Inside Thunderbird B-school’s chronic decline

July 11, 2013, 2:55 PM UTC

(Poets&Quants) — With its 2012 fiscal budget $4 million in the red, the Thunderbird School of Global Management has agreed to grasp a sorely needed lifeline. The school, long known for its international business focus, is selling its Arizona campus to a for-profit education company.

The decision has kicked up a storm of controversy. At least two board members have resigned in protest and nearly 2,000 of the school’s alumni have signed a petition contending that its agreement with Laureate Education Inc. would “cheapen the value of the [Thunderbird] degree.”

“This is the end of Thunderbird as we have known it,” wrote Merle Hinrich, a director and alumnus, in his resignation letter. “The Laureate transaction is a tragedy for Thunderbird and a total windfall for Laureate.” Thomas Greer Jr., another board member who resigned, called the decision to sell Laureate a campus built with tuition funds and donations “unconscionable.” Greer vowed to no longer contribute either his time or his money to the school.

Thunderbird President Larry Penley, who started on the job last November, believes their concerns are understandable yet misguided. “That intimate nostalgia for what we experience causes us to be resistant to change,” added Penley. “And then the bias that Americans especially have because of what’s been discovered about for-profits causes resistance. However, the facts don’t line up with Laureate behaving like these other for-profits.”

Some observers say the deal is evidence of waning interest in the MBA degree. In fact, many of the institution’s troubles have been long lasting and self-inflicted, making it a quintessential case study in organizational decline. The new partnership reflects years of deterioration due to increased competition from rivals, lackluster fundraising, insufficient resources devoted to getting jobs for students, and overly generous compensation for some of its faculty.

The school’s endowment, which in recent years has been below $20 million, is meager compared to many of its business school competitors. It didn’t help that a $60 million naming gift, at the time in 2004 the largest pledge ever made to a business school, never fully materialized.

Yet, even though the school lacks a significant endowment, several of its professors have been paid extraordinarily well. Kannan Ramaswamy, a global strategy professor who teaches in Thunderbird’s executive education programs, had a total compensation package with benefits of $700,096 in fiscal 2011. That is munificent pay for an academic who is not known as a superstar outside his school in Glendale, Arizona. It even exceeded the total pay of then-Thunderbird President Angel Cabrera whose compensation totaled $584,749.

While Ramaswany is the highest paid employee at Thunderbird, according to the school’s government filings, he is hardly alone. Andrew Inkpen, another global strategy professor, was paid $565,457 with benefits the same year. Graham Rankine, an associate professor of accounting, was paid $492,908. The compensation for three other faculty members — Robert Hisrich, a professor of global entrepreneurship; William Youngdahl, associate professor of operations management, and Mansour Javidan, dean of research — all topped $400,000 a year.

It’s not unusual for world class faculty to be paid so generously, but the highest paid business school professors tend to be widely known and publicly visible figures at universities that can afford them, not at a troubled school that has been in a long-term fight for survival.

A B-school in perpetual decline

The school’s full-time MBA enrollment has been steadily declining for years, falling to just 380 from more than 1,500 in 1990. Last fall, its entering class totaled only 140 students. The placement stats for last year’s graduating class, meantime, were among the worst reported by any business school in the U.S. Some 76% of Thunderbird’s class of 2012 were without jobs at commencement.

Indeed, Penley sees the agreement with Laureate as a way to fix the school’s lagging placement record. “One of the reasons for the alliance has to do with their very successful employment record for graduates,” he said. “Laureate has an employment network that is global. It gives us the opportunity to tap into that employee network and improve our placement record.”

Laureate’s campus in Madrid boasts a 60% employment rate for students within six months of graduation, noted Penley. This is in the midst of a 59% unemployment rate for youth in Spain, where competitor schools place under 50% of graduates after six months. Laureate also distinguishes itself from other for-profits that heavily rely on government-sponsored student loans, with a mere 17% of its income coming from such loans.

Thunderbird, which takes its name from its location on a deactivated Army Air Training base just outside Phoenix, was offering a global slant to business education when most deans didn’t think international business was important. The school was founded by Lt. General Barton Kyle Yount in 1946 to help Americans enter the emerging international business environment. For some 30 years, Thunderbird could boast the only international business program in the U.S. and the only one in which graduates had to be proficient in at least two languages.

The upshot: T-Birds, as the school’s alumni are known, are an extraordinarily global lot: some 40,000 alums spread across 147 countries. They include such prominent executives like BP (BP) CEO Robert Dudley and former Morgan Stanley (MS) International Chairman Walid Chammath.

