When Lowell Williams was appointed principal of Dudley College of Technology, it was in a “desperate state”, he recalls. It had been rated “inadequate” by Ofsted and was losing £3 million a year. While neighbouring institutions were being handed millions in capital funding, Dudley’s Ofsted grade meant it didn’t receive a penny.

“The facilities and resources were dire and they were spread to the four winds,” Williams recalls. “The college was profoundly disliked by stakeholders, the local authority, parents and schools.”

When a college is struggling to make ends meet, the advice from the government and funding bodies is clear: play it safe, cut costs and make sure there’s enough money in the bank to cover any unexpected problems.

Williams, however, did precisely the opposite. “I couldn’t see a way to rescue Dudley College without taking a risk. There was no risk-free money.”

The strategy Williams used was, he freely admits, “confident and cocky”. He raided the £10 million sitting in the college’s reserves, and borrowed “as much as the bank would let us”. In the years that followed, £26 million was spent creating state-of-the-art facilities.

Eleven years on, the college is still paying off its debts. But the gamble has paid off - and spectacularly so. The college’s overall income has increased by almost half, it was rated “outstanding” by Ofsted in 2017 - and, the following year, Williams was named a National Leader of Further Education as well as claiming the FE leader of the year title at the Tes FE Awards.

Plenty of principals, chief executives and headteachers, of course, shy away from such a buccaneering approach, instead opting to cut costs and keep their heads down.

The sad case of Hadlow College, which faces the ignominy of being the first college to enter insolvency, is a stark illustration of the consequences of pursuing unwise financial strategies.

Yet, there is a growing school of thought that this conservative, risk-averse approach of simply treading water is becoming increasingly untenable - and, perversely, can actually bring even bigger risks to an institution.

Take the funding context in which colleges operate. A 2018 report by the Institute for Fiscal Studies concluded that per-student 16-18 funding had fallen by 8 per cent in real terms since 2010-11. The cut in adult education funding has been even steeper, dropping by 45 per cent since 2009-10.

For Ian Pryce, principal of Bedford College, doing nothing in this context simply isn’t an option. “You just end up shrinking, and you reach the point where you can’t cut any further,” he says.

So, if college leaders have ambitions beyond simply struggling to stay afloat, is risk a part of the job that they have to learn to embrace? And what strategies can they employ to ensure that they are taking the right risks and minimising potential damage to their institution?

Embracing the unknown

The concept of learning to embrace risk appears to be sharply at odds with how colleges are being encouraged to behave by their paymasters. In recent months, warnings about the dangers of pursuing overambitious strategies have been emanating thick and fast from the Department for Education. In the current academic year, seven colleges have entered formal intervention from the FE commissioner Richard Atkins, six of them due to financial problems.

A scan through the commissioner’s reports makes for sobering reading. Northumberland College, for instance, found itself in the grip of a “rapidly escalating cashflow crisis” after embarking on a “wide and varied” series of “entrepreneurial activities”, including setting up a recruitment agency and an MOT and service centre. Several of these appeared to be “losing money”, highlighting the consequences of what the report described as a “high-income growth strategy which has involved a significant degree of risk”.

West Nottinghamshire College had been operating with “low working capital for several years” - “a significant risk that has not been sufficiently mitigated in the college’s risk register or its ambitious strategy for apprenticeships”.

North Hertfordshire College, too, had displayed “an unacceptable appetite for risk, resulting in corporate failure”, according to the commissioner’s report.

But if risk cannot be completely avoided, how can it be managed? In a 2012 article for the Harvard Business Review, academics Robert S Kaplan and Anette Mikes outline three different categories of risk:

1. Preventable risks

These are internal risks arising from within an organisation. As such, they are controllable and ought to be eliminated or avoided. Examples include risks from employees’ “unauthorised, illegal, unethical, incorrect or inappropriate actions and the risks from breakdowns in routine operational processes”.

While there should be tolerance for some minor errors that do not seriously damage the institution, companies should aim to eliminate these risks as much as they can. This can be achieved through active prevention: “monitoring operational processes and guiding people’s behaviours and decisions toward desired norms”.

2. Strategy risks

These are risks that an organisation takes on in order to generate superior returns. For instance, a bank assumes credit risk when it lends money: it will attract interest, but it may not be able to recoup all the money it is owed.

These risks are not inherently undesirable: “A strategy with high expected returns generally requires the company to take on significant risks, and managing those risks is a key driver in capturing the potential gains,” the authors explain. In the context of a college, this could include investing in an emerging curriculum area with potential for growth in the local area, which could attract a higher number of students later down the line.

To manage these types of risks, an organisation should employ a “risk-management system designed to reduce the probability that the assumed risks actually materialise and to improve the company’s ability to manage or contain the risk events should they occur”. This doesn’t necessarily mean avoiding risky ventures; rather, it can serve to give them the security to take on higher-risk, higher-reward ventures that competitors could not take on.

