's basic salary was £180,000 and he received a performance-related bonus of £44,914. It appears that the criteria for achieving the bonus were not particularly stringent. In March 2003 the technology platform was running a year late and no courses had been launched—the initial pilots that had been due to be launched in Spring 2003 were delayed until Autumn 2003. HEFCE told us that they were surprised when they found out about the bonus scheme. Sir Howard Newby said:

'There have been quite a few surprises along the way. I also have to say, on the bonus scheme, that I am not personally very happy with what I know of the bonus scheme that was in Opco, but it was not something that required, or had our approval, before it was put in place and all we could see was that they had a governance structure which looked perfectly straightforward and proper.[51]

'There was a properly constituted remuneration committee which determined the contracts and bonuses payable to the directors and other employees of the company. We had, through Hold Co, insisted, as a condition of grant, that the operating company abide by best practice with regard to the governance of a commercial company, and we are satisfied from the structures they set up that that was indeed the case. I have to say to you I was unaware of the nature of the bonus scheme that the remuneration committee and the board had endorsed, and I share my chairman's view that the outcomes are not ones we feel very comfortable with.'[52]

76. The running of the venture was handed over to UKeU with limited restrictions. The management were able to take their own approach, and that, based on limited information and no further market research, they made strategic decisions about the target markets, courses, pricing strategies, and other major operating decisions. For example, there was a shift in emphasis by UKeU away from the original PwC/HEFCE recommendations—a shift towards the international market. The UKeU board took the view that the major growth market was overseas. Sir Howard Newby told the Committee that:

'I think there was a shift in emphasis, yes. I do not think it was one or the other but once the e-University Opco board had been set up, they certainly felt that there was a major opportunity here, if you like, for UK export earnings…I think it is fair to say that the Opco board took the view that the major growth market was overseas, especially in Asia.'[53]

77. The fact that UKeU was able to move away from the original PwC/HEFCE recommendation and have this change in emphasis, without having to justify such a move as an evidence-based decision, demonstrates the lack of accountability of the senior management team. As the Minister described the position to the Committee:

'UKeU was a company which was set up; it had a proper board; it was limited by shares. It should have been able to make the balance between being overly concerned with getting the technological platform right or with marketing or with the product that they were aiming to sell. That is what companies are there for. Sir Anthony Cleaver and John Beaumont were paid a large amount of money to run that company and they both came trailing clouds of great reputation behind them. One would have thought that that company would have had a grip on those kinds of things that were going on inside that company. I do not think HEFCE can be blamed for that and I do not think the department can be blamed for it.'[54]

78. The extent of the free hand that UKeU was given to take such strategic decisions went further than this, though. UKeU did not have a formal statement of its business objectives and strategy, and nor did HEFCE ask for one. The PA Consulting report identified certain strategic directions, but had to infer strategic intentions from other sources. HEFCE said to the Committee:

'It is true to say that we were a bit surprised that there was no formal business plan, as I would have understood it, in the autumn of 2003. We certainly had had, however, oral briefings from the Chairman of Opco and the direction in which they were taking the business was known to us.'[55]

79. With no private investors, the sole reliance on public money, and with no direct accountability for the expenditure of that public money, UKeU had a very high degree of freedom. It could be argued that this was necessary in such a high-risk venture, but it should have been more accountable either through controls appropriate for a public sector organisation or through carrying some risk as a private company.

80. The original proposal was for the accountability and risk to be commercially driven through private investors in UKeU. The original Government objectives, and the original HEFCE/PwC business plan, stated that UKeU was meant to be an effective partnership with HEIs, and that it was meant to be a joint public-private venture. Indeed, one of the conditions of grant was that the business should seek 50/50 public/private funding to put commercial drive and accountability into the venture.

'It was a condition of our grant at the outset that the business should seek 50-50 public-private contributions, both to mitigate risk to the public purse but also to put commercial drive and accountability into the venture.'[56]

81. Other than signing a strategic alliance with Sun Microsystems Ltd to develop the technology platform, UKeU failed to secure any significant private investment (see footnote 14). Indeed, proposals UKeU put to HEFCE in 2003 contained no provisions for private sector investment until after 2009. In other words, without such private contributions, there was no commercial drive or accountability in the venture.

82. An important lesson to be learnt is that senior management should have had either very clear accountability for the expenditure of public money, or risk from market pressures to succeed through private investment in the project. A high risk venture such as this does not necessitate a high risk approach to structure and accountability. Where there is a significant distance created between the accounting officer and the decisions taken by the senior management of the operating company, there needs to be either clear lines of accountability or some market risk.

