The Cost of Scholarship at Business Schools

In a recent article looking the challenges facing business schools today, two Wharton professors - Karl Ulrich and Christian Terwiesch - estimate that cost of each article published in a top-tiered academic journal by business schools is $400,000. I believe this is a conservative estimate. It’s likely that the "full cost” for business schools for each article published by its faculty in a top-tier academic journal is probably closer to $2M - $3M.

Let’s use two Ivy League business schools as examples: Harvard and Cornell. These are convenient samples because each school publishes financial statements that can be used for this analysis, but it isn’t hard to assume that the results are generalizable.

For both HBS and Johnson, operating expenses for the academic year ending in 2013 can be broken down approximately as follows: salaries and employee benefits = 50%; student financial aid = 10%; other operating expenses = 40%. If we set aside the portion of the budget used for student financial aid then that leaves 90% of operating expenses supporting the two activities that form the core of the mission of business schools: research and teaching.

Let’s use the 50/50 split suggested by the authors in their analysis with regard to the resources devoted to each activity. This leaves us observing that 45% of the operating expenses of these business schools are devoted to research. In the case of HBS that came to $244M and the case of Johnson that was $35M. Okay - we’ve got the numerators in calculating our cost per article.

To get the denominators let’s go back to the authors’ original calculations. They estimate that the typical article is co-authored and the typical rate of publication is 0.75 times per year. Accordingly to HBS, it had approximately 220 research-active faculty members during this period. That would lead to (220 / 2 * 0.75 =) 82 top-tier papers. At Johnson, the approximately 60 full-time research-active faculty members should have produced (60 / 2 * 0.75 =) 22 top-tier papers.

Okay - let’s do the math. The full cost per top-tier article at HBS comes to ($244M / 82 =) $3M and the full cost at Johnson comes to ($35M / 22 =) $1.75M

While this is very much a back-of-the-envelope approach, I think it highlights that the cost of top-tiered academic articles is much higher than the authors suggest. One might argue that while 50% of faculty time is allocated to research, perhaps more that 50% of the other operating costs and staff salaries are actually allocated to the teaching activities of the school. That may be true, but it doesn’t matter: the schools wouldn’t exist without students so the 50/50 split of allocating costs between research and teaching is an accurate reflection of the mission of the schools and how bound together these two components really are. Similarly, one might argue that counting publications in top-tiered academic journals as the sole form of scholarly output is too limited. Perhaps, but since this is the basis on which most business schools grant tenure to professors, it seems that the business schools don't place the same emphasis on other forms of scholarly work.

As much as anyone can argue with any attempt to calculate the cost of scholarship, don’t look for business schools, or universities, to step-up and offer their own calculation. In most business schools the full cost of research activities are hidden or buried in budgets and certainly not labeled as “research”. I had the opportunity to chair the Senate Budget Review Committee at Queen's University in Canada for a few years. I can say from personal experience / observation that this budgeting shortcoming is also generalizable outside of business schools.

The standard budgeting process is typically to allocate 100% of faculty salaries and other operating expenses (e.g., facilities overhead, most staff salaries) to programs (e.g., MBA, EMBA, PhD, etc...). The only items classified as research-related are typically directs costs (e.g., databases, research assistants). This budgeting treatment was the case while I was an administrator at the business schools at both Queen's University in Canada and Cornell. Putting on my hat as an accounting professor, I pointed out to the business managers at both schools that the budgeting systems could not answer what is the full cost of research - rather ironic given that the mission of both schools included the creation of new knowledge. In both conversations, years apart, each replied that no one ever asked that question!

Students' tuition fees are used to fund all of the operations of a business school, and that includes research. I believe that business schools should be more comprehensive and transparent regarding disclosure about their research activities, the resources devoted to these activities, and the results. The students asked to fund these activities deserve to know.