International & Commercial Perspectives on the Post-Browne Landscape

International & Commercial Perspectives on the Post-Browne Landscape March 1, 2011

Objectives for today • Provide a perspective on the post-Browne landscape informed by experience overseas and commercial tools • US • India • Commercial frameworks and tools • Offer a commercial framework for thinking about the new landscape • Detail two commercial tools, and explain how they are useful • Business model analysis • Cost curve analysis

Perspectives on the Post-Browne Landscape The Browne reforms mean HEIs need to complement existing strategic analyses with new, market-oriented tools • The Browne reforms create a quasi-marketplace for English higher education. This reform adds to already significant forces at work: • Globalisation of higher education, especially student and researcher movement • Global tightening of immigration rules as a reaction • Concentration of research funding • Changes to teacher training • As with most large reforms, we believe people are over-estimating the short-term impact (and probably under-estimating the longer term implications) • Even in the US, where tuition fees are a much freer market and a higher proportion of students enter higher education, the basis of competition is not predominately price, but a complex mixture of factors, including in-state subsidies for local universities. • In India, IIT and other top universities are achieving scale whilst retaining student intake quality due to the size of the domestic market. The private provider scale model is also proving viable • In England, demand will still exceed supply and it is likely that most institutions will be able to charge £7,000 - £9,000 per annum in the short term. The overall financial impact for most institutions that are not directly targeted by specific changes in government programmes (e.g., teacher-training colleges) will be moderate • In countries where higher education is market-like, the for-profits have a strong interest in delivering at scale for lower-achieving students who want vocational & career-oriented qualifications. They will cherry-pick students from universities that have use these students and subjects as cash cows • To understand the medium and longer term implications, market-oriented analysis and tools are required. In any market success depends on delivering what the market is seeking. This requires institutions to align strategies and business (or operating) models to demand, and adopt organisational and leadership models that are aligned with the business model

Perspectives on the Post-Browne Landscape - US For-ProfitsThe typical focus is low income, ethnic minority and older students Low-Income Student Enrolment Growth, 2004-08 Non-White Student Enrolment Growth, 2003-07 Age 25 and Over StudentEnrolment Growth, 2003-07 CAGR (‘04-’08) CAGR (‘03-’07) CAGR (‘03-’07) Note: An independent student’s income or the income of a dependent student’s parents is considered “Low Income” if it falls within the lowest quintile of US household income. The upper limit of the lowest quintile was $18,500 in 2004 and $20,712 in 2008. “Private Sector” category excludes private not-for-profit institutions Source: NCES BPS 1996-2001; NCES BPS 2004-2006; NCES IPEDS database; Census Bureau; Parthenon Analysis

Perspectives on the Post-Browne Landscape - US For-Profits There is a much more intensive focus on marketing than in public universities • US providers spend very significant sums of money on advertising and other promotional campaigns • All manner of media are used including TV, radio, print, internet etc. • “You can hardly go a day without seeing a University of Phoenix advert on TV, print, the internet or even billboards and flyers” • Operations Manager, University Of Phoenix • The companies make huge investments in generating leads through • Inbound enquiries through website/campaigns • Buying lists of phone numbers/emails • Every lead is fed into a sophisticated CRM system and is assigned an “enrolment advisor” • Each lead is owned by an advisor who is responsible for constantly working on it until conversion or failure • Metrics such as conversion rate, lead to start rate are measured to track efficiency • Significant sums are also spent on training the sales force • “If I were to leave my details with Phoenix, I can be sure that someone will give me a ring in the next 60-90 minutes. They’re that good” • President, Madison Education Group Marketing and Promotional Expenditure of Selected Providers, 2009 Note: Selling and Promotional costs includes costs associated with enrolment counselors and other activities under marketing. Selling and promotional spend for Career Education is calculated by adding admissions and advertising spend. Splits between advertising and enrolment counselor expenditures from 2008 applied to 2009. Grand Canyon is a Christian university based in ArizonaSource: BMO Capital Markets Report, Company Filings

