The Spence Perspective

As Dean Michael Spence prepares to step down from office in September, Stanford Business asked him what changes he sees in the future for management education. Spence has a unique perspective. He has been dean of faculty of a large research institution (Harvard, 1984 to 1990) and dean of a relatively small business school (Stanford, 1990 to the present).

Illustration by Mark Summers

SPENCE: Before I talk about the future, I'd like to step back for a moment and look at how we got where we are today.
       Management education started at the end of the 19th century, when the original business schools were founded. The American economy was going through a sea change, moving from the agricultural to the industrial. People who were going into business needed a better education to help them understand how you function in that kind of environment. Through the first half of the 20th century, business schools focused on industries--steel, railroads--but that approach came to an end in the postwar years. The intellectual leadership at the time perceived that something was missing. And what that was was basically the kind of rigor that the disciplines of operations research, applied mathematics, and various social sciences could bring to management education.
       So a group of important people in several institutions, with support from the Ford Foundation, set out to do something about that. They succeeded in a tremendously effective way. Economics, sociology and psychology, operations research, and decision theory were brought into the business schools. At the same time, finance developed with the introduction of the capital asset pricing model and the ability to put fairly precise formulae around the pricing of options and securities that are derivative from other securities. So in all respects there was a big change. This had the effect of both increasing the rigor of management education and making it more durable in terms of individual career needs. It also made the business schools a more natural fit in the research universities they were embedded in.

STANFORD BUSINESS: Now, as we're nearing the end of the century, would you say that we're going through another major change?

SPENCE: I would. There are two things that have happened quite recently that are certain to have a tremendous impact on education. First is the end of the Cold War and the development of the global economy. Not long ago, international relationships were organized in reference to the military power of the superpowers and not to economic forces and capabilities. The removal of the constraints implied by the need to be on the side of one or the other in the Cold War led to the very rapid growth of the global economy--which I think of as not just international economic activity, trade, capital flows, and so on, but as an ability to manage a lot of those things in a much more integrated, efficient way than was ever possible before.
       The second is the development of information technology. Information and communication is the most important of a long list of things that contribute to our ability to function on a multinational basis with increasing efficiency, much lower transaction costs, and just much less sloppiness all around. So it looks as if it's possible that right at the end of this century--just as at the end of the last--we're about to embark on a profound set of changes. And I expect that management education is going to move in parallel with them as they did before.

STANFORD BUSINESS: What exactly does that move encompass?

SPENCE: Our industry, management education, is going to have to address all of the dimensions that are relevant to us: what it means to be in a global economy, who our students are, how we're financed, where we're located, how big we are, what languages we speak. And on the information technology side, how we interact with each other.
       Let me play economist for a moment. Higher education is quite labor intensive. Nobody would deny that. We produce a small number of products and services. We generate content in the form of research and course material. And then we deliver it by transmitting it in several forms. What makes higher education so labor intensive is that you need several hundreds of thousands of people to deliver the content. There will still be a need for research and the generation of high-quality course content. But if information technology allows a much smaller number of people to deliver a substantial fraction of the content, I would imagine that information technology ultimately will dramatically reduce the need for the faculty who are on the delivery end. This, by the way, should eventually lower the cost of education.

STANFORD BUSINESS: What does all this mean for the GSB?

SPENCE: Now, somebody might say, "I understand all that in principle, but my best guess is that 10 or 15 years from now, the Stanford Business School will be a small, selective business school operating mainly in Northern California with a labor-intensive instructional process that involves personal interaction." I agree. It's hard to imagine information technology replacing that.
       But my best guess is we're going to be somewhere in the middle, that we'll continue to generate content and deliver it locally using a variety of techniques--including personal interaction. But in order to be economically viable, we're going to have to deliver it elsewhere. That doesn't mean we have to have an MBA delivered by email and taught only by our faculty. There are all kinds of ways we could go.

STANFORD BUSINESS: I can see not cutting the faculty that we have but expanding the number of people they can reach. You need a certain mass of faculty to keep ideas churning. You're going to have to keep a community of scholars somewhere, aren't you?

