The VIRTUAL Reporter
Stanford University Graduate School of Business

Dean Spence: Unplugged

'It's Great Fun'

REPORTER: Is this job fun?
SPENCE: It's a terrific job. It's great fun because you're dealing with a relatively small group of people, by academic administrative standards, both inside and outside the school. They're all terribly talented. They have relatively similar interests so it's very focused. But the main thing is you just get to deal with incredibly imaginative, talented people -- students, faculty, staff, alums -- and they all in the end want the same thing, which is that we do a great job at what we say we're supposed to do. So I think it's the best academic administrative job in the country.

REPORTER: If we followed you around on a typical day, what would we see?
SPENCE: I would say there isn't a typical day. I probably spend about 35 percent of my time outside the school, and that is a mix of things, all of which add up to staying in touch. Mainly by virtue of the job, I'm on the boards of companies. I spend a lot of time talking with alums or senior executives from companies that are working partners with the school in various initiatives, that kind of thing, all of which is great fun. It fits the description I gave before. It's a combination of alumni affairs, staying in touch with what's going on in fundraising or development to help finance what the school wants to do, all that sort of thing.

There's a reasonable chunk of time that's spent on university stuff. There's a university cabinet that consists of the president, the provost, the deans of the schools and the heads of the major institutions like SLAC [Stanford Linear Accelerator]. That meets, oh, every couple of weeks for the better part of a morning, and there are other things that are related to that. So I would say probably maybe 10 to 15 percent of the time is spent either on university business as part of a group or on things where the school is relating to the university, something that we have to straighten out with them.

The rest of the time I spend in here, and the mix of that stuff is...

REPORTER: Literally in here?
SPENCE: No, meaning inside the school, dealing with people who are here now. It's all the way from LPFs when I can get there to events that your peers organize -- Challenge for Charity, SMIF, a PMP event, introducing new View from the Top speakers. A lot of what I do is show up as part of some process that I didn't initiate, but which requires me to be there to represent the school, and so that's -- I don't know, I'll stop doing percentages, but that's a reasonable chunk.

Then I have a group of people with whom I work closely and who report to me. Two associate deans -- Paul Johnson and Karen Nierenberg, for finance and administration and external relations, and then the academic associate deans. There are three of them, and right now executive education reports directly to me, although that's a bit of an abnormality. And the responsibilities? I mean, part of it is like much of management now. People need and want help, support and encouragement. There is some setting of policy direction, making choices about general direction removed from the detailed level, about what's important and where we need to go. You can call that strategy. Starts with a mission statement and goes from there.

And then there's the resources. The rough delegation of responsibility in a school like this, and this is very typical of academia, is that the matters related to academic policy are basically delegated by the trustees of the university and the president to the faculty straight through, so you might say 'well what the heck do deans have to do with it?' Well, what the dean has to do with it is to counterbalance [the faculty's responsibility], almost like the American Constitution, with the direct, ultimate control over the resources.

So what are resources? Money. Faculty slots. One of the most important things we do each year about this time is to decide where the new hires are going to be, where we need additional strengths and so on. So the academic administrators, if you like, are in charge of the resources and spend quite a lot of their time worrying about that: where they ought to be deployed and where they're going to come from, which is the fundraising side.

And then there are special projects. We're building a [new building] called the 'residential learning center' which will be for first-year MBAs, or MBAs and other master's-level students in executive education. It's been fun planning that.

REPORTER: When does that open?
SPENCE: Well, if it stays on schedule, it'll open in June 1997, in time for Summer Executive Education and then the academic year of 1997-98.

The Revenue Side

REPORTER: How much money is raised each year?
SPENCE: Probably $10-11 million, of which about half would get spent on a 1-5 year time horizon and the other half is endowment.