Perspectives on the Post-Browne Landscape Organisations in any market must create alignment between four elements • Market Needs and Responses • Identity & Strategy • Business Model • Organisation and Leadership • What are the main segments in terms of attitude and beliefs about: • Price, Debt, reputation etc • How will these segments evolve as: • The market matures and new offers/ entrants emerge • Customers become better informed • How do we communicate our brand and offers? • How does price impact this? • What are we really good at – what is in our DNA? • Which segments does this mean we are best placed to serve? • Do we offer every subject, even if it’s loss-making? • Where do we invest? • Which geographies are crucial to us? • What do we subsidise: research vs teaching, overseas vs domestic, sciences vs arts? • What is the optimal profile of teaching & academic staff cost and quality? • What range of curriculum is required? • How much choice and support do we give students • What new skill sets do we need for the post-Browne landscape? • What skill sets do we need for our business model? • How do we resolve tensions between academic freedom and commercial pressures in our organisation? • How do we find and/or develop senior managers with commercial instincts and credibility with academics?

Perspectives on the Post-Browne Landscape Cluster analysis reveals 12 types of university business model Rationale • Most analyses of the sector are heavily oriented towards academic (research) quality and ranking • However, the post-Browne marketplace will favour institutions that are excellent at what they do, be it research, teaching, providing value-for-money or creating economies of scale. All these factors are important elements of a business model • Different institutions can legitimately have different cost structures and spending priorities; benchmarking within groups of institutions with the same business model is much more meaningful than comparing across business models • We have used cluster analysis across a range of variables to identify institutions that have broadly similar business models Methodology • Cluster analysis (least squares) based on 5 variables for each of 40 cost centres (using HESA data) • Total academic spend (teaching and research, excluding overheads, facilities etc) • % of student FTEs • Research and teaching spend per student • Total research money • UCAS entry points Clusters • 12 identifiable clusters and sub-clusters and number of institutions in each cluster, including • General Teaching (3 sub-clusters) 58 • Art, music and drama specialists 22 • Small Academic 18 • Focused teaching 13 • Traditional Academic 9 • Science and engineering research 5 • Scale & Research 4 • University of London Research 3 • There are also several other specialist clusters - agriculture and forestry, medicine, education, Oxbridge and a range of other ‘one-off’ models, e.g.: Buckinghamshire, The Open University, Cranfield

Overview of ClustersThere is a very strong correlation between % academic spend on research and average UCAS entry requirement. This gives a conventional view of the clusters’ standing Research as a % of Total Spend versus Average UCAS Entry Requirement Bubble size is total number of Student FTEs in the cluster Note: Academic Spend is teaching plus research, and excludes operational and capital expenditure e.g. facilities and some overheadsSource: HESA Finance Plus Data 2008-2009

Overview of Clusters However, plotting academic spend per student against the average number of students shows the greater similarity between several business models Academic Spend per Student versus Average Student FTEs per Institution (Bubbles = total spend) Bubble size is total academic spend in the cluster Note: Academic Spend is teaching plus research, and excludes operational and capital expenditure e.g. facilities and some overheadsSource: HESA Finance Plus Data 2008-2009

Overview of Clusters Average academic spend per institution plotted against average UCAS entry requirements splits the clusters by teaching and research focus Total Academic Spend versus Average UCAS Entry Requirements of Universities Bubble size is total number of Student FTEs in the cluster Note: Academic Spend is teaching plus research, and excludes operational and capital expenditure e.g. facilities and some overheadsSource: HESA Finance Plus Data 2008-2009

General Teaching Universities The large General Teaching cluster has at least three sub-clusters Total Academic Spend versus Average UCAS Entry Requirements Sub-Cluster 3 Sub-Cluster 1 Sub-Cluster 2 Note: Essex has been sorted in with Sub Cluster 1 due to the % of its total spend that goes to research. Academic Spend is teaching plus research, and excludes operational and capital expenditure e.g. facilities and some overheads Source: HESA Finance Plus Data 2008-2009

General Teaching Universities - Sub-Cluster 3Total academic spend shows the focus on key subjects for this cluster; education, business, nursing, design and IT Total Academic Spend of Institution by Cost Centres 2008-2009, £M Note: Academic Spend is teaching plus research, and excludes operational and capital expenditure e.g. facilities and some overheadsSource: HESA Finance Plus Data 2008-2009