SPENCE: Absolutely. And of course the development of people and content is an expensive investment. It has the characteristics of largely fixed cost, which means you only have to do it once.
       Delivery is a different question. The danger to a place like Stanford would be if we took on the cost of the development of the people from PhD to junior faculty and supported their research and course development, and then other entities contracted with them, not us, to deliver the content elsewhere. That would leave us short of the resources we need to continue developing both faculty and research. So one of the reasons for being a participant in the delivery of content on a larger front, however those channels develop, is not to get rich. It's just to have enough resources to be a high-quality investor in people and innovative research in the future. The models we have today aren't particularly well adapted to this.

STANFORD BUSINESS: Of the two or three big changes in the history of management education over the past century, is this the biggest?

SPENCE: Probably not. What we're talking about is actually a major change in all of higher education. High-quality content needs to be delivered to a very large number of people--many of whom are extremely talented and some of whom don't live in this country--who are never going to go to Harvard or Stanford.
       There are lots of places that do an excellent job of teaching but they're basically not content generators. They can teach the capital asset pricing model, but I don't think they all have faculties that can generate the next capital asset pricing model. That doesn't mean they aren't important or useful, but an organization like ours could reasonably lay claim to being one of the content providers as well as a deliverer. We have a comparative advantage built up over a long, long period of time in faculty development and research and course development.

STANFORD BUSINESS: We've been talking about how technology and the global economy are changing the way we produce and disseminate content, but I wonder how they've affected the content itself. How or what are we teaching today that is different from what we taught 10 years ago?

SPENCE: We teach some subjects today because they're no longer just theoretical possibilities, you can actually implement them. For example, in finance there are a number of subjects that fall under the heading "risk management" that you basically cannot do without information technology. This is because without information technology and the direct links it provides to many markets, you can't trade precisely enough. You can hedge risk associated with stock prices by using options, and people do that, but if you want to actually conduct an arbitrage operation, you have to exercise several simultaneous trades in four different exchanges. Technology now makes it possible. You can sit at your desk and get real-time information off most of the financial markets in the world and make instantaneous adjustments to all those changes.
       On the business side, because new information technologies are becoming ubiquitous on a global basis, you get a dramatic change in the efficiency of the supply chain. Thanks to the Internet, you're seeing the systematic elimination of batch processing in favor of doing everything in real time. The Internet makes it possible to keep all the links open all the time. You don't need a dedicated electronic pipe anymore. Everything comes in, encoded and in real time. And then everything's updated.
       The global information network has had a big effect on other economies. Many of the emerging nations were already competitive because they have good educational systems and excellent but --by industrial country standards--underpriced human resources. But now they can also be integrated into either the global economy or some company's supply chain. So that enhances their value even more. (It also, by the way, accelerates the speed with which the prices of things, including labor, get bid up toward industrial country standards.) One of the things that holds them back is precisely the absence of the kind of economic infrastructure that enables them to be fully equal participants. No one would dispute that this is an interesting time.

STANFORD BUSINESS: No, no one. But let me ask you to go back to the state of American higher education for a moment. Have there been changes in the structure of these institutions?

SPENCE: Let me take a swing at that. America has way more colleges and universities per capita than any other country, basically because it has a private sector. The early colleges were religious colleges. They were relatively small; they had governance structures similar to what we have today; they had faculty--mostly men, initially--who hung around with the students, often in a residential environment.
       What we now call research universities--Johns Hopkins, Harvard, Stanford--developed in the late 19th century on a German model. They grew as a result of World War II because the United States needed the scientific and engineering and technical know-how for the war effort. After the war the country decided they were a huge asset. The Vannevar Bush report basically defined a relationship between government, universities, and business in the building of science and technology capability for the country. That started the sponsored research part of university funding, which came mainly from federal government agencies pursuing their interests within a well-defined framework.
       By the time I became a dean at Harvard, the sponsored research enterprise was gigantic. You had graduate schools. You had multi-million-dollar labs. You had faculty talking about spending tens and tens if not hundreds of millions to map the human genome. DNA had been discovered. Health care and biomedical science were transformed forever. And so you have the institutions of higher education with their governance structures from an earlier time.
       We still have small teaching colleges. But we now have big sponsored research enterprises; we have low airfares; we have faculty jetting all over the place to stay visible and interact in their academic disciplines. We cannot, and would not want to, go back to the old model. But we probably do need to change the governance structures to match the new reality.