REPORTER: We have this image of deans spending most of their time trying to get those funds for the school. Is that a hard job for you?
SPENCE: Well, I think there is a tendency to portray fundraising as a kind of separate activity, but in fact in my view, and I think Karen Nierenberg would say the same thing, most successful fundraising is based on relationships that get built up, and so one of the consequences of that is that it's very difficult to know when you're fundraising, if you take that seriously. You know when you're asking somebody to invest in the school. That's pretty clear. But that wouldn't be the lion's share of the time that I view as going into fundraising. A great deal of it is explaining what you're doing so that people know what they might be investing in, building up a sense of confidence so we all together collectively have some sense of direction and know what we're doing, and so on.

So I view the time I spend with the Advisory Council, which is in effect our twice-yearly board meeting, as in part fundraising because the alums from that body are investors in the school in a quite major way, and that's one of the places where they take the time to sit down and listen to what's going on and to criticize in a constructive way, to get involved in setting the direction. That's the sort of involvement that causes people to have both the attachment and the confidence that they want before they become investors.

I call donors "investors" because I think of them as people who have come to understand what it is they want to support and while they don't get a monetary return in the way an investor does in the private sector, they expect results of a certain kind. We now call our annual report the "report for investors" for that reason.

The GSB P&L

REPORTER: What is the financial condition of the school?
SPENCE: It's quite healthy right now. The school has what I call a balanced structural budget, which means the revenues are sufficient to cover costs. It's been running temporary surpluses recently, because built into the expense side of the budget is the faculty growth that we need and haven't achieved. I'm talking about approximately ten faculty members. Since 1990 we've added four executive programs, and at least five going on six fairly major research and course development initiatives in human resources, and manufacturing, and now in entrepreneurship coming up, and we've done that without really any significant growth in faculty, so we just need more people. We're not talking about expanding the school in a major way.

REPORTER: You mentioned at the faculty meeting that fundraising purposes have changed. Could you elaborate on that?
SPENCE: When I arrived at Stanford in 1990 it was a very small number of months before we [the university] got into the major controversy with the government over an overhead rate, and partly but not entirely as a result, a budgetary situation that was really quite difficult developed. I mean a structural deficit which in round numbers was $75 million, which is big. We didn't have to look around for very long before figuring out that it was going to take a university-wide effort to fix this. That meant there was a lot of budget-cutting and revenue-enhancing going on everywhere, and the effect for the [business] school was to have an increase in the formula payment of about $1 million a year. At the time our consolidated budget was $25 million, so [it was] on the order of three to four percent. That is not fatal, but it's a fair amount of money.

We did several things. We tried to become more efficient through a lot of effort on the part of the staff. We were more conservative in authorizing faculty searches. But the main thing we did on the fundraising side was to focus on the initiatives. They're multi-disciplinary, they're field-based, and they're more expensive. We knew we ought to be traveling around the world doing research and course development more than we were. I said to myself, if we're going to fund that, then we can't be raising most of the money we raise each year in the form of endowment, because you only get five percent of that every year as a payout rate, so we turned down the endowment fundraising, and focused even in relatively major gifts on money that we didn't plan to spend in a single year, but which we could spend at a more rapid rate than we spend endowment.

We did that for about three years, and after three years, when we felt we were back in equilibrium and we weren't going to have to start saying no to faculty initiatives, then we started to tip the balance back, and we tipped it back in two directions. One was of course endowment -- scholarships, faculty chairs. Endowment is the capital underpinning of the school, and it's there permanently. The other major fundraising priority is buildings, like the residential learning center, and at some point soon, we're going to need additional space for faculty. We don't have a design for it but there'll be more fundraising around it. The reason we turned [down the level of endowment fundraising] on purpose -- the norm was to raise a fair amount of endowment -- was for a short run fairly specific purpose.

REPORTER: Does the business school pay a fixed fee to Stanford?
SPENCE: Yes. There are seven schools at Stanford. Five of them have budgets that are approved by the provost, so the university takes in the revenue and then budgets [for them]. We and the medical school are called formula schools, which means we keep the revenues and pay the university about $1.5 million, plus we will shortly look after both of these buildings. So we don't really represent an expense to them, but we do need to help cover their general overhead and some things they provide. There's graduate student housing, roads, police, fire, the campus. So that's the deal. And we've always liked that.