Overview of ClustersThe most focused clusters are the University of London research-intensive and ‘focused teaching’ institutions Average Number of Cost Centres With Over 10% of Student FTEs versus Average UCAS Entry Requirements Note: Academic Spend is teaching plus research, and excludes operational and capital expenditure e.g. facilities and some overheadsSource: HESA Finance Plus Data 2008-2009

Cost Curve Analysis Economies of scale are not being achieved in most subjects (1 of 2) Academic Spend per Student versus Number of Student FTEs for Business and Management Studies Note: Academic Spend is teaching plus research, and excludes operational and capital expenditure e.g. facilities and some overheadsSource: HESA Finance Plus Data 2008-2009

Cost Curve Analysis Economies of scale are not being achieved in most subjects (2 of 2) Academic Spend per Student versus Number of Student FTEs for Psychology and Behavioural Sciences Note: Academic Spend is teaching plus research, and excludes operational and capital expenditure e.g. facilities and some overheadsSource: HESA Finance Plus Data 2008-2009

Perspectives on the Post-Browne Landscape Summary of takeaways • There is no market in the world in which the predominant basis for competition is price, although there are price-sensitive segments • Reputation and scale are much more common bases of competition • In any market or quasi-market, alignment between the market needs, institutional strategies, business models and organisation is key to success • Unlike typical ‘rankings’, there are several broad viable business models available (and plenty of variants of these). • Most institutions have multiple departments that have no financial viability • The ‘broad academic offer’ – which is the default for most universities – is financially challenging, and most institutions will not be able to sustain it in the longer term unless the breadth is a distinctive part of their offer • ‘Winner-takes-all’ economies of scale mean that even profitable departments may find themselves under threat in the medium term

Appendix

The Parthenon Group Overview About Us • Practice Areas • Capability Areas • Founded in 1991 as a boutique strategic advisory firm • 200 members in 2010 • Offices in Boston, San Francisco, Mumbai and London • The firm serves CEOs and business leaders of Fortune 500 companies, high growth companies, private equity firms and educational institutions • Business and Financial Services • Consumer, Retail and Restaurants • Education • Healthcare and Life Sciences • Industrials • Information/Publishing • Private Equity • Technology • Change Management and Implementation Support • Competitive Analysis • Corporate and Business Unit Strategy • Cost Improvement • Econometric Forecasting • Innovation • Marketing and Distribution Strategy • Merger and Acquisition Strategy/Due Diligence and Execution • Policy Development and Systems Design • Pricing • Sales Force Optimization • Strategic Resource Allocation

The Parthenon Group Representative Corporate Clients Middle Market Fortune 500

Education PracticeMission and Vision MISSION AND VISION To be the leading strategy advisor to the global education industry UniqueInstitutional Capability Unmatched Client list Success Stories and Impact On Learning and Business Outcomes • Highly capable and experienced education team leaders • Comprehensive engagement in the education industry • Experience across the globe • A history of sustained investment in education • K-12 (primary and secondary) schools in both public and private sectors • HE and other post-secondary institutions • Corporate training, skills • Foundations and grant-givers • Local, regional and central governments • Publishers, technology and other education support service companies • Success that encompasses both business and educational results: • Educational success, as measured by improved student outcomes and policy/system reform • Business success, as measured by economic value-add • Unique perspective on success that enhances Education Center of Excellence capabilities and opportunities

Education Practice – Unique Institutional Capability Experts in Educational Markets Capital Markets Higher Education Educational Markets Education Support Services Skills and Vocational Policy and Regulation Primary & Secondary (K-12)

Education Practice – Unmatched Client ListGlobal Presence in Over 400 Education Projects Since 2001 = On-the-Ground Education Sector Projects Completed = Parthenon Offices

Education Practice – Unmatched Client List Representative Education Clients Primary and Secondary Education (K-12) Higher and Further Education Educational Services (Including Publishing)

