Lessons from the recession

By Michael Luger

I am old enough to have experienced several economic crises in my working career, and that helps put today’s malaise in perspective. Tax revenues fall and social spending for unemployment support and related programmes rise. And more often than not, when governments have responded by attempting to cut public spending, they have axed higher education budgets more than other categories of spending. A graph of HE outlays as a percent of GDP in the US and UK over time would show a cyclical pattern within a fairly tight range.

So no one should be surprised to see state governments in the US and the Higher Education Funding Council for England slashing their budgets; California's Governor has proposed a $1 billion cut, and almost spending reductions of nearly £1 billion have been outlined in England over the next three years.

This pattern has several implications for business schools.

For one thing, business schools in fiscally challenged countries once again are likely to see their parent university become more wary of their 'independence'. The ability of B-schools to operate as devolved parts of universities is a recurrent theme. B-schools claim that market forces require them to pay faculty on a different pay scale, provide more services to students because of the higher fees they pay, and invest in closer-to-market activities such as executive education. To do that, they argue, they should be allowed to retain most of the surpluses they generate. The central university, however, worries about unequal treatment of faculty and the receipt of sufficient revenue to cover central charges and of economic rent for the use of the university's imprimatur. During stable economic times comfortable compromises are struck. But when the centre is faced with hard choices due to government funding cuts (and less donor support), they tend to seek more cross-subsidy and control.

Of course, this won't apply to all business schools. Some, like LBS and INSEAD, are essentially divorced from a parent university. And some - especially in Asia and the Middle East - are in regions or countries that have weathered the recession fairly well. Indeed, of the top 50 countries ranked by GDP growth between 2008 and 2009, only two were in Europe or America. The US and almost all members of the EU saw declines, whilst growth was 9.2 percent in Qatar, 8.7 percent in China, 6.1 percent in India, and 4.5 percent in Egypt, to give scattered examples.

This presents an opportunity for universities and business schools in those regions to strengthen relative to their competitors in places that are facing sharp economic adjustments. Arguably, it is easier for governments in those places to sustain their investments in HE. As a result, we have already seen an impressive rise in the fortunes of such business schools as Hong Kong UST, Indian Business School, Nanyang Business School, and the Chinese University of Hong Kong. They have been repatriating native brainpower, recruiting non-native talent, and investing in world-class equipment and facilities.

It takes a lot more resolve and foresight for hard-pressed governments to maintain higher education spending. But some are trying to do that. Whilst many American states are cutting their spending, the Obama Administration actually has increased the research (NSF) budget.

It will be an enormously hard sell, however, to lobby governments to maintain their HE spending. Facing hard choices, are governments likely to favour higher education rather than healthcare, defence, or even primary and secondary education? History suggests otherwise.

It would be better for universities to take bold action on their own, moving away from the vagaries of public largesse. First, seek ways to reduce reliance on government funding. Increase, or seek approval to raise fees, especially for professionally oriented programmes.  Both the lifetime value of a higher education and students' average willingness-to-pay suggest there is room for that in most countries. If a portion of the increased fees is retained for use in needs-based bursaries, that change would increase the equity of HE financing.

Second, increase the share of revenue coming from sources other than fees, including non-degree teaching (executive education) and consultancy, especially from clients not affected by budget cuts. Third, replace waning government research funding with corporate research partnerships. Fourth, explore other alternative, creative sources of revenues, including validation activity, selling testing services, and commercialising such activities as libraries, museums, catering, car parking and events. And fifth, act more like a business in managing costs: make sure to organise efficiently, minimising the cost of red tape and unnecessary duplication; be rigorous in your hiring decisions; and practice strategic cutback management.

The sixth imperative for universities relates to the fact that each of the preceding five is what good business schools have been doing for years, and are capable of doing more if allowed to by their parent institution. So, rather than constraining business schools by tighter controls and higher tax rates, free them up. This is the higher education equivalent to the Laffer curve argument: tax revenues will be greater for the entire university with less centralisation because there is a greater incentive to be profitable.

But there must be a quid pro quo. Business schools should be asked to help the university be more commercial and efficient. Disseminate best practice across the university and create partnerships that extend across school lines.