REPORTER: Because they can't get their hands on the revenue.
SPENCE: It's not just that, it makes things more predictable. You actually have a bottom line. If you decide you want to do something, you could. You obviously can't run a deficit for too long. It's like running a small company.

Free Advice: What Businesses Say...

REPORTER: You mentioned the Advisory Council. What were some of their comments and criticisms about where the school was going?
SPENCE: It depends on which place in time that you take. I think the Advisory Council is of the frame of mind that we have become pretty good not only at identifying, but also talking about the challenges and problems that we've got. I don't have a sense from John Brown, who's the chairman, or anyone else, that there's a whole bunch of problems that they think we've got now that we don't also think we've got. So we talk about them. For example, I think it's a major challenge to be competitive in executive education in a way that's consistent with the school's mission statement. I think it's a major challenge for American business schools to be keeping up with our corporate clients and customers as they develop a kind of global way of doing business.

You don't have to take General Electric, just take McKinsey. McKinsey does a lot of research and in many ways is like us, needing to be on the same page. But they're in 35 countries with 8,000 people. We've got 75 faculty in Northern California. If you want to create some structure that is likely to produce a differential rate of learning, that's probably the situation you create. That would be a major challenge and I guess I'd think the Advisory Council would agree. Not on what the solution is but that it's probably the biggest challenge. I think it'll take five or ten years to deal with it completely.

REPORTER: Do you get a lot of direct statements from executives that you talk to saying 'we want this, we need this, we need that'?
SPENCE: No, rarely that direct. I would say mostly what I get is 'let me tell you the challenges that we're facing,' said by a CEO or a senior executive in a company, and how we're dealing with them, and the idea is that hopefully that will trigger some thoughts about what we at the GSB could do, what our role in all of this great big system could be that would help out or would be responsive. That's normally the way it goes. I don't very often have somebody say, "You should do this," partly because most people don't know enough about how somebody else's organization works. I might have a few thoughts of what it would be nice for Intel to produce next, but I doubt if I'd ever say to Andy Grove anything that sounded like what they ought to do inside Intel anymore than he's likely to tell me [in detail] about what we ought to do in the curriculum. I mean, you just get past your competence.

More Free Advice: What the Students Say...

REPORTER: Did you sit in on recent exit interviews with graduating students, and what impressions did you get?
SPENCE: I did. All of the associate deans sat in on some of them. I think I got one or two of the four or five MBA ones and one of the two Sloan ones. I don't want to go into a lot of details, but I would characterize what I hear as a lot of general satisfaction with the whole experience and a lot of very constructive comments about a whole range of things. It shifts a lot from year to year. I find it very interesting and rewarding to participate in, but more than that we actually learn quite a lot. When something comes through as a constant theme, especially when people are at the point where they don't have any reason to gripe and don't want to manipulate your behavior any more, it's very interesting.

REPORTER: How long have these been done?
SPENCE: Three years. We thought it was too impersonal just to rely on the exit surveys and the academic survey, as valuable as both are, and which we all read very carefully. We just thought that face-to-face interaction was necessary, so if someone had an awful experience as a member of a minority group or whatever, there was a chance to hear it. We invite people when they don't want to do it as part of a group to come in and talk individually.

REPORTER: What are the constant themes you hear?
SPENCE: People really like the size and close-knitness of the place, and the relationships that come out of that kind of environment. A lot of them find it very stimulating. It's partly the formal academic part and partly just a lot of ideas flying around here. We hear that a lot. The most constant theme where they're asking us to do something about it, and we've worked hard at it, is people are frustrated at not being able to get into courses, particularly the high-demand courses. All the time I've been here we've worked at that. Part of that is soluble. But to the extent that the high demand is high demand for a person, and not a course, it's much harder to do. It's harder to deal with that one.