Education Practice – Unmatched Client ListRepresentative Education Transactions (Completed Deals) Commercial due diligence Commercial due diligence Commercial due diligence Commercial due diligence VendorCommercial due diligence Commercial due diligence Equity Provider: CHAMP Ventures August 2008 Equity Provider: Star Capital Partners February 2007 Equity Provider: CBPE Capital September 2007 Equity Provider: Englefield Capital October 2007 Equity Provider: Baring PrivateEquity Asia June 2008 Vendor: Bowmark Capital July 2008 UK based job search, recruitment and training agency Independent provider of aviation training, personnel solutions and technical support services Provider of vocational training in the UK Co-educational schoolfor international children Operator of international schools and services Educational travel services business, providing activity and adventure trips, educational tours and school ski trips Commercial due diligence Commercial due diligence Commercial due diligence (refinancing) Commercial due diligence Commercial due diligence VendorCommercial due diligence Equity Provider: Apollo Global (Carlyle) July 2009 Equity Provider: Nord Anglia September 2009 Debt Provider: Ares Capital Europe March 2010 Equity Provider: Sovereign Capital June 2010 Equity Provider: Providence Equity July 2010 Vendor: RJD Partners July 2010 Provider of professional services training Private day and boarding school in Switzerland Provider of vocational skills training and employability services Provider of vocational skills training Provider of university access and English language programmes provision of world-class university access and English language programmes. Provider of supply teachers, teaching assistants and nursery nurses, both short and long term, to schools throughout England and Wales

Education Practice – Success StoriesInternational Strategy Development for UK University Situation • Parthenon’s client is a leading provider of distance learning in the UK and internationally • International positions reflect historic activities, and do not take account of new opportunities Objectives • Identify 1-3 attractive markets for the client to enter • Give an overview of the kinds of customers, offers and partners required for success • Total opportunities to be material in the context of the overall institution • Identified potentially attractive markets by screening every country in the world through a series of macro-economic and demographic filters • Examined the regulatory and market dynamics of around 20 most-attractive countries, and evaluate their suitability for market entry • Surveyed potential students and partners in four most-promising countries to identify the most appropriate offer and potential partners Parthenon Activities • Identified four markets – one developed and three emerging – that were suitable for entry • For each market, identified partners who expressed an interest in partnering with the client, and set up follow-up meetings • Identified the offers most suited to that market • Now providing support to the client in considering market entry strategy SelectedResults

Education Practice – Success StoriesInternational Competitor Analysis for UK University Situation • This distance education oriented university is undergoing a strategic review. The Vice-Chancellor is aiming to turn the university in to a more nimble, innovative university of the future • Having established a new internal strategy team, the vice-Chancellor retained Parthenon to assist the internal team with refreshing parts of the overall strategy Objectives • Determine the potential impact of entry of U.S. for-profit higher education providers into the UK market (e.g., Apollo, Capella, DeVry, Bridgepoint) • Conducted detailed landscape of the U.S. market to understand the for-profit private higher education providers • Developed in-depth profiles of competitors (business models, price points, spend on marketing) • Engaged in scenario planning / game theory (developed a point of view on how U.S. competitors might enter the UK market (e.g., through acquisitions or partnerships) Parthenon Activities • Identified critical areas where the university needed to invest in order to be stay ahead of its competition and to protect its student base from being taken by new competitors/market entrants • Recommended a more student-centric approach: • Increase spend on marketing since the university had traditionally been very passive in acquiring new students • Introduce more flexibility in start dates rather than continue the “one-size fits all” approach • Adjust price points to ensure competitive position SelectedResults

Education Practice – Success StoriesBusiness Plan Development for Oxford University’s Saïd Business School • Oxford University’s Saïd Business School (SBS) was established in 1996 and is one of Europe’s leading business schools • Its flagship program, the one-year MBA, represents the majority of the School’s focus and revenues, and is a differentiating factor when compared to other UK-based business schools • The School was considering an expansion (additional MBA stream and expanded Executive MBA) which would require the School to make a capital investment in new facilities. At the request of the key donor (Mr. Saïd), an independent party (Parthenon) was engaged to conduct a review of the expansion plan that had been developed by the School Situation • Conduct a high level assessment of the School’s business plan • Validate and challenge the achievability of the School’s business plan, including the robustness of the plan’s structure, key inputs and assumptions and the deliverability of the financial projections • Advise on the School’s ability to repay debt (required to finance the expansion) at the levels envisaged in the plan • Determine whether the School will be able to increase its funding in areas key for its competitive performance (such as faculty salaries, doctoral and MBA scholarships, and the Careers and Alumni Relations Services) Objectives • Conducted interviews with key members of the SBS management team to develop a better understanding of the assumptions underpinning the business plan • Conducted desk-based research and analysis to benchmark SBS against comparable leading international business schools • Ran sensitivities on financial projections, determined impact of sensitivities on projections • Developed a view of the achievability of the School’s business plan Parthenon Activities • After pressure testing the assumptions, determined that the business plan was achievable • Identified opportunities to drive improvements in efficiencies/ lower costs (to increase potential margins) • Established that even in the worst case scenario cash flow generation would be sufficient to support the School’s debt payments SelectedResults

