Don Jacobs: Why B-Schools Have to Lower The Price of an MBA

Don Jacobs is in his office on the third floor of the building named after him at Northwestern University. It’s the afternoon before the commencement for the Class of 2010, and on the back of his office door hangs his ceremonial robes, all ready to go, for what would be his 31st consecutive commencement at Kellogg. “It’s going to be a hot day tomorrow,” he says, noting that the temperature in the university auditorium will be well above a sweltering 100 degrees. The student speaker for the event already had been advised to trim back his speech to little more than three minutes because of the heat.

Jacobs chuckles loudly, flashing a toothy grin that brings his eyes to a grandfatherly squint. “You know the last time it was this hot we had Oprah here to do the commencement address and she practically melted down up there,” he giggles. “Sweat was just pouring down from her face.” Jacobs puts his large hands up to his face at this point just to show how much water was pouring off Oprah. “When she walked off the podium, she said she would give us the money to air condition the gym,” continues Jacobs. “The president of the university heard her and nearly fainted. I told him it would never happen. We only use that place three times a year when you would ever need it cooled. It’s just not worth it.”

That’s Jacobs, one of the most influential business school deans of his generation. Though he has been out of the job as dean of Northwestern’s Kellogg School of Management since 2001, he is, at the age of 83, still teaching four different courses to MBAs, including Global Initiatives in Management, which includes two weeks in the region with students doing field study, and Managing Risk. Then, there’s the corporate governance course he teaches at Kellogg’s Hong Kong Executive MBA program.

In the 1980s, Jacobs reinvented the modern business school and transformed MBA education, in the process taking a second-tier institution and putting it comfortably in the company of an entrenched elite–Harvard, Stanford, Wharton, Dartmouth, Chicago, and Columbia. What he accomplished in his 26 years at the helm of the Kellogg School of Management is the stuff of legend. There have been b-school deans who have profoundly shaped their institutions, and there have been deans who have resurrected the reputations of once-proud schools that have lost their way. But Jacobs is the only dean to have had such a dramatic and profound impact on what MBAs are taught–even today–and to have carried a school from the second ranks to the very top of the business school elites.

Perhaps the most remarkable part of his successful narrative is that Jacobs himself would hardly fit the part of a hard-charging, intellectually elitist academician. The son of two Chicago bakers, he is as unassuming as the tell-it-like-it-is guy next to you in a blue collar bar ordering a Pabst Blue Ribbon. Wickedly smart, deeply strategic, and highly pragmatic, Jacobs was easy to underestimate–just as the managers and executives did with a young up-and-comer by the name of Jack Welch in the 1970s.

So what does he make of all the hand wringing over the value of the MBA today?  What does he think of the wild accusations that business schools and their expensive products caused a global financial and economic meltdown? What about the latest concern that MBA students have become intellectually disengaged from the academics and too engaged in a two-year search for the highest-paying job and a two-year party with classmates? Now that business schools in the U.S. alone churn out more than 150,000 MBAs a year, are the three most-coveted letters in education as distinctive as they once were? Is an MBA from an elite school worth the $300,000 cost in tuition, fees, and forgone compensation?

Settling into the chair behind his desk, surrounded by mementos of a well-lived and well-traveled life, he laughs out loud again. “We lived on easy street,” he says. “It was all milk and honey. We’ve had our pick of the best students and faculty. We were able to charge a hefty price for the degree. Not only did we pay our own costs, the universities found a goose to pluck, and they’ve plucked it. The costs went up dramatically and the returns to graduates went up dramatically. Until now, there has been a very good return on the degree. I think that is gone. Entering salaries, the entire return package (to graduating MBAs), is going down. For us to compete for the best students, we’re going to have to lower the price of the degree. Now the intelligent people will lower the stated coupon price by offering larger scholarships to the best students. But this will affect everyone.”

To Jacobs, it’s simply a matter of supply and demand. In the year before he became dean, there wre only 370 graduate business schools. Today, there are more than 190,000 graduate management programs worldwide, according to the Graduate Management Admissions Council. The annual output of MBAs in the U.S. when Jacobs took over in 1975 was less than 50,000. Today, it’s more than triple that number with more than 150,000 MBAs being awarded each year. Every week or so, another business school is launched in India and China. Steady increases in MBA tuition, no less, have outpaced inflation for at least the past 15 years. In the year that BusinessWeek named Kellogg the top business school in the world in 1988, annual tuition and fees came to little more than $15,000. Today, the annual bill comes to more than $39,000 a year.