New Ventures

REPORTER: Did the entrepreneurship and venture capital initiative come out of the exit interviews?
SPENCE: No. The exit interviews aren't the only place we get feedback. The entrepreneurship initiative came from the recognition that 1) the courses taught by the lecturers were very important to students, that we had a first class program in that area that needed expanding to meet the demand better. Second, we thought there was interesting and important research to do, so we wanted to expand the commitment to that. We are in the process of doing that. Finally, we wanted to have less of a separation between lecturers and lecturers and tenure-line faculty, so the entrepreneurship initiative is designed in part to bring those two groups of people or subsets of them together to work on both teaching and research.

REPORTER: How's that going to work?
SPENCE: Well, when it gets up and running in the next few months there will be two leaders of it, one a lecturer and one tenure-line faculty, with an advisory group of people, and companies, much like all the other initiatives. There's an increasing number of faculty who are interested in it.

REPORTER: What exactly is the entrepreneurship initiative?
SPENCE: It will take on more definition in the next few months, but it's a set of research and course development activities. If you go back three years we probably had three or four courses in entrepreneurship, small business and venture capital, and we're now approaching 15 courses. That would be part of it, the most visible part to students. There is a quite large research program in terms of company involvement that focuses on human resources management in rapidly growing companies. That started with Mike Hannon and Jim Baron and some graduate students. We'll probably expand that and cover broader territory.

Restructuring

REPORTER: What about the White Paper -- what's become of it?
SPENCE: The White Paper was designed mainly to put out both a set of concerns, results, and findings of task forces that the faculty had the year before. Speaking not only for myself but for George and Garth and Jim [Associate Deans Parker, Saloner, and Barron, respectively], after it was all said and done, reviewed by students, staff and faculty, the Advisory Council, and everyone else who wanted to comment on it, about 80 percent wasn't controversial and we're just going to go ahead and do it. We're going to have MBA Research Fellows, put money into course development and the diversity area, more into the international area, etc.

Second, there were a bunch of ideas which were highly controversial, the most significant of which was the Dean's List, and that met with negative reaction, from students and faculty, so we dropped that. We figured that the argument that there was too high a risk that the Dean's List would be used externally more than it would have any interesting impact internally is probably right.

By the way, I think the level of willingness to give honest feedback, both verbally and in writing in the grading process, has gone up. The one thing I don't want to see is the situation in which there's an implicit deal between the faculty and the students. The deal when it starts to go down this road is: I'm not going to bother you too much [so don't bother me], and all the grades come out the same. That's not good. I don't care whether [the grades are] public or not. The issue is having a level of honesty in that feedback. It's not about flunking people or having more people hit screens. We can adjust those hurdles so that doesn't change. I feel the fundamental issue is how challenging is the classroom. Is this a place where expectations are high, and the delivery in terms of effort from our side, from the faculty, is high too. So that the high expectations on the part of the students for the instructor and each other are all justified. That's the goal. That's something you've got to do one by one. There's no silver bullet. You don't get at that by changing the grading system. You get at it by talking about it and working on it.

REPORTER: There is this business where lower expectations carry lower effort , and the whole thing spirals down.
SPENCE: That's what we were worried about. It's not that there won't be some. We didn't want that to be the general direction. We knew there were classes where this doesn't happen. Lots of them. We're trying to up the fraction that are in the spiraling up category, rather than the reverse.

REPORTER: The process of improving things faculty member by faculty member could take a long time. It's uncertain when it will happen, and given the inertia of any institution that could be a long, drawn out effort.
SPENCE: Yes. But on the other hand, it's like a lot of things in business, the really fundamental changes are on the implementation side, where there are more or less continuous efforts all the way along, because they involve people and how they react. I agree with you. But I think that's the way it is. You don't announce the change and all of a sudden it happens.

REPORTER: How's the faculty voting going for the P-minus guidelines?
SPENCE: I think that's going to pass. Now remember, it's a guideline. That means that if somebody appears never to have any P-minuses in their class, somebody's going to have a conversation with somebody. It's not a rule. It's a way of keeping track, a score keeping system.

