Cornering the Market

Amid a host of disruptive forces affecting higher education, business schools must fundamentally change the way they operate if they’re to shape their own future. And, many believe, they’d better do it fast.
Cornering the Market

Imagine presenting the following case study to a class of MBAs: A service-based institution faces dwindling sources of funding, an onslaught of new competitors, and a range of stakeholders who are demanding a wider range of options, easier access to services, and greater value for their money. To stay competitive and continue to grow, the institution must adopt new strategies and radically revise the way it operates. And it must do so in ways that align with not only its own goals, but those of its change-averse parent organization.

The class must answer the crucial question: How?

In April, Len Jessup and Angus Laing presented a very similar real-life case study not to a class of MBAs, but to a gathering of administrators at AACSB International’s annual conference in Chicago. The topic of their presentation: What new financial models will help business schools sustain their missions in the years to come? The time-honored strategies that brought business schools to where they are today will not take them much farther, say Jessup, dean of the University of Arizona’s Eller College of Management in Tucson, and Laing, dean of Loughborough University’s School of Business and Economics in Leicestershire, United Kingdom. “We can no longer continue to try to squeeze efficiencies from existing models,” says Laing. “We’ve got to change our models.” 

Business schools need to act quickly and strategically to overcome budget shortfalls and retain their competitive edge, these two deans emphasize. Based on their experiences and conversations with colleagues, Jessup and Laing have their own recommendations for how business schools can position themselves to help shape their own futures.

“The business model for business schools has changed dramatically,” says Jessup. “And it’s not going back.”

First, Differentiate

As more schools raise tuition rates to make up for reductions in government support, students are expanding their college searches farther field in order to find programs that give them the most value for their money. That makes it more important than ever for business schools to differentiate their offerings from a growing pool of competing programs.

That is especially true for universities in the U.K., says Laing, due largely to the 2010 Browne Review of the funding of Britain’s higher education institutions. In response to the report’s recommendations, the British government raised the tuition cap that the country’s higher education institutions could charge annually, from £3,290 to £9,000. By the 2014–2015 academic year, most universities in England will have raised their undergraduate tuition rates to the £9,000 limit to offset the withdrawal of state funds. The government also withdrew its funding of business education, as well as of all subjects other than STEM disciplines (science, technology, engineering, and math). Consequently, undergraduate business students now must pay the entire cost of their educations.

Loughborough already has adopted the £9,000 tuition rate, which covers the cost of delivering the business school’s programs as well as a subsidy it pays to the university to support higher-cost disciplines. But higher rates make students in the U.K. much more willing to consider less expensive business schools in other countries. Such increased student mobility will make it more difficult for schools to differentiate themselves based on the cost of their programs. “The new tuition cap has opened up the prospect of far more competition from English-language business schools  in mainland Europe,” says Laing.

Going forward, business schools will have to find other ways to set themselves apart from competitors, he adds. For instance, a yearlong undergraduate internship program helps distinguish Loughborough’s business program from those at other schools. Because relatively few other programs offer similar opportunities, says Laing, the compulsory internship helps Loughborough continue to recruit strong students in spite of greater student mobility. “You must be able to answer the key question that students and parents will ask: What does this degree offer that we can’t f nd else-where?” says Laing.

Grow Your Profit Centers

In the U.S., many business schools at publicly funded universities are finding that they’ll need to generate more revenue to make up for dwindling sup-port from state governments. For that reason, business schools will need to do more to bolster their best prof t centers, Jessup says.

That was Jessup’s aim when he was appointed dean at the Eller College in May 2011. At the time, the university president gave him two directives: First, make the business school self-sustaining. Second, do the same for the university as a whole. Enrollment at the college has been on the rise—increasing nearly 20 percent since 2006. At the same time, state support for the university in 2013 had declined close to 40 percent from its peak in 2008, while university tuition doubled. To raise more revenue, Jessup’s first priority was to continue the growth in enrollment with new programs. He also supported an increase in the Eller College’s differential tuition from US$400 to $600 per semester. A surcharge that Eller’s undergraduate students pay over and above the university’s tuition, differential tuition revenues flow directly to Eller College. Finally, Jessup looked for ways to strengthen the school’s executive MBA program and increase revenue from sources such as donations, grants, and corporate contracts.

