Russell University - Fresh Attacker on the Online Education Market (McKinsey 1st round)

1. Market analysis
   1. Demand. What is the size and growth of the EdTech market? What are the general trends? What sort of courses are customers interested in? What are the most important features for our target customer? How much do customers spend on online courses/subscriptions? How likely are they to cancel their subscription?
   2. Competitors. Who are our main competitors? How do their platforms and courses differ from ours? How has their size and profitability changed over the past 5 years? How are their courses structured and what payment terms do they offer?
2. Synergies between the two companies
   1. Revenue synergies. Can we convert people from our online courses to our on-campus courses (e.g., cross-selling within the university’s offering)? Would customers be more likely to trust an EdTech platform owned by a university? Can we upsell our on-campus students to the online courses? Can we charge higher tuition fees if we offer access to the platform? 
   2. Cost synergies. Can we unify IT support? Can we utilise our existing servers / digital architecture? Can we utilise our professors and researchers to create new materials for the platform?
3. Transaction assessment
   1. Financial considerations. What is the expected investment cost? What are the expected revenues and associated running costs? How long would it take us to break even? What is the expected annualised return over the next 5 years and how does it compare to other investments that we can make?
   2. Non-financial considerations. Can our executives lead this brand? Is their organisational culture compatible with ours? Do we have the operational capabilities to run it?
4. Risk assessment
   1. Financial. Is the budget secured and can we afford any unexpected costs? 
   2. Technical. Do we have to integrate the platform with our current IT infrastructure? What is the expected downtime during the merger? How will this impact our customers?
   3. Capabilities. Do we have the knowledge to run this sort of platform? What sort of training will our staff require to learn how to utilise the platform? Can we protect our students' and our university’s proprietary data?
   4. Branding. How will our perceived prestige be affected by us offering cheaper online courses (i.e., potential brand dilution)?

For instance, there are 3 significant points that the candidate could focus on:

• Firstly, it appears that we have <5% ‘enrolled online’ students whereas our competitors have 90-100% ‘enrolled online’ students. This confirms the market potential for online education and also highlights that we should take active steps in order to improve our online presence. The acquisition of Eduline is indeed one avenue for achieving this. Alternatively, the client could try to improve their in-house online course capabilities.
• Secondly, Russell University appears to be charging 15 times the amount that US universities are charging for their online courses. This offers us a strong hypothesis to explain why the demand our client has faced was low. Target customers might turn out to be price sensitive, so acquiring a company such as Eduline that offers value-priced courses could indeed provide our client with an opportunity to improve their position on the market.
• Finally, Eduline appears to be a promising acquisition given that it attracts twice as many campus students as our largest potential competitor (Harvard) and generates 80% more revenue per student than American universities.

The candidate could also point out that in order to get a better estimate of the actual opportunity size, we would need to understand the churn rates of the business and figure out how subscriber numbers might change as part of the acquisition.

Upon performing calculations, candidates should identify that:

• Paying close to £46 million per year seems like a hefty investment, and we should consider whether offering alternative courses or increasing the cost of our current courses could yield better results.

Our method assumes that the churn rate is negligible; however, if we are unable to retain Eduline’s subscribers (especially during the implementation phase) or achieve the anticipated 20% growth rate, it will likely take us longer than three years to recoup our investment.

While there is no right or wrong approach to the issues the candidate should discuss, there are a number of key points they could bring up, including:

1. Market risks

Demand decreases

• Decrease prices, offer cheaper subscriptions, or temporary discounts
• Implement referral programme

Competition increases

• Offer novelty courses (IOT, Blockchain)
• Enhance our perceived reputation

2. Implementation Risks

Integration with our platform is more complicated than we thought

• Conduct a full financial and technical assessment before the acquisition

Our staff do not have the expertise to conduct online sessions

• Provide digital skills training and conduct quality checks

Our quality of teaching decreases substantially both online and in-class

• Provide clearly defined plans on how academic staff should split their time
• Minimise disruption through the integration period by working on the platform outside of business hours

Regulatory limits on content and quality of online courses

• Align in advance with the Ministry of Education and other regulators whether any content or marketing adjustments need to be considered

3. Financial Risks

Currency exchange fluctuations make acquisition more costly

• Renegotiate payment terms, currency, and timeline with Eduline

Implementation becomes more costly

• Slow down implementation / phase it out over a longer timeline
• Identify additional sponsors

Maintenance becomes more costly

• Get an accurate estimate of costs and time frame and monitor progress

Lost opportunity costs

• Assess the ROI of other investments (internal and external)

4. Brand Risks

Perceived prestige of our degrees decreases

• Ensure clear delimitation between online certificates and in-person degrees.

Perceived quality of our education decreases

• Ensure rigorous assessment criteria for online certificates

Identity and sustainability considerations

• Find opportunities to further reinforce our brand identity as a community-mindful university, for example by offering subsidised subscriptions for local schools, or free subscriptions for children from disadvantaged countries.

Upon performing the calculations, the candidate should assert that this is a 50% increase in fees, which looks quite substantial. This may lead to other issues, such as a decline in demand or a general decline in the quality of the students we admit, since the university may lose the ability to be as selective. 

Based on the current analysis, I recommend that Russell University acquire Eduline at a cost of £138.6m. My top three reasons for this are:

• First, the online education business is increasing rapidly and has the potential to quadruple the number of students that we can reach.
• Secondly, we expect to make at least £46.2m/year on a modest assumption of 10% annualised growth.
• Thirdly, it is a better option than increasing fees for international students by 50%, which can affect demand or impact the calibre of accepted students.

Some of the risks involved with this acquisition concern the technical requirements of platform integration and employee training, as well as our perceived prestige. 

As a next step, I would like to do a more in-depth technological review to mitigate these risks, as well as a more in-depth analysis of how we can maintain a clear distinction between our online and in-person activities in order to retain our reputation and teaching quality.