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The range of tuition charges at business schools depends directly on their business model and sources of income. The nature of income determines also the availability of financial aid and scholarship schemes. My purpose here is to provide a comparative perspective on how business schools earn their revenues, and propose a typology to better understand how the nature of income determines propensity to increase or lower tuition.
The business models for business schools vary across regions, and results from cultural, societal, economic and political factors. Traditionally, a business school’s business model or income source determines its strategy, its mission, and the resources it relies on. There are, basically, three alternative models briefly described below. Actually, these models are not mutually exclusive, and most successful business schools are based on models that allow for a diverse range of income sources:
Type 1. Subsidized business schools
Typically to be found at large public universities, subsidized business schools’ income tends to come from regional or federal (national) budgets. Statistical surveys show that around 70 percent of the funding of subsidized business schools comes from government subsidies. As a result, these business schools are able to offer low, or even free, tuition fees. Typically these are large institutions with a substantial teaching staff made up of high-profile academics with a track record of research. In countries such as China, where education is still largely funded by the state, business schools receive government money based on the number of successful graduates they produce.
The chart below projects the average distribution of income at subsidized business schools.
The survival of the subsidized model depends on the extent to which the state is prepared or able to continue funding higher education. Unfortunately, this is not the case at many US public universities where tuition fees have increased over the past decades to levels comparable sometimes with those of private institutions.
Another example is the UK, where in recent years schools are moving away from government funds and searching more revenue autonomy.
In Europe, most of the major universities are publicly funded, although many business schools were set up as independent institutions, or are funded by business organizations such as the local Chamber of Commerce in France.
Some university analysts wonder if this model will be sustainable over time, as governments increase cuts on public spending across different areas including education.
Type 2. Endowment-funded business schools
Rooted in the tradition of philanthropy and “giving back,” endowments are a characteristic feature of the US university system. The private universities of the Ivy League, for example, compete with each other in international rankings based on their endowments, which are made up of the amount of money they have accumulated through donations from individuals and organizations. Donors often subject their endowments to conditions regarding their use. Business schools with large endowments will generally have other sources of financing, like executive education or publishing, which also make a significant contribution. The graph below illustrates the average amount of income that the top business schools make from interest on endowments above 10 percent.
During the financial crisis of 2008, the value of endowments was hit hard, reducing their income-generating capacity. The business school expert John Byrne says: “Stanford saw a decline in endowment income in 2010 to $52 million from $58.8 million a year earlier. The school largely offset the decline by rising tuition and fees from students, which brought in $70.9 million last year, up from $64.5 million in 2009. The result: Student tuition and fees now account for 46% of Stanford’s annual operating budget, up from 42% in 2009”. [1]
However, philanthropy is embedded in the US culture and the practice of donations has continued steady after the financial crisis.
What is less clear is whether the model of endowed business schools is exportable to other latitudes outside the US. The fund raising efforts at European universities, for example, have resulted in uneven results to date.
At the same time, it is discussable whether the endowed schools are more active in granting scholarships to their students than the subsidized or the tuition based schools.
Type 3. Tuition-based business schools
The defining model for most of Europe’s top business schools is tuition-based, with most funds coming from matriculation fees for their assorted programs, as well as from executive education and fund raising.
European business schools have long been envious of the generous endowments bestowed on the big US schools. The plus side of this is that, as a result of being financially needy, European schools have had to become more responsive to the requirements of the market.
The unresolved question is which of the above three business models of business schools is the fairest one, in terms of granting access to its students in reasonable and affordable economic conditions, offering bearable loan schemes and enough scholarship opportunities. There are a number of pilot initiatives in different countries worth following, which I will analyze in a subsequent post.
Notes
This post is adapted from a passage of my book "The Learning Curve: How Business Schools Are Reinventing Education" (London: Palsgrave Macmillan, 2011).
[1] J.A. Byrne, ‘The Financials Behind the Harvard-Stanford’, Poets & Quants, 4/12/2010
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