The Profit Squeeze Is Pinching B-Schools

Less exec-ed income means canceled classes and tuition hikes

Applications to MBA programs are at record levels--up 40% and more at many schools. Multimillion-dollar facilities will open on several campuses, including Case Western Reserve University's Weatherhead School of Management, where a $62 million Frank Gehry building was just completed. All signs of health. But as B-schools close the books on the academic year, financially it's looking like one of the toughest ever. The reason: Corporate America is penny-pinching. As part of their attack on spending in the face of weak profits, companies are slashing training budgets. And that has reverberated across B-school campuses. How so? Even the most prestigious schools get about 30% of revenues from executive-education programs, which cater to corporate clients.

Now, B-schools are reeling from 15%-to-25% declines in exec-ed revenue. They're retrenching by cutting staff and course selections and scaling back marketing and administration. And when that's not sufficient, they're resorting to tuition hikes--as high as 12%--bumping tuition to as much as $34,000 a year. "When companies cut, training and travel are the first things to go, and we feel it almost instantaneously," says F. Brian Talbot, associate dean of University of Michigan Business School. "And we're the last thing they add back."

Executive-education powerhouses such as Northwestern's Kellogg Graduate School of Management and Michigan saw a slide in training and travel budgets that was, in some cases, even worse than during the 1991-92 recession. At Michigan, 10 nondegree courses were canceled, including several popular management offerings. Exec-ed revenues are projected to be down about 22.5% this fiscal year, ending June 30.

At most schools, executive education brings in millions of dollars that help fund programs that don't cover all of their costs, such as PhD slots and, to an extent, the MBA itself. Indeed, over the past decade, schools have raked in plenty from companies eager to retain workers with perks such as exec ed. But now the squeeze is on. One cost that's hard to trim: faculty salaries. A dearth of business PhD graduates has pushed up faculty pay, to $100,000 or more in many cases. Because there's growing rivalry for top talent, "you cannot cut from salaries or research and teaching," says Meyer Feldberg, dean of Columbia Business School in New York, which was hard hit after September 11, losing about $3.2 million in exec-ed revenue.

To head off the pain, last fall Feldberg got B-school budget officers to cut administrative costs. Lunch was no longer served at staff meetings, staff festivities were toned down or eliminated, and grad students usually hired as part-timers found themselves looking elsewhere. The moves cut 7% of costs, says Feldberg, leaving the school better able to cope with this year's 17.5% drop in exec ed. One expected deal for next year has already fallen through: Coca-Cola Co., which had all but signed on the dotted line of a nearly $1 million contract for a custom program, has postponed indefinitely.

The losses have also affected staffing. At the University of Pennsylvania's Wharton School, where open-enrollment attendance slipped about 15% and 17 companies delayed custom programs, officials cut 15 administrative positions from the exec-ed staff. At Michigan, about 25 posts were axed.

A number of schools have raised MBA tuition. At University of Chicago Graduate School of Business, tuition is up 6.6% for 2002-03. The increase--to $32,600--means an additional $4.8 million for the B-school's coffers. Dean Edward Snyder says that will more than make up for the $2.5 million in lost exec-ed revenue. But tuition hikes are usually bad news for students, especially considering the tenuous job outlook and loss of perks employers had been offering, such as partial payoffs of MBA loan debt for new hires.

There are signs that 2002-03 could be looking up a bit. Columbia and Michigan are cautiously adding back a handful of staffers, for example. But until corporate profits recover, B-schools could be facing another lean year.

By Jennifer Merritt in New York

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