Education Practice – Success StoriesGrowth Planning in Private Post-Secondary Education Provider Situation • Parthenon’s client is a leading for-profit U.S. provider of post secondary educationthat serves ~100K students annually • Declining rates of enrollment growth across the for-profit market required the development of a growth strategy to improve our client’s core offering • Assess relative company performance measured by local market share – determine the most meaningful definition of market share for the company • Identify drivers of profitability by local market and determine key levers to increase operating profit in near and medium term • Develop clear enrollment and financial targets in each metro area to achieve above-market growth over 3-5 years Objectives • Collected and analyzed specific enrollment data for both the client and competitors • Modeled enrollment demand and growth • Conducted detailed cost allocation analysis and variance by location • Interviewed students, faculty, administrators and leading external industry experts to assess performance drivers • Created comprehensive financial models and strategic growth plans for each individual market Parthenon Activities SelectedResults • Developed strategic growth plan intended to double revenues and triple contribution margins over 5 years • First quarter results exceeded expectations, with ongoing performance analysis underway

Education Practice – Success Stories Strategic Planning for Graduate School of Education Situation • The Graduate School of Education program is a premier U.S. and global education institution, and is part of a leading private university • The school offers Masters and Doctoral degree programs and Executive Education programs, and also conducts cutting edge education research • New leadership at the school seeks to develop a robust strategic plan to support ongoing investment priorities and corresponding growth initiatives • Develop a comprehensive situation assessment and fact-base, including an overview of the school’s mission, an assessment of current degree and non-degree programs, and an in-depth profile of students/alumni and faculty • Assess potential growth opportunities, including adjustments to current degree programs and the possibility of new degree offerings, particularly in the area of education leadership • Provide recommendations regarding strategic priorities, corresponding investment requirements and an actionable implementation plan Objectives • Conducted comprehensive interviews of the school’s administration and faculty to help inform and develop consensus around the school’s mission and programmatic priorities • Analyzed market needs, gaps and preferences via in-depth discussions with and surveys of potential employers (e.g., U.S. public school districts, education foundations, etc.), prospective students and education leaders • Completed a full assessment of the school’s current program portfolio, including an evaluation of Masters, Doctoral and Executive Education offerings within the context of recent market trends and broader financial planning requirements Parthenon Activities • Identified a tangible market need for more robust and effective training programs for education leaders, with a specific demand for programs with a blended focus on education, management, and policy/politics • Validated the Graduate School of Education’s strong positioning to address this specific market need • Prioritized opportunities for the school to optimize its current portfolio of programs offerings through adjustments to its Masters programs and ongoing development of its Executive Education offering SelectedResults