The deep world recession of the past two years, moreover, has left an economy unable to completely absorb the increasing output. Many MBAs from top schools who in the past would have four to six job offers at graduation went unemployed. Last year, even Harvard Business School graduates had a tough time: nearly 25% of them were without jobs at commencement. At Dartmouth, some 30% lacked jobs at graduation. Starting salaries for most MBAs also tumbled along with the job offers.

“There’s a larger supply of people who are trained and unemployed,” says Jacobs. “But it also is an area that has been overcompensated for a long time. As you look around the economy, it’s not an activity that is sustainable. And if you have a reduction in returns, the costs of entering a program has to decline. Everyone will be affected.”

The upshot? Jacobs believes that the best schools are going to need more money to remain competitive for the best students, not only with each other, but with schools of law, medicine, and engineering. “Universities are going to have to give some of the endowments back to the business schools. A university is like a conglomerate,” he adds, revealing his roots as a finance prof. “A conglomerate has a depreciated number on its price over and above the breakup value. People say why is that? And the answer is very simple. If you are a conglomerate, you are always looking for the bad part of the firm to fix. If you’re going to fix it, where are you going to get the resources? From the good guys. So you are always taking from the really good ones and giving it to the bad ones. Universities are the same way. They take it from the great ones, the good schools, and they give it to the dogs. They are going to have to give up some of that. We are going to be less of a goose.”

The goose wasn’t even born yet when Jacobs began his academic journey after the end of World War II. Trained as an economist, he earned a bachelor’s degree in the field from Roosevelt University in 1949, and then a masters and PhD in economics from Columbia  University in 1951 and 1956, respectively. He joined the Kellogg faculty a year later in 1957, becoming director of the school’s Banking Research Center in 1960. When he was named dean in 1975, after a six-year stint as chairman of Kellogg’s finance department, the goose he inherited was hardly golden.

The boom in management education was yet to occur, and Kellogg was hardly considered an A-player in the game. Jacobs even lacked the money to upgrade the faculty with first-class professors. Instead, he had to place his bets on newly minted Phds with upside potential. “Don was fearlessly entrepreneurial when it came to advancing the reputation and quality of the school,” says Stephen Burnett, a professor of strategic management and associate dean of executive education. “If there was a person or initiative that would help Kellogg, Don would let nothing stand in his way, especially convention or university bureaucracy.”

That was especially true when he decided, amidst much doubt and skepticism, to build on campus an executive education facility, the Allen Center, in the late 1970s.

At that time, the school did not have a fraction of the executive offerings required to fill a building with 64 bedrooms and three-plus classrooms 365 days per year.  The university president at the time was convinced the Allen Center would fail and that he would soon have a brand new dorm. “Don’s notion was that if you don’t build it, they certainly will not come,” recalls Burnett. “A big expensive empty building is a wonderful incentive for innovation in executive education, and this is precisely what we did.”  By the early to mid-1980s, Kellogg was designing and delivering extremely large custom programs for executives at some of the world’s best known companies, including Goodyear, General Motors, Zurich Insurance, Beatrice Foods, Ernst & Young, British Petroleum, and Spiegel.

Adds Burnett: “This was a full decade before other schools even knew what a custom program was, much less had serious experience at how to design and run one. From Don’s perspective, by doing custom programs we were exposing senior-level executives of major organizations to the excellence of Kellogg while simultaneously developing faculty by giving them deep insights into these organizations. The fact that other schools would not do them just meant that we had no competition.”

At the very first Kellogg commencement in 1979–which occurred because of a student suggestion–Jacobs told his graduates he would see them at the Allen Center. “You think you’re only going to come back here just for reunions, but you’re wrong,” he said. “You’re coming back and you’re going to pay me tuition because we’re going to sell you another product. Five, ten, fifteen years later, your knowledge is going to be out of date. You’ve got to come back.”

To this day, Kellogg has one of the most successful executive education business in the world. “Under his leadership, the business school became a business as well as a school, less isolated in academia and more customer-oriented,” says Stuart Greenbaum, who worked closely Jacobs as an associate dean and who later became dean of Washington University’s Olin School. “Don transformed the academic environment from one where faculty members only spoke to each other, into one where professors speak to business. This was a revolutionary idea back in the 1970s.”

As an academician who practiced what he preached, Jacobs has served on as many as 25 corporate board over the years, from Commonwealth Edison, now Exelon, to First Chicago, now part of JPMorgan. But the board seat that arguably had the biggest personal impact on his life was Swift & Company, the giant meat packing concern.

