Dean's Column

A Premium Program Comes at a Price

Revenues have simply not kept pace with our costs. And with a smaller student body that distinguishes us from competing institutions, we suffer a smaller revenue stream but similar infrastructure costs.

BY DEAN ROBERT JOSS

A YEAR AGO, we concluded a thorough review of whether the operational model at the Stanford Graduate School of Business was still the preferred way to achieve our mission of being the best at providing future leaders with the critical skills needed for lifelong professional challenges. With strong support from you, the alumni, we made a strategic choice to remain small in size but at the top in quality and impact. You told us overwhelmingly that the culture, experience, and success of the School are built on the unique learning experience we achieve through our intimate scale.

That premium formula (high quality, high impact, small size) comes at a price—and at a time when the general costs of education continue to rise relentlessly. It is a constant struggle to generate revenues to keep pace with costs. Although we have raised MBA tuition 40 percent since 1997, tuition and fees in the 2000–01 academic year covered just 51 percent of our $84 million annual operating costs, and we ran a small deficit. This year, I anticipate a deficit of roughly $5 million on an operating budget of $91 million before we close the books in August.

With a smaller student body that distinguishes us from competing institutions (we graduate about 365 MBAs yearly; Harvard and Wharton produce 900 and 800, respectively), we have a smaller revenue stream but similar, rising infrastructure costs. What has driven the increases? First, we’ve invested heavily in faculty. Competition for increasingly scarce faculty has driven up salaries more than 25 percent over the past five years, and we have little endowment support for junior faculty. Medical benefits and teaching support costs have increased even more. Housing costs in the Bay Area exacerbate the problem. But faculty are crucial to a high-quality model with small class size. As new areas of teaching emerge, such as behavioral finance and supply chain management, others do not go away, forcing us to expand our faculty to provide the best curriculum. Despite the difficult recruiting environment, we have been able to attract the right people, and the faculty has grown from 83 to 95 over the past three years.

Second, we have invested in our centers for Entrepreneurship, Electronic Business and Commerce, and Social Innovation. The centers house innovative research, have produced more than 200 new teaching cases, and spearhead community outreach. Third, we have put nearly $12 million into new technology over the past three years just to remain competitive. This includes basic classroom tools such as built-in projection equipment, online course registration, Web technologies, and enhancements to the computer lab.

Finally, over the past five years we have spent $19 million to refurbish our facilities, which do not compare to those of many competing schools, such as Harvard, Wharton, or the University of California, Berkeley, where new buildings have been constructed. Our budget includes no funds to replace our inadequate 36-year-old GSB South building.

Other schools have bolstered revenues with high-priced “executive MBA” programs that allow students to earn an MBA degree part time. At Stanford, we have chosen to stay exclusively with a full-time, two-year, residential program. We simply don’t see how students can achieve the same high-quality transformational learning experience that we offer while coping with a full-time job.

While tuition covers half of operating costs, the contribution from our endowment, which is healthy and safe, has increased from 21 to 28 percent over five years, thanks to gains in investments and gifts. However, our Board of Trustees prudently has fixed the amount of funds we draw annually from the endowment at 5 percent. As a revenue source, annual giving now covers 16 percent of operating costs, compared with 18 percent in 1997.

Reserves will cover this year’s deficit, but dipping into such funds is not a permanent solution. Like our peer schools, we have raised tuition for the coming year—to $33,300, up 7 percent. Expense budgets are being pared back. These moves will help shrink the deficit for next year, but our model cannot persist without sustained financial support. In past years, we positioned the School as the clear leader among schools of management. Consequently, many competing schools moved more closely to our educational philosophy. I greatly value all that the alumni have done in the past year. Today, we have an operating deficit, but I am confident your support will enable us to close this gap so the School can keep investing in the future.

To contact our development office, email or call David Kennedy, associate dean for development, at kennedy_ david@GSB.stanford.edu or 650.723.3355.