Education Practice – Unique Institutional Capability Team Bios – Management team Tammy Battaglino Partner Karl Cheng Partner Robert Lytle Partner Tammy co-founded and leads the firm’s Education Practice. For over 15 years, she has advised clients on issues related to operational excellence, strategy development, and new venture creation. Her clients include a wide range of organizations from start-ups to Fortune 100 companies, school districts, government agencies, and some of the world’s largest foundations. Tammy’s extensive education experience spans for-profit and public sector entities across the K-12, higher education, and corporate training continuum. She has led dozens of engagements with organizations that include the NYC DOE, NY State DOE, Boston Public Schools, DC Public Schools and leading education-focused foundations and non-profits. She holds an A.B. in Economics from Harvard College. She received her M.B.A. from Harvard Business School and her M Ed from the Harvard Graduate School of Education. Rob co-leads Parthenon’s Education Practice, with a focus on global for-profit education markets. For over 15 years, he has led client engagements on general strategy, profit improvement, and investment due diligence across a broad spectrum of business models in the following sectors: K-12 and post-secondary schools; educational publishing, testing, and service provision; and consumer education products and services. His clients include high-growth companies, publicly listed Global 100 companies, financial investors, and international governments. In addition, Rob has participated in numerous high-profile corporate turnarounds, mergers, divestitures, and privatizations in Europe, North America and Asia. Prior to joining Parthenon, he was with Bain and Co. and served as a U.S. Army aviator. He holds a B.S.E. in Economics from the Wharton School of Business and an M.B.A with high distinction from The Tuck School of Business at Dartmouth. Karl has advised a broad range of clients in education, publishing, financial services, and industrial businesses. His functional areas of expertise include corporate strategy, business plan development, and pricing. He also has experience across both the private and public sectors, having advised corporations, non-profit entities, and public/private partnerships. Karl’s public sector education experience includes improvement strategies and business planning engagements with Charlotte-Mecklenburg Schools, Chicago Public Schools and DC Public Schools. Karl also manages multiple client engagements with education-focused foundations. Prior to joining Parthenon, Karl worked at Booz·Allen and Hamilton and ExxonMobil Corporation. Mr. Cheng received an A.B. from Harvard College, magna cum laude in Economics, as well as an M.B.A. from Harvard Business School.

Education Practice – Unique Institutional Capability Team Bios – Management Team Haven Ladd Partner Chris Ross Partner Karan Khemka Partner and Mumbai Office Head Lisa Cloitre Director, Education Center of Excellence Karan is the Head of Parthenon’s Mumbai office and international ECE practice. He has extensive experience in the Asian private education sector, including business plan development across education verticals, a due diligence of an international language school with assets in China, a due diligence of an Indian IT training school, analysis of the Chinese market for English Language publications, and a due diligence of a network of for-profit universities in China. Other education projects include U.S. and UK market entry strategies for a major multi-national educational publisher, and a due diligence of a leading UK educational publisher. He has worked extensively for clients in Asia, the Middle East, and Europe. Karan holds a bachelor’s degree in International Relations from Georgetown University and a M.A. in Law from Cambridge University. Haven is a Partner with The Parthenon Group, which he joined in 1997.While at Parthenon, he has focused on strategic issues facing companies and schools in the U.S. education market. He brings a perspective on strategy built on 11 years of consulting across education and corporate clients in a variety of industries including professional information services, healthcare, insurance technology, manufacturing, and many others. His work in education has included developing district-wide strategies to increase high-school graduation; designing sustainable growth plans for post-secondary providers, and building data and performance management systems across districts and networks. Functionally, his experience includes finance, organizational design, operations, and corporate strategy. Haven received his undergraduate degree in 1997 from the Harvard University, Magna cum laude. He received his M.B.A. with distinction in 2003 from the Tuck School of Business at Dartmouth, where he was a Tuck Scholar. Chris is a Partner with The Parthenon Group, which he joined in 2001. He works on numerous corporate and education clients. Typical projects have included G&A optimization, merger integration, growth strategies, pricing strategy, portfolio optimization, and sales productivity. In addition to client work, Chris coordinates all Associate training for the firm. Prior to joining Parthenon, he worked at PricewaterhouseCoopers in their D.C. office. He holds a B.A. in Economics from Williams College and an M.B.A from the Tuck School of Business at Dartmouth, where he was elected Edward Tuck Scholar. Lisa is the Director of Parthenon’s Education Center of Excellence and a member of the firm’s management team. Lisa advises both corporate and public sector clients in the education industry, with a focus on engagements with state and district departments of education, foundations, school operators, and education nonprofits. She specializes in strategy development and implementation, business planning, portfolio optimization, and education reform. Within Parthenon, Lisa helps oversee the firm’s Women in Business network and broader diversity initiatives. Prior to joining Parthenon in 2002, she worked for Fidelity Investments in Boston and Deloitte and Touche’s International Assignment Services in Brussels, Belgium. Lisa holds an M.B.A. from the Tuck School of Business at Dartmouth and a B.A., cum laude in Government and French from Dartmouth College.

International & Commercial Perspectives on the Post-Browne Landscape