Accountability role of HoldCo

83. UKeU was set up with the intention that the HoldCo would hold 50% of shares in UKeU, representing the public sector half of the venture. The original role of the HoldCo in terms of monitoring UKeU was quite limited. As we have discussed, private sector investment was intended to bring in its share of accountability to UKeU through market forces. The role of HoldCo was to act as a quality assurance body for the HE sector, and to consider the value for money of public investment in UKeU.

84. In its quality assurance role, HoldCo held the licences through which UKeU could deliver HE courses from particular Universities and theoretically could withdraw such a licence if required. Along with the Committee for Academic Quality which HoldCo set up, this hold on licences gave it effective control over quality assurance.

85. The holding company was the body through which HEFCE was able to invest public money in the e-University venture without having any direct relationship with the operating company. HEFCE granted HoldCo funds to invest in the operating company. In light of this, HEFCE expected HoldCo to have a role in ensuring value for money in terms of public investment in UKeU. Sir Brian Fender, former Chairman of HoldCo told us:

'The Funding Council expected the holding company to be aware of value for money when passing money from the Funding Council through to the operating company, and I think that is a role we accepted, but we have to do it in a rather limited way, as you can imagine, because this is a voluntary or an unpaid Board with a part-time and modestly paid, I might say, Chief Executive, and there is a limit to how we could investigate the value for money of the operating company.'[57]

86. When UKeU was established, equal shares were given to the public sector shareholders (HoldCo) and the private sector shareholders (Guillemont and Croft Nominees). Over time, however, as more public funds were invested into UKeU, HoldCo became the far more dominant shareholder and this affected the relationship between HoldCo and UKeU. Sir Brian Fender told us:

'When the next (public) investment was made (through HoldCo) and there was no parallel private investment, then we became the parent company; so that was a matter for concern.'[58]

87. It was as a direct result of the lack of parallel private investment that HoldCo became the sole agency through which UKeU was accountable. Dr Lepper, Secretary to the HoldCo Board, said that:

'at a fairly early stage the holding company became the parent of UKeU, and a number of us, including the directors, were not particularly satisfied with that situation, because it did mean that the Board was actually responsible for the actions of UKeU when it was not set up to take that responsibility. That is, I think, why Sir Brian said we had to look for an alternative structure.[59]

88. Our inquiry has found that HoldCo became the primary accountability agent, but this was not the original intention. As a result, HoldCo only had the formal structures in place for it to perform a very limited monitoring role where this role needed to be much more significant. With no private investment, the structure needed to change to develop the role and capacity of the HoldCo to hold UKeU to account.

89. HoldCo advised HEFCE that the existing structures needed changing in autumn 2003 at which time HEFCE asked PA Consulting to undertake a full business review of UKeU. Sir Brian Fender told us:

'Given that the structure was set up as if there were 50-50 funding from the public purse and the private purse, we said, "Hang on, what we have got now is essentially a publicly funded body and the prospect of private investment receding." I remember raising it with Howard Newby, I think on 9 October, if my memory serves me right, and said, "Look, we have got a mismatch now between the structure and the funding", and, of course, the Funding Council then set up, it was always going to set up, a review….it is absolutely clear to me that at the end of 2003 we needed a new structure which reflected the fact that it was tax-payers' money that was going into this project and not a 50-50 mixture.'[60]

Accountability of HEFCE

90. The Chief Executive of HEFCE was the accounting officer for the £62 million of public funds. In evidence given to the Committee in June 2004, Sir Howard Newby, Chief Executive of HEFCE, described his role as the 'monitor, not the manager' of UKeU. He told us:

'If I may say so, we are approaching one area…which I personally did find extremely difficult, and that is where my responsibilities as an accounting officer end and those as a shadow director begin. This is what was unique about this venture...when we deal with a conventional university, my role is very clear: I am the accounting officer for the sector, the vice-chancellor or principal is the accounting officer for the institution. That whole relationship is set out in a financial memorandum between ourselves and the governing body of the institution, and my rights and responsibilities are very clear.

'In this case, because it was set up as a commercial venture, company law comes into play, where I have to be very, very careful—and I was always cognisant of this—of not acting or being seen to act as a shadow director, and yet I had accounting officer responsibilities which might, if it had been a more conventional institution, have led me to act in a way which might have been judged as acting as a shadow director.' [61]

91. As we have seen from the previous section, in practice there was a conflict between the role of the accounting officer and the role of the shadow director. UKeU themselves recognised the conflict. In evidence John Beaumont said that he thought the accountability arrangements could have been better.[62]

92. As the accounting officer, the HEFCE Chief Executive was legally restricted from being involved in operational decisions. This is necessary where private investment is involved, but in this particular case, UKeU was, in practice, wholly publicly funded. In the absence of risk from market pressures, the accounting officer needs to be able to make accountability reach down to the operational level. The Government will have to consider the implications of this conflict in the role of shadow director and accounting officer for any future projects. As stated by HEFCE in evidence to this Committee:

