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Much of the debate about higher education, certainly in the UK, has focused on income – how much should be charged in tuition? Little attention has been given to the other side of the equation – what the money is being spent on.
University staffing costs can easily approach 75 per cent of institutional expen- diture. Faculty members who carry out research and also teach account for much of this.
While research can generate income through funding councils and other research grants, most research is cross-subsidised by teaching income. So the core calculations are simple enough. How much do faculty members teach? What does the teaching time cost? How much income does the teaching time generate?
At the research-intensive end of business schools, annual teaching loads of 80-120 hours are not uncommon. Assuming 120 teaching hours and a fully loaded cost (salary, social security contributions, pension and secretarial support) for an average faculty member earning €90,000 ($120,000), a teaching hour costs €750, or €6,000 a day. At teaching-led institutions with an annual load of 240 teaching hours for faculty staff, an hour costs €375, a day €3,000. If research income is subtracted and one accounts for service, the hourly cost is reduced – but still remains considerable.
There are interesting parallels between business school academics and consultants or secondary school teachers. Statistics from the Organisation for Economic Co-operation and Development relating to teachers show that an average teaching hour in developing economies costs €8 and in OECD countries €34. In consulting firms, individual consultants can have targets approaching 200 billable days per year. This would lead to a cost in the region of €50 per billable hour for a mid-level consultant.
Some ways to control costs in universities have become obvious – teach less or increase class size. Both limit the overall need for staff and appear to be the preferred options in undergraduate education. Whether this benefits the educational experience of students is less clear.
A look at income rounds out the picture. Teachers are not high earners. Consultants are. They are billed out at more than three times fully loaded costs.
Faculty members need to generate income as well. A US colleague recently indicated that at his university, business school faculty members generated on average €628,000 a year, compared with €147,000 for colleagues in the school of fine arts.
If x is the number of days a faculty member teaches, y the number of students in the classroom and z the price paid by each student per day of education, increasing x even marginally surely makes a big difference to how much income is generated.
Many institutions are using a faculty model that is very luxurious. In no other industry do the key employees spend as little as 10-30 per cent of their time directly generating income. Would the world end if faculty members simply agreed to teach an additional course?
Alternatively, business schools need to redefine the profile of faculty members. By legitimising clinical faculty as an additional faculty track, setting them higher teaching loads and encouraging them to remain involved in practice and conduct research that is not primarily aimed at top-tier academic journals, business school economics would benefit and in all likelihood many students would be delighted.
Such ideas have verged on the heretical for years but the reality is that the demand for business education is growing faster than the pool of doctoral and research-focused faculty staff. At the same time, the financial support offered by the state for education is declining. Middle-income countries are creating their own business schools – and in time will no longer be the source of premium paying international students.
A handful of business schools are rich enough to be unconcerned. Many others are not and some, we hope, agree that the present faculty model is too luxurious and cannot be maintained for ever.
Kai Peters is chief executive of Ashridge Business School.
Howard Thomas is dean of Lee Kong Chian School of Business, Singapore Management University.