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The Stanford Graduate School of Business endowment soared to nearly $1 billion this August, making it one of the wealthiest business schools in the nation and the envy of the management education world. But this fall, the fund took a serious hit, and the seemingly untouchable business school, which depends heavily on endowment earnings for its operating budget, found itself on shaky financial footing. Faced with a gaping $10 to $15 million shortfall for this school year and a similarly gloomy outlook for 2010 and 2011, Dan Rudolph, the school's senior associate dean for operations, did the unthinkable: He laid off 49 school employees, or about 12% of its 400-person staff.
"It was very painful," says Rudolph, who also put eight staff members on a reduced work schedule, eliminated 12 contractor positions, and reduced budgets for travel, food, and the library. "We hadn't really done that before at Stanford and we were trying to avoid it."
The business of running a business school has never been so challenging. Up until recently, business schools have mostly been shielded from the waves of layoffs and cutbacks that have been rolling through corporate America. But after being hit hard by the financial crisis in 2008, they are bracing for an even tougher year ahead.
"2010 is a larger question mark than most of us would like to admit at the moment," says Robert Bruner, dean of the University of Virgnia's Darden School of Business. "We're weatherproofing ourselves."
Business schools are grappling with plunging endowment returns, a decline in annual giving, and state- and university-mandated budget cuts. B-School deans are being more cautious than ever, delaying plans for ambitious new buildings, freezing wages, suspending hiring, and slashing travel budgets and other nonessential expenditures. Many schools are reporting a slowdown in executive education and evening MBA programs, an important source of revenue for those institutions. Meanwhile, public universities are reeling from a series of state cutbacks, slashing student services, eliminating classes and, in at least one instance, asking students to help them cover the shortfall.
The handful of schools that have managed to stay in the black, like Columbia Business School, are using the economic crisis to their advantage, trying to increase faculty hiring in a marketplace that suddenly has significantly less competition. Columbia, which relies on its endowment less than some other schools, has seen an increase in annual giving, and plans to hire more faculty this year than it did last year, but would not disclose specifics. Says Glenn Hubbard, dean of Columbia Business School: "We expect to have a banner year on hiring."
That kind of unbridled optimism is not heard much in the corridors of business schools these days. The main culprit behind the shifting fortunes of many business schools has been their university endowments, which after years of sharp gains have precipitously tumbled. A recent study of 628 educational institutions around the country showed that college endowments lost an estimated 22.5% on investments during the five-month period from July 1 to Nov. 30, on top of a 2.7% drop in fiscal year 2008. For the most recent five-month period, the funds lost a staggering $94.5 billion in asset value, and some funds could lose as much as 40% for the year ending June 30 if the economy doesn't make a recovery, according to the study, released on Jan. 26 by Commonfund and the National Assn. of College and University Business Officers.
"We hope this doesn't occur," says John Griswold Jr., executive director of the CommonFund Institute. "But with the uncertainties regarding the economy and government moves to improve it, we may see even lower asset values in the near term."
That spells trouble for schools like the Yale School of Management, which depend heavily on endowment earnings for daily operations. The university's endowment, now valued at $17 billion, has lost about 25% of its value since the end of June, curtailing endowment returns and forcing the management school to rein in spending, says Sharon Oster, dean of the Yale School of Management. The school has implemented a salary freeze for faculty making above $75,000 and is not replacing people who leave the school unless it is "mission critical," Oster says. Construction on a planned $180 million state-of-the-art campus and building for the school, slated to open in 2012, will now likely be delayed, "unless I pull a few rabbits out of my hat in terms of raising money," Oster says.
Deans at other top business schools also are looking for a few magic tricks to get them through the next few years. One area of concern is executive education and evening MBA programs, where many schools are reporting cancellations and declines in enrollment in part because companies are cutting back on the number of employees they're sponsoring. The University of Michigan's Ross School of Business is experiencing a significant slowdown in its evening MBA program, where about half of the students in the program typically come from the automobile industry. The school is also worried about its executive education program, says Robert Dolan, Ross's dean.
At Dartmouth University's Tuck School of Business, the school is scaling back its plan to hire 10 professors over the next five years, now hiring only five, and holding off on plans to add more services for students and smaller-scale seminars, Dean Paul Danos says. A slowdown in annual giving, coupled with recent endowment losses at the university, translates into "a double whammy," for the business school, Danos says. Meanwhile, at Darden, where the endowment is down about 25%, the school has frozen salaries and suspended hiring, says Dean Bruner. The idea is to better position the school to withstand the gale-force economic winds of this year and next, he said. "It's all about preparing ourselves," Bruner said.
Still, the pain that private universities are experiencing pales in comparison to some of the severe cutbacks public universities are facing. At Florida State University's College of Business, school officials say state funding was cut by 4% last year and will be cut a similar amount this year. Even more concerning, the cutbacks in state appropriations for the college in 2010 could be as high as 10%. Says Caryn Beck-Dudley, the school's dean: "I'm very nervous."
The school has already taken several drastic measures, one of which was getting rid of 110 phone lines, for a savings of $40,000 a year, says Beck-Dudley, who no longer has a landline phone in her office and now exclusively uses her BlackBerry for all school phone communications. One of FSU's computer labs was recently shut down because the school couldn't afford to buy new computers or staff the facility, and the school may have to close them all in the coming year, Beck-Dudley said. With a university-wide hiring freeze in place, she's had to hold off on the hiring of eight new faculty members, a move that led to the canceling of 25 classes this year. Perhaps even more troubling, the school recently decided to cancel its part-time MBA programs in Tallahassee and Panama City because "we didn't have the faculty to teach them," Beck-Dudley said. Current students in those programs are being permitted to finish their degrees, but no new students are being admitted.
"The students aren't in the classes that they need to get into, and that will only get worse," Beck-Dudley said.
Faced with a steady stream of cutbacks, some state schools are coming up with creative solutions to make up for budget shortfalls, in some cases placing the onus on students. At the University of Buffalo's School of Management, which was hit with a 5% reduction in state funding this year, the school has mandated that each student pay an additional $184 in mandatory fees each semester, starting this spring. The money will make up for a $1 million shortfall in the budget and will be funneled directly to career services, says Arjang Assad, the school's dean. If the school didn't raise the money from the students, it would have been forced to make cutbacks that would have directly impacted students, Assad says.
"I was convinced this was the way to go because otherwise you cut services, and when you start cutting services it is a slippery slope," says Assad.
MBA students like Benjamin Nold, in his second year at Buffalo, are taking the increase in stride. There was a "bit of an uproar" when the school first announced the new student fee plan this fall, but most students have realized the dire straits the school is in, he says.
"I think our school is a pretty good value, so $400 a year is not going to break the bank," he says. "I'd rather pay a little bit more to ensure that we have a fully staffed career-services office, rather than not have one at all."
Damast is a reporter for BusinessWeek.com.