'I think I would want to establish very clearly, as I said earlier, how we get around this problem of shadow directorships conflicting with my accounting officer role. That is a very serious lesson to learn from that.'[63]

93. In evidence given to this Committee, UKeU senior management staff claimed that they should have been given longer to succeed and that the project was cut short before they could deliver against their targets. However, when we consider the evidence that they were pursuing an 'impossibly ambitious business model', that they were following a narrow definition of e-learning, that their market research was woefully inadequate, and that they focussed on the development of technology over the needs of the learner, we must conclude that their supply-driven approach was not going to produce the intended results.

94. Why then did HEFCE not call a review of the business model at an earlier stage—for example, when the UKeU had failed to get private investors interested? A risk assessment was undertaken, but if there was an agreed set of actions for the accounting officer to undertake based on the assessment of risk, it is difficult to see where they were followed.

95. Marketing, for example, has been identified by both HEFCE and the Minister in evidence to this Committee as the main failing of UKeU. If this is the case, why was this not identified and acted upon at an earlier stage? Press articles have suggested that many HEIs were feeling uneasy about UKeU from as early as 2002. We know that some HEIs pulled out of partnerships with UKeU at various stages. We also know that potential private investors such as Pearsons pulled out of any partnership with UKeU when they had originally shown interest. Why were these signals not picked up on?

96. In evidence to the Committee, Sir Howard Newby explained that:

'I think it is fair to say, Chairman, that as events unfolded in 2002-03 there were those in the sector who were questioning whether the rather—if I can put it this way —technology-led approach, which the Opco board had adopted, was the appropriate approach. But I have to emphasise, at the time, that was an opinion and, as my Chairman said, we were waiting to get some hard facts before we could authoritatively intervene, rather than trade opinions with those, as you rightly say, who were heavy hitters, who had experience in the IT world, and who had the commercial background as well. Who were we to question their opinion on this matter?'[64]

97. Based on the reputation and expertise of the senior management and board members of UKeU, HEFCE did not believe they were in a position to question their strategic decisions until there were definite output measures—in this case, student numbers. Whilst this is an understandable position for HEFCE to take, it did mean that funding continued for over two years to UKeU without a robust analysis of the business decisions that were being taken.

98. A key lesson to be learnt is that, in high risk ventures such as UKeU, a great deal more needs to be done to support the accounting officer to enable him to act effectively in his role. The accounting officer must have at least equal expertise available to him as is available to the company in order to hold such an unusual public-private venture to account. The accounting officer in the public sector must have the backing of experts with a high reputation to assess such public-private ventures against agreed benchmarks and criteria for success.

99. A group of advisors to HEFCE including members of PwC who produced the original business plan, and experts from The Open University and British Council, for example, could have been put together to keep UKeU in much closer account in terms of the decisions they made. This would have enabled much closer accountability from the start of the project.

Accountability of the DfES

100. HEFCE's relationship with UKeU was an arms-length relationship, and the DfES relationship with HEFCE as an NDPB is also an arms-length relationship. As a result the accountability to the Minister was very indirect.

101. The Chief Executive of HEFCE was the accounting officer, not the Permanent Secretary of the DfES. It is HEFCE that would be accountable to the PAC. Dr Howells said that the Minister at the time had no choice in these arrangements, and that this was the normal way of funding higher education projects through HEFCE. However, this is not strictly true. The DfES can run higher education projects directly and have done so in the past, for example the Aim Higher project. The choice was made to operate UKeU through HEFCE. Sir Brian Fender told us that the idea for the project came from him,[65] therefore it is not surprising that HEFCE was asked to set up the venture, although it clearly suited the DfES to run the project at arm's length.

102. The question to be asked is whether there is a lesson to be learnt for the DfES in terms of running more projects directly. Did they lose control over the project by handing it over to an NDPB? Would the DfES have run the project differently? The answer to the first question is that the Minister did not lose any influence by having UKeU run through HEFCE. The Minister still had regular update meetings—not just with HEFCE, but also directly with UKeU. We know from HEFCE's evidence that the Minister was regularly briefed on the progress of UKeU by HEFCE. We also know, from evidence given to the Committee by Sir Anthony Cleaver and John Beaumont, that the Chairman and Chief Executive also met the Minister every six months. In answer to the second question, it is not likely that the outcome would have been any different if the DfES had been running the project directly. We have heard no evidence to suggest that the DfES would have arranged structures differently if it had chosen to run the project directly.