Today, Eller College generates between  $90 million and $95 million annually from tuition and other sources, while spending only about $50 million to run its programs. “We are more than self-sustaining at this point,” says Jessup. Eller College pays a large subsidy from its surplus back to the university.

Jessup admits that not all business schools can boost their tuition rates to such a large extent. Even so, their leaders need to consider tuition increases if state funding has dried up—especially if an increase does not hurt their ability to attract students. In Eller’s case, its tuition remains nationally competitive. “We draw students heavily from states such as California, Illinois, and New York, where rates are higher,” he explains. “Competitive pressures nationwide have actually helped us, because more students are voting with their feet.”

In the U.K., raising tuition past the £9,000 cap is not an option. For that reason, many business schools are no longer growing their domestic undergraduate recruitment efforts, says Laing. Instead, they’re focusing on specialized master’s and MBA programs, where there is no government regulation of fees. They also are focusing more on international recruitment at the undergraduate level, because they can charge different fees to international students. To increase revenue, says Laing, “we’re shifting the mix of programs we teach and the students we recruit.”

Adopt RCM

Recently, some deans have raised the possibility of separating their business schools from the larger university—essentially going private. But what would privatization mean for a business school? For many schools, says Jessup, the drawbacks outweigh the benefits.

While privatization offers a business school financial and strategic autonomy, it also makes it responsible for the costs of building maintenance, security, and employee health insurance and retirement plans. “Once deans add up the total cost of ownership, many realize that business schools reap significant benefits from being part of a university campus,” says Jessup.

Rather than going private, Jessup strongly advocates that public universities adopt responsibility-centered management, or RCM, the financial model that the University of Arizona is in the process of implementing. In the U.S., the RCM model was pioneered by schools such as Indiana University and the University of Michigan in the mid-1970s, when they converted from a centralized administration overseeing the entire university to a decentralized system that allowed individual departments to retain control over their own tuition dollars. In return, each department pays a tax back to the university to support central services—the taxes from financially stronger programs subsidize less lucrative but strategically significant disciplines. For a business school, that tax often ranges from 30 percent to 50 percent of its tuition revenues.

Under RCM, a business school can really spread its wings, says Jessup. But even though more large public universities are adopting some form of RCM, Jessup realizes that not all university presidents are ready to jump on the RCM bandwagon. Some are concerned that their universities will become more focused on generating revenue than on providing education as a public good. Others fear that less prof table departments might struggle—or even face closure.

To persuade university leaders of the benefits of RCM, business school deans can fall back on their training in organizational behavior and change management, says Jessup. “There’s strength in numbers. If you’re arguing for RCM or a similar large-scale shift in mindset, bring other key decision makers—other deans—to the table,” he says. “Have benchmarking data to show how and why others have done it. Most important, help university leaders understand that the school might not survive unless it shifts to some form of an RCM model.”

He points to Indiana University as one example deans can use to make their case. For instance, although IU’s music school cannot sustain itself on its own tuition dollars, it’s still ranked No. 3 in the nation. In fact, IU boasts 90 programs ranked in the top 25 in the country because RCM allows larger profit centers such as the business and law schools to remain entrepreneurial and generate more revenue. Those programs not only sustain themselves but also support many important but less lucrative programs in the arts and sciences.

“What better argument that universities can thrive under RCM?” says Jessup. “The model isn’t just good for the business school—it’s good for everyone.”

Learn from Disruptors

There’s no question that online education has transformed how courses are delivered. (See “Technology, Education, and the Developing World” on page 30.) And it’s still unclear whether the massive open online course, or MOOC, is a friend, foe, or farce to higher education. (See “What Makes a MOOC?” on page 26.) But business schools should not ignore for-profits like Strayer University or MOOC platforms such as Coursera and edX, says Laing. Just consider what happened to Kodak after its leaders ignored the implications of digital photography.

Laing points out that the same trends affecting business schools—decreased funding and higher costs—are driving many students to seek out cost-effective educational alternatives. Case in point is the success of U.K.-based distance learning provider the Open University and Open University Business School, where Laing served as a director of research and marketing professor for four years. “Since the OU has developed a successful MBA program, it’s aggressively targeting the undergraduate market, offering students the ability to study part-time at lower cost,” Laing says.

