Professional school is getting costlier each year. But as students confront the problem of rising tuition, universities also are coping with fiscal issues that bring into question the value of professional education itself. Business schools used to be viewed as “cash cows” that our universities counted on to help underwrite their programs. But since the economic downturn, the milk we are capable of providing has begun to run dry.
Fortunately, business schools also are well-positioned to reverse this trend. We can draw from our research and curricula to diagnose the causes of our fiscal challenges and identify remedies. We have long been teaching our students how to reach effective solutions. Now, we must apply those lessons to our own institutions.
CAUSES & EFFECTS
At the University of Rochester’s Simon Business School in New York, we believe that the reasons for the fiscal challenges business schools face are multifold:
A hard-hit financial sector. Finance is the largest department—and accounts for the highest faculty salaries—at most business schools. The economic downturn hit the financial sector particularly hard, which in turn has cut into the ROI of a business degree and led to an appreciable decline in full-time MBA applications over the last five years.
More suppliers and greater capacity. As the business higher education industry has grown over the last four decades, we have witnessed what the standard economic model predicts: heightened competition from an increasing number of suppliers and expanded capacity from existing suppliers. Nearly 700 business schools are now AACSB-accredited, compared to 147 in 1970. This fierce competition has pushed business schools to increase their competitive efforts, which has served to commoditize our MBA, EMBA, and BBA programs. This commoditization has only further eroded our operating margins.
Soaring faculty salaries. Business education is what economists term an “increasing-cost” industry. For instance, as our industry has expanded, salaries for research faculty have increased at rates that have outpaced increases in our net tuition—primarily because supply of newly minted PhDs is failing to keep pace with demand. This trend is putting us in an ever-tighter budgetary vise, so that we’re shifting away from expensive research faculty toward clinical faculty, who now teach as many as half the courses at a majority of accredited business schools. In some cases, they teach even more than half.
The rankings. The media rankings have set in motion an arms race among business schools to attract the best students.
The average discount on tuition offered by flagship full-time MBA programs at top private U.S. business schools is now 52 percent. That rate jumps to 56 percent at places such as Harvard and Stanford. Schools simultaneously are striving to decrease their intake each year so they can improve the quality of student profiles they report to media rankings outlets.
Reductions in public funding. The ironic truth is that many public business schools are now public in name only, subject to a morass of constraints imposed by politically motivated regents, legislators, and governors. Witness the attempt by UCLA’s Anderson Graduate School of Management to break free of its public chains, even though in doing so the school forsakes any future claims on state funding.
Declining corporate support of education. At the Simon Business School, gone are the days when Kodak could underwrite at least 30 new EMBA students each year and give students every Friday off for classes. For the last two years, Simon’s EMBA program hasn’t enrolled a single student from Kodak.
These five forces have created a perfect fiscal storm. It’s a toxic combination, and the casualties are piling up:
• Thunderbird School of Global Management in Glendale, Arizona—a perennial top-tier school with a strong reputation for international business—tried to sell its campus facilities to Laureate Education, a for-profit venture. The sale was intended to obtain an infusion of cash in the wake of a US$8.7 million operating loss last academic year. However, the school recently pulled out of that agreement, and it is now in talks with Arizona State University regarding the formation of a merger or partnership.
• George Washington University in Washington, D.C., parted ways with its business school dean, following a reported $13 million operating loss.
• Yale University’s School of Management in New Haven, Connecticut, has lost $20 million over the last 15 years.
• The Wharton School at the University of Pennsylvania in Philadelphia has been turning over admissions directors as applications to the full-time MBA program have dwindled. The school has had five directors in the past ten years.
What can business schools do? We can employ the best practices we teach to articulate, execute, and constantly improve on our value proposition, ensuring the financial sustainability of the enterprise. I believe achieving these goals will take a threefold effort. First, we must offer programs that play to the strengths of our business schools or universities, respond to market demand, and contribute net revenues. Second, we must take more innovative approaches to revenue generation. And, third, we must seize opportunities to commercialize university knowledge and promote venture creation for our regions.
Through the steps outlined above, the Simon School has been able to achieve, for the first time in its relatively young history, four consecutive years of an industry norm 5.5 percent draw on its endowment. We have begun to pay down debt associated with past building projects and restructuring plans. Even so, we realize that we must stay mindful if we are to successfully execute our strategic plan while improvising as market dynamics continue to unfold.
DISTINCT & DIFFERENT
Addressing our fiscal challenges through effective strategic planning and execution is consistent with AACSB’s mission-based approach to accreditation. It begins with schools differentiating themselves as unique brands.
Schools can focus on a functional area (Northwestern’s Kellogg School of Management and marketing), an industry sector (Vanderbilt’s Owen Graduate School of Management and healthcare), geography (London Business School and London), delivery method (University of Phoenix and online learning), delivery time (Santa Clara’s Leavey School and its part-time offerings or Rotman and its early morning part-time program), or overall thematic approach (the University of South Carolina’s Moore School of Business and international business).