It was while serving on Swift’s board that Jacobs, who has had open heart surgery, became a vegetarian. After learning more about the industry, he called the chief executive of Swift aside with a startling conclusion: “I said to the CEO, ‘We’ve got to sell this company.’ He said, ‘Why?” I said, ‘Because the man is going down. I couldn’t imagine people continuing to eat meat. We sold the company and everybody made a lot of money. Now the CEO and I teach an experiential course together on Business Dilemmas.”

He used the Allen Center and his board contacts to help the school. Just as crucial, however, Jacobs believed that the soft skills, such as leadership and teamwork, collaboration and culture, innovation and creativity, were just as important as the traditional hard skills, such as accounting, finance, statistics, and operations. He saw the chance to transform the typical b-school education by putting team exercises into almost every single class in the curriculum. This was so unusual at the time that at an academic conference devoted to graduate business education in the 1980s, a rival dean was nearly aghast when Jacobs explained that Kellogg students do the majority of their work in teams. “At our school,” the dean shot back, “we call that cheating.”

Jacobs, however, would have the last laugh. In 1988, when BusinessWeek released the first regularly published rankings of business schools, Kellogg came out on top, a position it would hold for the next six years. Corporate recruiters loved the school’s graduates and how well they worked with others. Kellogg MBAs weren’t smug or arrogant, they didn’t expect to be CEOs within five years, and they didn’t demand nearly as much compensation as the graduates of Harvard, Stanford, or Chicago.

Kellogg MBAs, in turn, loved the school. Jacobs was a highly visible, hands-on leader at a time when many MBAs at top schools only saw the dean for first-year orientation and commencement. His door was always open. He empowered students to begin and run all kinds of initiatives and programs.

“Kellogg established a reputation as a school where students felt they had a real voice in how things were done,” recalls Ray Boyer, one of Kellogg’s senior staff members at the time. “It didn’t come about by accident. When students would go to Don with an idea for how to improve the school, he would typically say something to the effect of: ‘That is a terrific idea.  Tell me how to do it.’ Some of Kellogg’s first international connections for students came about this way, leading to an array of international programs.”

Shockingly, Jacobs even came to school every Thanksgiving Day to serve students–who didn’t return home for the holiday–a celebratory turkey dinner, personally dishing out mash potatoes and meat on plates. He knew full well what it was like to be away from family: he and his wife, Dinah, had a commuter marriage for some 24 years. She lived in New York, working as corporate director of consumer affairs for Citibank, while he worked in Evanston. Instead, Dinah often came back to Evanston to spend Saturdays and Sundays with her workaholic husband, or sometimes, they would arrange their travel schedules to collide so they could meet in cities all over the world. Recalls Jacobs: “One time the chairman of Unilever had a party for us and said it was the most wonderful relationship he ever heard of. Both of us could work long hours during the week and then meet in Cleveland on the weekends. It didn’t really work out that way.”

In 1988, e-mail and the Internet were in their infancy. So the news that Kellogg was number one reached the school via fax. Staffers remember waiting as the fax machine cranked out the flimsy paper achingly slow. “I clearly remember how the headline and the first paragraphs of the story came into view and how our celebration started before the paper was halfway out of the machine,” remembers Boyer. “After all, it was BusinessWeek magazine saying, essentially:  “We’ve searched for the best MBA program. We found it at the Kellogg School.”

I took the first page of the story down the hall to Don Jacob’s office. He was on the phone. I caught his attention and signaled number one. He gave a big grin and a thumbs-up. He went back to his phone call. And that was it.”

Jacobs soon held a town hall meeting. The place was packed with celebrating students, faculty and staff. Jacobs remembers it well. “They said, ‘Okay, what are you going to do now? I looked down and said, ‘What are you crazy? The fact of the matter is, we’ve got the formula. We know what we’re doing. We just have to keep doing it better. The only thing is to stay ahead and let everyone else try to catch us. If we stop running, then we are in deep trouble. I don’t think this place has the will to stop running, and I’m very pleased about the new dean.” Sally Blount, who had been dean of New York University’s undergraduate business school, assumed the new role in July of 2010.