REPORTER: A number of changes were made in the MBA core curriculum this past year. How did they work out and what else is planned?
SPENCE: There'll be more changes, but I don't yet know what they'll be. You get lots of different signals from that. Some of the faculty where their core sections split [between quarters] aren't happy with it. That would be OIT mainly. They don't think that's ideal. There's always an issue where you only have three quarters of sequencing. In exit interviews we heard some endorsement of having modules, where you have more flexibility with respect to how much time is put into each subject than you do if you use the quarter as the only unit of account. It's not a new idea, but what was interesting was to hear it resurface with a fair amount of positive endorsement. It's not that easy to do, but that doesn't mean it can't be done.

I heard in the exit interviews from the second year students that the fact that first year MBA students had five courses in the first quarter made it clearly more demanding on your time, especially given that it's the first quarter, and that it made some inroads into the amount of time your class had for other kinds of activities. There's a feeling it was hard to get your attention for a while early in the year.

REPORTER: Was that intended?
SPENCE: There was a feeling that starting the year off that way and getting a fair amount of what's fundamental out of the way had the benefit of giving you more flexibility with subsequent course sequencing and with electives. But there are lots of forces at work in this place that cause the entropy to set in as you go through. You only have to go up to the golf course to discover that. So I think there was a feeling to start it out with a bang, and people could sneak in more electives later in their first year or take courses across the street. There'll be other demands on students' time as they progress. We're not stupid.

We heard a fascinating thing in the exit interviews. I think Sherrie Taguchi is doing a wonderful job. Her predecessor was also very talented. Sherrie's been very successful at bringing more companies in and getting them to take an interest in all of you. It's very important, but we did hear from students that it's finally gotten to the point where it's hard to handle all this corporate demand. It's true, there's a small enough number of you [students] that while it's very important to have the menu be as rich and big as possible, it can also be a burden to do your duty of meeting appointments and filling up schedules.

REPORTER: Lecturers here only teach, and are some of the most popular teachers, yet they have only one-year contracts and not a lot of security. At a law or medical school only practitioners teach. Are lecturers valued, and how well do business experience and academic research mix here at Stanford?
SPENCE: I think the answer is increasingly well. Historically there was some real tension because the lecturers were not well integrated into the school. There was a feeling that they weren't valued for the real value they create. Concretely we are going to try and change their titles and contracts to make the alignment of their commitment to the school and to all of you, and our commitment to them better than it is now. We've been working on that for several years. The history is rocky, but less so as time goes on, and we learn more about doing this better. I'm very optimistic. On the tenure line the evolution is more and more towards being aware of the managerial issues. Having [lecturers] around as potential working partners as well as the rest of the contact with the real world is potentially incredibly useful.

I think the entrepreneurship initiative is going to be the test case, because that's where the greatest exchange of values is going to occur. That's the experiment we're going to run. There is always a risk in any institution of having two classes of citizens. The lecturers self-select themselves and are selected by us. There are a great many practitioners with a great deal to say but don't know much about teaching, but they're not here, so you haven't seen them. The lecturers here are the ones who are simply great teachers. They are also still practicing what they preach. I'm pretty optimistic about the future, as long as everybody keeps reminding themselves of why we are all here.

REPORTER: One of the things that surprised us a was the number of HBS cases used in the classroom here. Is the $250,000 being spent for course development...
SPENCE: We hope. It's been made available.

REPORTER: ...going to change that or is it being used for something else?
SPENCE: It is to do our own cases, but in specific areas. Those things by themselves I wouldn't want to portray as leading to a huge change in the portfolio [of cases used]. In fact, there are more and more Stanford cases now.

What happened is that for a long period of time HBS was the main producer of case teaching materials, and they perfected the art. They devoted a huge fraction of their enormous internal resources to doing it. I think everybody else decided to specialize in something else. The United States still does the lion's share of the basic research in science and engineering, not all of it, but some huge fraction, and since it's freely available, you wonder if you're sitting in Japan whether you'd actually go into competition over that or use it. Having said that, I think the direction of the school is toward more field-based research and course development as an inherent part of the process of maintaining relevance. And I expect that the mix [of cases] will change because of that.