At Simon, we have adopted a five-year strategic plan to differentiate our school through a thematic emphasis on business analytics. We also focus on developing critical thinking and problem-solving abilities through our Frame, Analyze, and Communicate (FACt) model.
In addition, we have launched a new brand positioning statement, “Toughen Up.” We have sought to position Simon not as a Darwinian environment where only the fittest survive, but as a school that prepares business leaders to work with the very best in a competitive global marketplace. It is a call to action to our faculty, staff, and alums to keep raising our game as we train students for professional success. “Toughen Up” conveys to students that their success requires focus, creativity, and hard work.
IN STEP WITH THE MARKET
Business schools also must be ready to change as the market changes. We’ve developed the Simon School’s five-year plan to respond directly to several trends:
Specialized master’s degrees. Like many schools, we’re seeing higher enrollments in specialized master’s programs than in full-time programs, so we’ve developed specialized programs that follow shorter, more focused formats that are attractive to working professionals. Our part-time MS in medical management, for instance, has grown in step with the expanding healthcare sector and the advent of the Affordable Care Act—so much so that we have added a full-time option on our main campus and are considering a part-time variant at our New York City Extension Center location. We also offer MS options in finance, accounting, marketing, medical management, pricing, management, and business analytics.
Degree programs for working professionals. Our part-time Professional MBA is a cohortbased program that allows students to complete their coursework in two and a half years; each year, it enrolls more than 40 students, nearly all of whom complete their studies. That’s compared to only about 70 percent of students in our non-cohort-based part-time version of this program.
Programs for undergrads. In partnership with our undergraduate college, we have restarted an undergraduate business major and plan to graduate at least 120 students annually by 2019. The initiative is designed to encourage students to obtain the best of both educational worlds in business and liberal arts. The business major also will hedge against declines in our graduate business enrollments, open more channels with recruiters, enhance the pipeline of students to our graduate programs, and support our fundraising efforts.
More joint and multidisciplinary programs. Four years ago we started a Technical Entrepreneurship and Management (TEAM) program in partnership with the Hajim School of Engineering and our university’s Center for Entrepreneurship. We are in discussions with our counterparts at our medical program to develop an analogue to TEAM in the biomedical engineering space, as well as with our Eastman School of Music to launch a possible joint program in music and entertainment management.
We have taken these steps while remaining cognizant of the number of programs we can effectively manage. We already have shut down certain programs and will continue to evaluate our offerings for impact, strategic fit, and profitability.
MORE ROADS TO REVENUE
By constantly revising our program mix, we hope we will continue to attract new students, which will lead to enhanced tuition revenues. Improved fundraising has been another part of our fiscal success. The Simon Business School has set the goal to raise $85 million as part of our university’s overall $1.2 billion major capital campaign. To date, we have secured 12 new endowed professorships as part of the campaign, and we have quadrupled our annual private sector scholarship support.
A key step forward has been the establishment of the campuswide George Eastman Circle (GEC), our unique annual giving fund. GEC membership requires individuals to make a five-year unrestricted commitment of at least $1,500 annually and has gradations up to more than $50,000 per year. Donors who make this commitment receive networking opportunities, as well as invitations to hear speakers such as David McCullough, Maureen Dowd, and Bill Clinton. Nearly 500 alums, friends, faculty, staff, and even students now support Simon through this philanthropic vehicle. Through the GEC, the Simon School has doubled contributions to its annual fund.
Such giving augurs well for future philanthropic support, given that donors who give at least $1,000 annually to an organization for five consecutive years are more likely to make major gifts to that organization in the future. Fund structures like that of the GEC make philanthropy a habit of the heart.
Throughout our strategic planning and advancement activities we have sought to cultivate a sense of ownership among our alums and friends. Just as people wash cars they own and not the cars they rent, so too are people more inclined to “take care of” a school that is integrated into their own identities.
Finally, we also expect to raise money for the school by commercializing university ideas and supporting venture creation in our region. Universities are idea factories, integral to the socioeconomic success of their communities, and business schools are uniquely well positioned to drive this value generation on campus.
The Simon School’s partnerships with the schools of medicine and engineering, mentioned above, will promote entrepreneurship on campus. Supported by a seven figure gift from an alum, we have started a student venture capital fund that teaches our students what it takes to succeed as entrepreneurs and venture capitalists—and allows our school to take equity positions with promising ventures, particularly those with ties to our university and region. We also offer elective entrepreneurship courses that focus on commercializing university-generated knowledge. By having a stake in this process, a business school can generate significant returns to universities open to such market opportunities.
THE BOTTOM LINE
While the financial climate presents a future of hard work for business schools, opportunities await institutions that practice what they preach. Like Dorothy with her red shoes in “The Wizard of Oz,” we have had the power all along. Now we need to apply it.
On June 30, Mark Zupan stepped down as dean of the University of Rochester’s Simon Business School, where he has served since 2004. After a sabbatical, he will return as a professor of economics and public policy.