At the same time, for-prof t online education providers like London-based BPP University College and U.S.-based University of Phoenix, both owned by the Apollo Group, can provide students faster time-to-completion for degrees and certifications. “For-profits might not give students the ‘life-changing experiences’ of traditional higher education,” says Laing, “but they do offer cost-conscious students a very sensible approach.”

Traditional business schools will not be able to compete with for-profits on price, or even on the benefits of traditional delivery, if that’s not what students are looking for. Instead, Laing advises business schools to learn more about how for-profits and MOOCs do what they do. It’s possible that their underlying models offer solutions for traditional higher ed.

With that in mind, 20 universities in the U.K. recently joined Future-Learn, a consortium led by the Open University. Through Future Learn, the universities will examine models such as Coursera, edX, and Udacity, and then develop a similar platform for MOOC delivery. 

“It will be diff cult to ever charge for MOOC content,” Laing admits. As example, he refers to the difficulty that newspaper publishers have had trying to persuade people to pay for online content that was previously offered for free. Even so, he can imagine a day when traditional business schools use MOOCs to augment their face-to-face courses—when, for instance, professors might ask students to view a MOOC developed at another school and then use its content as a spring-board for class discussion.

Where MOOCs are concerned, says Laing, “it’s arguably easier to charge for the learning support, the exams, the credits, and the school brand. What matters is the quality of the interactions in the classroom—that’s what students are buying.”

Transform the University

Jessup and Laing agree that business schools can play a critical role in transforming their universities into economic powerhouses. “University presidents and provosts typically come from the arts and sciences, not business—the notion of profit centers and cost centers and how to manage them is often foreign to them,” says Jessup. “Business schools at public universities are in a position to help their universities make the shift to a performance-based budget allocation process.”

Jessup makes sure that the Eller College plays this role for the University of Arizona. Two years ago, UA faculty and centers spent about US$625 million annually on grant-funded scientific research, but its commercialization activities were falling short of potential. Since then, the Eller College has helped UA restructure its activities around technology transfer and commercialization, largely through a new initiative called Tech Launch Arizona. Tightly linked with Eller’s McGuire Center for Entrepreneurship, Tech Launch Arizona helps faculty and startups develop and commercialize their best inventions, which improves the financial health not only of the university, but of the region as a whole.

Persuade Policymakers

Finally, if business schools want to secure their futures, they must do more to promote the strategic value of their activities to law-makers, says Laing. “Government focuses heavily on the economic importance of STEM—science, technology, engineering, and math. We need to show officials that it should be STEM2, with the second ‘M’ standing for management,” he says. “As governments struggle to promote their growth and innovation agendas, business schools have not articulated what we can contribute as much as we should.”

If business schools want to secure their futures, they must do more to promote the strategic value of their activities to lawmakers.

To that end, the Association of Business Schools in the U.K. has formed an innovation task force that aims to reach out to policymakers and promote business schools as drivers of regional and national economic growth. More important, the task force wants to convince policymakers to provide more funding support for business school activities that support entrepreneurship and urban regeneration initiatives.

“There’s huge opportunity in this area,” says Laing. “We need to think carefully about the messages we send to government officials, so they view business schools as strategically important, in the same way they view medicine and engineering as strategically important. We need to convince them to provide incentives to encourage business schools to act more entrepreneurially.”

What Are Business Schools For?

Jessup and Laing stress that it’s time for business schools to do some serious soul-searching—to ask the crucial question: What are business schools for? If their purpose is to educate future leaders, drive economic growth, promote innovation, and support their ongoing missions, then they must adopt the best strategies and financial models to support those goals for the long term. “

At best, 20 percent of our faculty think deeply about what the business school does as a whole, rather than focus only on their own narrow expertise,” says Laing. “Very few ask, ‘What’s the world like? How is it changing? How do I need to operate?’ A culture of conservatism holds us back. We’re not as entrepreneurial as we should be.”

By outlining the critical issues that business schools face—and highlighting possible solutions—these two deans hope to trigger even more vigorous discussion and action among their colleagues. But it’s not all bad news, they say. The market may be tumultuous, but Laing and Jessup believe it’s a great time for business education. They see tremendous opportunities in the years ahead—but only for those business schools willing to take action today.