103. There is a case, in a high risk project involving public money such as this, for the DfES to have agreed with HEFCE measurable benchmarks and criteria for success. The difficulty in this particular example is that there were some agreed success criteria—the involvement of private investors, the launch of the platform, and student number targets. The appropriate risk assessment had been undertaken and agreed by the Minister. Difficult decisions had to be made when there were early signs of the targets not being met (no private investors interested, platform delays). As discussed in paragraph 98, the problem was that those whose role it was to hold UKeU to account did not have equivalent expertise to the UKeU senior staff and board members, and therefore put faith in their reputation and expertise until there were more concrete output measures to consider (very low student numbers). The DfES would have been in no better a situation than HEFCE as the accounting officer in this case.

104. The lessons for the Government on ensuring accountability are the same as those for HEFCE: in high risk ventures such as this, more needs to be done to support the accounting officer to enable him to act effectively in his role. The accounting officer must have equivalent expertise available to him in order to hold such a public-private venture to account. The Government needs to learn how to work effectively with private investors—how to utilise market pressures in joint public-private partnerships and how to involve the private sector in a more organic process of developing new projects. We have expressed concerns about these problems before, in our report on Individual Learning Accounts and in our report earlier this session on the DfES' management of its expenditure.[66] The DfES must improve its working practices if it is to continue to work with the private sector

Evidence-based policy

Use of existing evidence

105. The outcome might have been very different if existing research had been utilised regarding both the approach to e-learning (pure or blended) and the progress of comparable ventures in other countries.

106. Dr Howells told us that there should have been more testing of various models, approaches, and prototypes.

'I am a great believer in testing models. I think we should be much more evidence based in terms of how we devise policy and run organisations. We probably could have done with more time in terms of looking around the world, perhaps not reacting as quickly as we did to what we perceived to be great threats coming mainly from America of our own students being captured to do degrees by universities like Phoenix and so on.[67]

'I think we should pilot and test more often with these kinds of things, so probably we could have been a little bit more modest in our aims and also used some of the great expertise that is out there…I can see that there was a real sense of adventure at the time that this was a great new future and we had to be in there right at the very beginning. It is easy for me to say this with hindsight now.'[68]

107. Robust and reliable market research information could have guided UKeU in a very different direction. Whilst it was the case that UKeU inherited an ambitious project, this need not have had the hold on subsequent strategic decisions that it did have. The ambitious nature of the original idea for the project alone cannot be blamed for the failure of UKeU. If UKeU had made proper use of market research, the initial ambition for the project would have held less importance.

108. The problem for UKeU was a combination of the ambitious nature of the original idea, and an over-confidence about the level of demand for e-learning which led to an approach which was insufficiently focussed on research and marketing and which was not learner-centred. To be successful, the project's main focus should have been on clearly identifying its market and knowing the demands of its customers.

109. The lesson to be learnt is that such high-risk ventures entering new and emerging markets must have a focus on front-line research. They need to have the flexibility to adapt to changing market trends, and directors/managers must be able to make strategic and operational decisions, but these decisions must be evidence-based and rooted in robust and reliable research information.

The Government's approach to risk

110. It was HEFCE's responsibility to conduct a Risk Assessment of the project. HEFCE's risk register for the UKeU project was shared with the DfES and endorsed by the Minister in 2001. We were told by Sir Howard Newby that '…the risks which have come to fruition…were risks that were identified in the original register'.[69] It is not obvious what actions were taken to mitigate risks or whether previously agreed actions were taken where risks did occur. Was there an agreed action plan for the accounting officer in light of the risk assessment; and if so were these actions taken?

111. There are lessons to be learnt about the Government's attitude to risk. UKeU was approached not as an experiment or pilot but as a fully fledged project and, as a result, its failure has brought questions of accountability as well as of the lessons to be learnt. We do not wish to make the Government too risk-averse. In his evidence to the Committee Dr Howells raised the issue of risk:

'I certainly think it was a very risky experiment. I would not go so far as to call it a disaster because I am quite interested in the lessons that we have learned. In terms of some of the things that the Americans have tried and failed at, for example, this is pretty modest stuff. There is a very different mentality in this country, by the way, about risk and the consequences of failure...Having said that, the Chairman put his finger on it, this is not private money; this is taxpayers' money. The Chairman also said very early on, 'we have also got to be careful that we do not make the government risk-averse.' I draw from that the lesson that we have to make sure that those structures are right, that they are very clear and very open and that people can measure those yardsticks.'[70]

112. We do not want the Government to become increasingly risk-averse as a result of the UKeU experience. Instead it should learn from this experience and, in the future, take a more experimental approach to such high risk ventures. This would involve focussing more on testing various models and prototypes; taking an evidence-based approach; involving the private sector as partners in a more organic process; undertaking effective risk-assessment procedures; and setting open and transparent success criteria for such projects.

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