On 28 February this year, students protested outside Senate House in the University of London. A small group somehow got into the office of the vice-chancellor, Adrian Smith. While there, they took a cache of documents. I have seen two, and they that reveal a dark underside to one of the most contentious aspects of higher education.

In the past few years, universities have become the arena for a whole series of fights, and not only over £9,000 tuition fees. Academics have been striking over falling salaries, even as their managers have been awarding themselves ever-higher payouts. The poorest workers are battling for either a living wage or for less miserable terms and conditions. And students from Sussex to Birmingham and Edinburgh have been campaigning against the privatisation of their services and the accompanying clampdown on protest.

At the root of all these disputes is an existential argument: what is a university for? Is the old ideal of a community for critical inquiry to be superseded by what are effectively degree-awarding businesses? Is education a public good, or a means to rack up CV points and deliver housetrained recruits to big employers? These questions aren't novel – but they've become ever more urgent as Vince Cable and David Willetts cut public funding and steer higher education towards the market.

Which is where Senate House comes in. The building that inspired George Orwell's Ministry of Truth is not an academic hub such as King's College London and University College London, but more of an administrative and support centre for those and other colleges in the federal University of London. Yet since Smith took charge in 2012, it has become one of the most controversial sites in British higher education.

First there was the decision to abolish the University of London Union (ULU). Then the heavy-handedness against student dissenters: staff filming protesters from Senate House, an injunction taken out last December to ban all demos on campus, and the dragging of a 25-year-old woman through the courts for last summer chalking a slogan on a wall.

That repressiveness triggered last month's protests and the seizure of those documents, which were returned the same evening.

The two files I have read are reports to the vice-chancellor's executive group, intended for Smith and his seven highest-ranked managers in the central university administration. They are on a subject central to the changes in HE: the trend towards contracting out to private companies nearly every aspect of the modern university, from cleaning to catering to careers advice.

Claiming that outsourcing cuts costs without hurting services, universities from Falmouth to Sussex to Northampton are handing over their services to outside companies run for profit. To encourage them, George Osborne has exempted from VAT services such as Human Resources (HR) and Information Technology (IT) that are shared between universities. Yet the Senate House files show a university elite admitting that outsourcing has actually pushed up costs and made services worse. Despite that, the executives vow to press on with an even grander privatisation scheme. The documents also expose one of the ways in which the Senate House managers have sought to make outsourcing tenable: by appearing to machinate against contracted-out workers with the very trade union that is meant to be representing them.

The people who are losing out from Smith's outsourcing work in the University of London's Bloomsbury buildings are those cleaning the toilets, sweeping the grounds and portering. Last autumn I spoke to grandmothers who had to get up at 4am to clean lavatories, yet were on such miserly contracts that they couldn't afford to get sick or go on holiday and were heading for a poverty pension. For doing three of those jobs every day, a typical worker was left with around £9,000 after tax; vice-chancellor Smith, by comparison, is on an annual salary of £153,000.

There was nothing accidental or new about the horrible treatment of these people. Senate House has been outsourcing its basic services for years. In 2010, it bundled up most of the contracts and tendered them to Balfour Beatty Workplace (BBW), a subsidiary of the construction giant. From July 2011, however, the balance of power began to shift. First, the cleaners started fighting for the London Living Wage. By the following summer they had won. Then they began agitating for sick pay, holidays and pensions on par with the University's staff. The largely Latin American workforce called their campaign 3Cosas ("Three things").

Every time I've spoken to a University of London official about the 3Cosas, they insist that this is not their fight: it's between the workers and BBW. Yet the report shows the vice-chancellor's office is a very interested observer. Entitled Contracted-out workers: Claims and Demonstrations and dating from early 2013, it is a thorough intelligence-gathering exercise.