3. External risks

Some risks arise from events outside the organisation and are beyond its influence or control. This can include changes in government policy, or shifts in employment patterns in the local economy. These require a distinct approach: management of them focuses on identification of the risks, and mitigation of their potential impact. This can be easier said than done, the report explains: “Extensive behavioural and organisational research has shown that individuals have strong cognitive biases that discourage them from thinking about and discussing risk until it’s too late.”

For Pryce, entrepreneurial thinking has to be weighed up against the role of a college as a public asset and civic institution. “You don’t want to lose the provision to your town, so you do your research. If an opportunity has a 70-80 per cent chance of being successful, great; if it’s 20-30 per cent, you’ve got to weigh that up. It’s a judgement about likelihood of success: you’ll never get 100 per cent.”

And individual risks must be considered within the context of the wider strategic aims of the organisation. At Bedford, Pryce has not dabbled in international provision, as the college’s strategic aims are all about serving the community in Bedfordshire.

Opportunities closer to home, such as an expansion of apprenticeship or higher education provision, is of more interest. Even there, however, Pryce is a firm believer in carrying out a detailed “pre-mortem” to assess the potential drawbacks as well as rewards. “You’ve got to have an appetite for risk, but it’s got to be a realistic probability of success, not just dreaming,” he adds. “It’s important to think: if the numbers don’t add up, what’s your exit strategy?”

Pryce cites the example of the college’s expansion of adult courses when he was new in post, some 19 years ago. “Based on our research, I knew Bedford could be about three times bigger for adults. We introduced IT learning centres, we opened one less than half a mile down the road in Bedford, and people said, ‘You won’t get anybody.’

“I said, ‘No, we’re going to get thousands of students’. And we did. We were inundated from day one, people who had never set foot in a college. A few weeks ago, we welcomed our 10,000th adult student.”

In the Black Country, Williams has also adopted the “build it and they will come” approach. In his first few years at the college, there was no interest in investing in the college from local or regional partners.

“I can’t blame them,” he concedes. “You can’t actually get other people to put their investment in until you put yours in first. But by the time we’d built Advance 1, employers started saying to the local enterprise partnership [LEP]: ‘Have you seen the engineering kit that Dudley have put in? I’ve put my apprenticeships in there.’”

After funding the first few developments itself, Dudley College began to reap the benefits. When it built its centre for advanced modern construction methodologies, three-quarters of the £12.75 million outlay was stumped up by the LEP.

The more risks you take that pay off, the healthier an organisation becomes - and the less risky future decisions become.

But the bills still have to be paid, of course. To take a risk in the first place, a college often has to make a conscious decision to dip into its reserves - its safety blanket against unexpected problems - and wave goodbye to having cash in the bank.

This hasn’t deterred Dudley. “We’ve been in constant battle with the agency over the fact that I don’t think at any time in that period has our financial health rating been ‘good’,” Williams says. “We were very close to breaching our bank covenants - in fact, we thought we had at one point. We had legal disputes with the contractors. We’d invested everything, so we didn’t have anything left. There were some very dark moments on that journey where we thought, ‘We’re in trouble here.’”

Williams is acutely aware that, had one of a number of scenarios played out differently, he could easily have joined the growing list of high-profile college leaders who have ended up unemployed.

“Any one of those things could have put us into the position that we didn’t have enough cash to carry on operations,” he says. “It was virtually do or die. Nobody had another plan; it had to work. Luckily, I had a business-minded college corporation who understood how you invest in business. This allowed us to take risks which, when they work, everybody says were very sound investments, well thought through and carefully managed.” He pauses, giving a wry smile. “But had they not worked, there would have been a problem.”

When taking the role risk plays in education leadership into account, it’s worth remembering that it’s not just about the organisation today, or its learners of the future. The risk arising from every single decision made by a chief executive isn’t just professional: it extends to their private life too. While Williams learned to love risk due to necessity, he fully understands why many of his peers take a very different approach.

“If you’re a principal, you’re 40 years old and have got two kids and mortgaged yourself, what’s your mindset?” asks Williams, before answering his own question. “Stay in the game, stay alive. You don’t want to lose your job. You’ll think, ‘We’ll be OK for another couple of years.’

“Bearing in mind the public derision of failed leaders and ‘fat cats’, lots of principals want to keep their heads down. They want to be in a safe place; not be risky with the corporation, not be risky with teaching and learning policy. Stay out of the papers, don’t speak up and upset anybody. If things go wrong, it is the principal who takes the fall.”

Stephen Exley is FE editor at Tes. He tweets @stephenexley

This article originally appeared in the 24 May 2019 issue under the headline “Living on the edge”