But it wasn’t until the mid-to-late 1980s that the school truly came into its own. Thunderbird had been given, in the words of former Roy Herberger, who was president of the school from 1989 to 2004, “the gift of globalization.” Amid Perestroika in the Soviet Union in 1986, the fall of the Berlin Wall and the Tiananmen Square massacre in China in 1989, the doors to a new global economy opened. Other than the University of South Carolina, whose business school also focused on international business, Thunderbird was in a singular position to capitalize on the growing interest in global management.

Still, the school’s unique qualities were quickly challenged by business school titans like Wharton, Columbia, and Harvard, along with schools in both Europe and Asia.

Truth be told, Thunderbird could never match either the prestige or the cache of the big brand schools. Even in its best years, its acceptance rate — often hovering in the 70% to 80% range — was much higher than the major business schools, which accept less than 20% of their applicants. So were the average GMAT scores of its entering classes, which tended to range near 600, more than 100 points below the best schools, which typically report scores in the 700-plus range on an entrance test where the highest possible score is 800.

Besides, the school was often in perpetual turnaround mode. When Herberger took over as president in 1989, he was confronted with what he called “a classic turnaround” challenge. “It took me awhile to look beyond the lack of paint, the unrepaired roads, and the old facilities,” he recalled in an oral history interview. “The faculty was underachieving, and the students were underachieving. The students were floating along…The expectations weren’t high enough.”

At the time, the school was unaccredited and unranked. With the exception of a language training program that brought in $300,000 a year, Thunderbird had no executive education programming at all. One study commissioned by the school showed that its alumni were more devoted to each other and not the school. “When it came down to writing a check for the school, it was, ‘What for? I got my education in spite of whatever you guys did,’” said Herberger.

Thunderbird seemed to turn the corner when Herberger landed in 2004 a $60 million naming gift from entrepreneur Sam Garvin, an alumnus and owner of the Phoenix Suns basketball franchise. Garvin did give $13 million in cash toward the $60 million pledge, but could not honor the timetable for the gift, so he and the school agreed that his name should not be on the school.

When Angel Cabrera, a native of Spain who had been dean of IE Business School in Madrid, succeeded Herberger in late 2004, Thunderbird was in a precarious financial situation. “The school was losing significant amounts of money when I arrived,” recalled Cabrera in an oral history interview. “We were in a tough era in terms of applications and shifts in demand.”

Cabrera, who left the school to become president of George Mason University in July 2012, told the school archivist during an oral history interview that the school was reporting an annual budget surplus despite the collapse of the economy in 2009 and 2010. But, he said, “we continue to be a relatively poor school. We don’t have much of an endowment like the schools that we compete against which have terrific endowments to support their activities.”

To raise cash, the school attempted to sell part of its 160-acre campus, only half of which is built upon, to developers for condos, single-family homes, and commercial use. But the plans never got off the ground due to the collapse of the real estate market in Arizona. The deal with Laureate was clearly another strategic option.

An opportunity to switch gears?

Penley, who succeeded Cabrera as dean, maintains that the partnership is absolutely necessary due to all the challenges the university is facing in what is still a growing market for global business education. Over the past 17 years, Thunderbird has experienced a 75% decrease in enrollment for its full-time MBA program. Penley attributes the drop to a shift in the business education market.

“I think because of opportunity costs, students are no longer choosing two-year MBA programs like they did in the past,” he said. “And the price of tuition has gone up at all private schools. So schools must shift with that shift in demand.”

To address this changing market, Laureate will provide $13 million to help Thunderbird create new online and undergraduate programs, while also expanding its global footprint. Penley said Thunderbird is looking to launch campuses in Paris, Madrid, Santiago, Sao Paulo, and Asia.

The alliance with Laureate will also pull Thunderbird out of an accumulating debt crisis. At the height of the economic implosion in 2009 and 2010, Thunderbird was running annual budget surpluses, but Penley said that due to the fluctuating financial nature of a private institution that relies on tuition, gifts, and grants, Thunderbird is no longer running a surplus. Instead, the school has racked up $24.5 million in debt and was $4 million in the red in fiscal 2012.

The partnership with Laureate, he argues, will include other financial benefits as well. First, a sale-leaseback for $52 million will pull the school out of debt for the first time in Thunderbird’s history. Secondly, the alliance could take Thunderbird back to the days of operating solidly in the black with the potential to produce $100 million in operating surplus. Finally, adds Penley, $30 million will be invested in campus upgrades.

But many alumni are unconvinced. The school’s Shanghai alumni group, with nearly 100 active members, shot off a protest letter to the school in late May, suggesting that Thunderbird should even consider shutting itself down to “preserve the integrity and reputation of the brand” rather than team up with Laureate.

Penley says he was genuinely saddened by the letter. “Thunderbird is, I think, given a new vitality by virtue of this alliance. And I think that’s going to be important to a lot of students,” he says.

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