The 3Cosas workers were members of the Senate House branch of Unison. Yet according to the report's author, the central university's head of HR, Kim Frost: "While Unison broadly supports the aims of the TC [Tres Cosas] campaign, they have distanced themselves as a union from the manner in which it is conducted." He means the "noisy demonstrations" put on by the cleaners, with drums and whistles and dancing.

But Unison officials were doing more than just distancing themselves. They were apparently consulting with the university management on how to shut the cleaners up. The paper records that union reps "have suggested in meetings with me that if the university conceded some ground, Unison would be better able to counter the TC campaign".

What leaps out is the word "counter". According to this document, Unison representatives are looking for ammunition to fight the people they are being paid to represent. And how do they plan to do that? "Unison have suggested that … conceding an extra day's leave could suffice" – even while their own members are fighting for equal holidays, sick pay and pensions.

Go to the University of London offices today and you will spot posters claiming: "Unison supports the 3Cosas campaign". The secret file suggests quite the opposite.

This is obviously the university's summary of the Unison position at one point in time; perhaps the trade union got more aggressive later. But the 3Cosas activists I have spoken to have pointed out how they were blocked by Unison's Senate House branch: outsourced workers' campaigns unsupported by branch leadership; their electoral bids for union committee positions thwarted when Unison declared the poll void. There is clearly also a cultural gulf between the migrant workers and their largely white union representatives, made worse by a one-time steward who sends out emails complaining about "the Spanish" and how they "won't comprises" [sic].

Approached for comment, Ruth Levin, the regional organiser for Unison Greater London, emphasises that Unison doesn't tolerate racism; although she won't disclose whether any disciplinary action had been taken. While not denying that meetings with the central university had taken place over how to "counter" the 3Cosas, she says, "Our sole aim is to improve the working lives of our members." But at that point 3Cosas workers were Unison members.

Levin also argues for her trade union's desire for negotiation, against the outsourced cleaners' combative approach. That contrast between the dinosaur unionism of stereotype – fond of "constructive dialogue", forever counting down the days to the annual conference and the Christmas social – and the aggressive campaign run by 3Cosas is certainly marked. But it might also be that the cleaners and porters – despite all their working pressures and difficulties with English – had organised themselves into a force that Dave Prentis's officials wanted to bring to heel.

This is what the central university's managers believe: "Unison regionally are clearly concerned that radicalisation of the BBW workforce might cause them to leave Unison and move to another union." Soon after, many of the BBW workforce did leave Unison, going to the tiny Industrial Workers of Great Britain (IWGB). After an effective strike last November, the contract workers won improved sick pay and holiday leave. Both university and Unison touted this as a victory for "moderation"; but managers at BBW (now owned by French firm Cofely) told IWGB rep Jason Moyer-Lee: "We sat down and negotiated with Unison because that's what we had to do, but obviously we couldn't ignore that there was a two-day strike going on."

The second secret document takes us into the heart of the university's outsourcing programme. It comes from October 2012, just over two years after the central university had awarded BBW responsibility for managing nearly all of its facilities. But already the deal was falling apart: the report states that BBW reckoned it was making a loss on the contract of "an apparent £800k-£1m".

What was the firm doing about that? "BBW have chosen to reduce the deficit by reviewing … staffing and service levels". In other words: by cutting university services. "This has led to a difficult working relationship between BBW and the university when the constant perception is that they are reviewing service levels to reduce deficit rather than to bring efficiencies and better service levels to the University". Yet the report author, Paul Nicholson-Lewis (the same man who, police say, was "very keen to press charges" against the 25-year old chalk artist [http://london-student.net/news/02/25/chalking-trial-student-cleared-police-assaults/]) also admits that no one from Senate House has checked the contractor's claim: "We only have BBW's word".

Who's to blame for this screw-up? In large part, the highly paid university managers themselves. The tender document was "clearly written by many authors and then 'cobbled' together. Both contract and specification contradict each other throughout." The report admits that the university executives "were not ready" for this new bigger contract. Even so, "this is nothing to feel bad about because we have learned a lot".