STANFORD BUSINESS: Isn't the faculty itself different? They seem more entrepreneurial than they were a decade ago.

SPENCE: They are entrepreneurial, and self-motivated, but I don't know that that's such a big change. In all of my time in academia, I've found that the kind of faculty who earn tenured positions in a Stanford or a Harvard are people who have an enormous range of options: They're partly loyal citizens and partly free agents.
       The tenure contract is written--stated--in such a way as to not be terribly clear about what the responsibilities are, and so you basically rely on good will. I think what makes it work is that most people who are faculty members of an institution like this understand that they are very talented but they're also very privileged. We've been allowed to do something where we are more or less self-directed and have a great deal of freedom of movement. I think that the lion's share of us who have had this opportunity are grateful for it and think we owe something back. The repayment takes a lot of different forms. It's partly looking out for your younger colleagues; it's partly making the institution run effectively. A place like this definitely relies on faculty leadership and faculty loyalty to the institution. Whatever form it takes, I haven't seen any evidence of a shortage of supply at Stanford.

STANFORD BUSINESS: And what about the students? Have you noticed changes there?

SPENCE: Yes, but these aren't sea changes. The PhD students seem to me to be very similar to their predecessors--talented, imaginative. The MBAs are older and more experienced. Thirty-five years ago my generation came straight to business school from college. About 20 years ago they started to be more like our MBA students today, who have at least two years' experience and an average of four. One difference: With the boom in the Internet, the students are now riveted by one of the great entrepreneurial opportunities. But there was the boom in investment banking in the 1980s and I'm sure there'll be others.
       All that aside, I think the students, best as I can tell, remain fundamentally the same. They're smart, imaginative, energetic, for the most part really nice, public spirited--very much so--and pretty easy to get along with. I certainly don't see any reason to be anything other than optimistic about the kind of leadership that the generation I've seen here or at Harvard is going to provide.

"High-quality content needs to be delivered to a very large number of people--many of whom are extremely talented and some of whom don't live in this country--who are never going to go to Harvard or Stanford. "

STANFORD BUSINESS: Part of the business of "deaning" is that every constituency thinks you're their private property. I don't know if you want to comment on this, but I've sat back and watched the faculty think you're theirs, the students think you're theirs, the alums think you're theirs, and so on.

SPENCE: Yes, these are all legitimate interests that collectively result in some pushing and pulling, but it's not impossible to deal with. I suspect that CEOs have a similar experience. A CEO has obligations that go well beyond the company. Various communities and constituents view the organization and the head of it as their property. I think the days are gone when the remote autocrat is going to be terribly successful in any organization.
       Here, the faculty wants to know they have an open channel to you and that you are sympathetic. And the students too. At Harvard the undergraduates thought I was irrelevant. In fact, they didn't know I existed. The GSB is different in that it's smaller. So you actually can get to know some of the students, and they do get curious about what's going on and what you do. And the staff are important too. It's easy to get caught up and not recognize that the staff need attention and communication.

The building of relationships with alums is absolutely crucial. You need their support for a whole variety of things, but you also get a lot of valuable feedback. Also, they communicate to the rest of the world what they think of the state of the School, and that's a really important part of our image.
       One thing I've learned about the Business School is that it has a very strong culture that has been built up over a lot of years. It is a supportive culture that puts a lot of emphasis on personal as well as professional development and fulfillment. It emphasizes excellence and achievement, but not at the expense of others. It's been interesting to me to see how durable it is. It doesn't go away. You may think of these things as fragile, but I actually don't think they are. I think they're very persistent for the most part. Whatever changes the institution undergoes today and in the future, I believe that the underlying culture will remain.