When you add together all the initiatives in human resources, entrepreneurship, manufacturing, and technology and the courses they are built around, I hope but don't want to predict, that we're on a trajectory where five years from now you'll see "Stanford" stamped more often at the bottom of course materials.

REPORTER: What's the fireside chat process?
SPENCE: Every year the associate deans sit down with every single member of the faculty to talk about what they're doing, what they could be doing better, what they want to do in the future, what kind of support they need. It's the human resources management process on the faculty.

Growing Global Some More

REPORTER: Back to the international issue -- is Stanford really that small?
SPENCE: Stanford seems small to the rest of the world for two reasons. One, it actually is small relative to the competition, and the world is getting bigger in terms of real interest in management education. And we retain in California about 50 percent of the MBA graduating class. That, by the way, is not likely to change, and that creates some challenges. When we talk to recruiters in Connecticut, we have to admit that the class is 360, and half of them are going to stay on the West Coast. I'm not sure we all understand the model very well. But there is a serious long-run strategic question in my mind about our viability at this scale, if you think of yourself as serving mainly a global market.

Think of it in terms of the taxonomy of companies. In America there were domestic companies and international companies, and international meant most of their focus was on America, and they did business internationally because there were opportunities. What is happening now is that companies are going to predicate themselves on serving the global marketplace. Not all of them, but a subset, and including the ones that were formerly international. Well, in that world, I think that's the transition we'll be on, too. Because unlike an undergraduate program, it is inherent in our business that we have that kind of involvement [in changes in the marketplace].

This is just my view. It's not necessarily a widely shared view. I think the issue of a scale increase in the long run will be forced [by corporate globalization]. There are a lot of people who think you can be very small and do just fine. But I think the arguments, having to do with the network, the level of knowledge and visibility that you have, and the access [are compelling]. If it worked in America for 25 years at about the size of this country and this school, then it seems to me it's got to be scaled up eventually.

REPORTER: So the international issue is related to the scale issue, and the two will be solved together.
SPENCE: Yes, and it isn't just where your students come from, but if you think your former students are a fairly important input to the long term investments you make in being innovative and at the forefront, then that's got to be conducted increasingly on a global basis and you're going to have to be bigger. The thing that makes this complicated is that you've got the full range of options for scaling up. You've got alliances, if they're long-term and strong enough. As a drag on that, you've got huge differences in the state of development of management and business schools around the world, so it's not easy to create good alliances.

I think this is the most complex problem that we face now, and scale is part of it. I'm probably going to spend a fair amount of my second half [as dean] talking and thinking with people about that, and I don't think we're going to settle it and be where we want to be in my time. I think we'll be lucky if we have a clear, shared sense of direction and are on the way toward some objective by three or four years from now.

REPORTER: Do you feel pressure from international alumni?
SPENCE: Yes, we do.

The Past and Future

REPORTER: Professor Ed Lazear claimed in class that you might win the Nobel Prize some day for your research. Do you care to handicap that?
SPENCE: That's very flattering. The research I did when I was a graduate student and then afterwards on information and markets was very well received and seemed to have some impact. I think probably you can't drop out of active research for as long as I have, which is eleven years thus far, and expect people to even remember your name let alone what you did a long time ago. That's nice of Eddie but it seems to be unlikely.

REPORTER: You've been here as dean for five years now. Are you ready for another five years?
SPENCE: Well, the parameters to that are I certainly would like to stay and continue doing what I'm doing. If the provost has determined that it's a good idea for the school and the university, I'm certainly intending to stay on and keep working. Second, there's a tradition around here that goes way back to Ernie Arbuckle, which I think is a very good one, which is ten years is plenty long enough. I think Ernie served ten, Arjay [Miller] was ten, and Bob Jaedicke was slightly under ten. I'm certainly not going to break with that. That can be a maximum. I think in the short run [my priority is] properly funding some of these things where I've made a commitment to my colleagues who are working hard on the substance to get these things underpinned, whether research and course development or facilities. So I'm not leaving.

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The VIRTUAL Reporter
Stanford University Graduate School of Business