Adrian Smith, vice-chancellor of the University of London. Photograph: Sarah Lee for the Guardian

As corporate insouciance goes, this is up there with the Co-op. Bear in mind this report is being read by some of the best-paid people in higher education; at the opposite end of the scale from the cleaners whose lives depend on such contracts. According to the last annual report, the number of Smith's lieutenants taking over £100,000 per annum has jumped from 7 to 11 in just one year. Here they are detailing a massive failure, and chalking it up to experience.

But it's not just the details that were bodged: something more fundamental is awry. "Where BBW are using old university direct contractors, the companies are charging BBW a higher rate than the one we paid direct – mainly due to having to pay an annual 12% management fee to BBW on top." Here in the university's own words, is the basic problem with outsourcing. Where there were two parties, a third has now inserted itself – and is demanding a cut just for being there.

These two documents – one about contract workers, the other about the contract itself – may seem to be talking about separate issues, but they are actually two sides of the same coin. The simplest way to make outsourcing of such basic services profitable is to squeeze the pay, terms and conditions of the very poorest: the men and women who do the actual work. Yet almost as soon as BBW took over in Bloomsbury it had to deal with a noisy bunch of migrant cleaners demanding a living wage, then better sick pay and holiday.

The document ends by asking "if BBW has delivered our initial aspirations" for the contract. The criteria include "cost savings and good service", and across all of them the report concludes: "this is doubtful".

A University of London spokesman points out that any financial losses were incurred by BBW and that the current contract will lapse next year. At which point, Senate House will launch an even bigger shared services programme. Such schemes, normally involving lots of job losses and a big name such as Serco or Capita, have often come to grief in local authorities and healthcare. At Senate House, the staff are hostile: another confidential report from last month (seen separately) reports that when the idea was floated in staff focus groups "most of the sessions became overrun with examples of ... what would be wrong if UoL had a commercial partner".

These documents concern the central University of London, but their themes are almost universal across higher education. As universities fret over their places in the market free-for-all, the sector is now overrun with managers proffering their big ideas for institutional survival, and taking even bigger salaries for doing so. .

At Senate House or Sussex that involves handing over swathes of the university realm to private companies. At UCL it means getting in controversial mining giant, BHP Billiton, to chip in £6m for research on resources. For his £400,000 salary , Birmingham's David Eastwood plans to open up a university free school.

These are business plans; literally so, since they involve bringing on to campus more private businesses. The quid pro quo for that is that dissent, argument, protest – the very stuff of university life – is viewed as disruptively uncommercial. Just before becoming director of the LSE, Craig Calhoun wrote of how relying on private finance "changes the character of universities. Among other things, it makes it less and less possible for them to offer public spaces for protest against the control of society by financial interests."

Four decades before students wangled their way into Smith's office, students at Warwick occupied their university's Registry. While there, they discovered files showing political surveillance of staff and students – even of schoolchildren applying for admission. Enlisting the leadership of EP Thompson, then on the history faculty, they came to the conclusion that Warwick was a "business university", in which academic concerns took second place to a strategy set by the senior industrial executives sitting on the all-important council. The result was uproar; a series of articles in the press, and a book called Warwick University Ltd.

History repeats itself: first as tragedy, then as forced entry. Were he still alive, EP Thompson would have had a field day with BHP Billiton's sponsorship of an institute for sustainable resources. And he'd have had no difficulty parsing those Senate House documents. Just republished, Warwick University Ltd ends with this plea for the role of critical thought in an age of managerial control: "Is it inevitable that the university will be reduced to the function of providing, with increasingly authoritarian efficiency, pre-packed intellectual commodities which meet the requirement of management? Or can we … transform it into a centre of free discussion, and action, tolerating and even encouraging 'subversive' thought and activity for a dynamic renewal of the whole society within which it operates?"

Forty years on, those are still the big questions. Except they are now even bigger.