When all was said and done, Jacobs believes that interviewing all the applicants to the Kellogg School was the key to breaking into the top ranks. Why? Because in those years there were widespread complaints from companies about the inability of MBAs to work well with others. No one doubted the technical abilities of MBAs to crunch numbers, analyze competitors, or plot strategy. But it was widely believed that the interpersonnal skills so necessary for success in business were lacking. Assessing those skills with face-to-face interviews allowed Kellogg to sort out candidates who were far more likely to work well with others, who were highly articulate, and who didn’t have a chip on their shoulder. It addressed the dirty little secret of MBA education: that student selection, more than faculty or curriculum, accounts for the ultimate quality and reputation of any school.

Yet, interviewing all the applicants, gave Kellogg an ever larger advantage. “That interview ended up being the smartest thing I ever did,” says Jacobs. “We did it because we wanted a certain type of person for our program. But on the other hand, at the time, if you got admitted to Kellogg and to Chicago, you went to Chicago. If you got admitted to Kellogg and Columbia, you went to Columbia. We weren’t getting the best of the bunch. We figured that if we interviewed them, we would get some, maybe 10% to 15%, who would have gone elsewhere. What I didn’t understand,” says Jacobs, “is that we would get a lot more than that 15%.

“Let me tell you a story,” he continues. “My wife, Dinah, started taking tennis lessons and one of her fellow students was a woman in our MBA program. She was orginally from West Virginia and she had been working for Campbell Soup as an auditor, traveling around the world. She was a real sweetheart, and we became friendly with her.  She met a guy and they became friends and she was suddenly thinking about marriage. But he was going to go to Wharton for graduate school, so she decided to apply there and to Kellogg as well. Six weeks after we got her application, she got a phone call from us. ‘I’m from Kellogg,’ he said, ‘and I have been asked to interview you.’

On that very day, she got her acceptance to Wharton. So she said, ‘Look, I’m already in Wharton. I’m not interested.’ He said, ‘Please, you’ve got to let me interview you because if you don’t, they’ll think I really screwed it up. She agrees, reluctantly, and told us that in the first 15 minutes, she was only mildly interested in what she heard. During the second 15 minutes, she’s thinking this is interesting. In the third 15 minutes, she thinks there is something to it. By the time an hour passed, she said, ‘I was on my way to Evanston.‘ What i realized then is that we were putting salesmen in front of people. We were not up 15%. We were way up.”

For years, Kellogg was able to pick up highly talented candidates who most likely would have been sitting in the classrooms of rival schools. Yet, even when he told other deans about the benefits of his strategy, they rarely altered course. Jacobs remembers frequent discussions with John H. McArthur, dean of Harvard Business School from 1980 to 1995. The two had first met in 1960 when Jacobs was in a year-long program studying math through Harvard and MIT. His roomate was Larry Fouraker, who also ended up as a Harvard dean, and their next door neighbor was McArthur.

“I kept telling John you’ve got to interview. And he kept sayng no, no, no. Finally, I couldn’t stand it anymore.

“‘John,’” I said, “‘you’re not getting this. If you give me the face cards of your applicants, I’ll give them to my admissions people and we’ll get 15% of them to turn Harvard down. Why wouldn’t you do it?’

“‘It’s too expensive,’ he said.

‘’What do you mean it’s too expensive?’” I asked.

‘These people are all over the world. We couldn’t possibly do send our staff all over the place to do that.’

“‘John,’’ Jacobs patiently explained, “‘We don’t have our staff do these interviews. We let our alumni do that.’”

“‘Are you crazy?’” asked McArthur. “‘You trust them?’”

“If I don’t trust my alumni, I better get out of this business.”

“John finally had Harvard interview candidates, but only those who were accepted,” laughs Jacobs. “He never really got it. I told him to give me your face cards and i will give it to our admissions people and we’ll get 15% of them to turn Harvard down. He wouldn’t believe it.”

Today, of course, Harvard still doesn’t interview all of its applicants, but it won’t accept anyone who is not invited to an interview.

So after all these years, what does he think of accusations by some critics that MBAs were largely responsible for the global economic collapse. At the height of media silliness, The Economist dubbed MBAs “resilient wreckers,” claiming that “business schools have been widely accused of fashioning the wrecking balls and training many of the demolition crews that have wrecked such havoc in the economy over the past two years.” Jacobs pooh-poohs the notion, even laughs it away. “We are all silly people,” he says, “but I don’t think we got that silly. The fact is that we all have some blame. We allowed a structure to continue when most of us understood it was a bad structure. Everybody understood that these (exotic debt) instruments were getting very complicated. They knew the rating agencies had now become very important because nobody read the fine print in the instrument. Bad people figured out how to make everything get an A rating and the sellers were paying the rating agencies to grade it. It was crazy.”

To think his students, his alums, helped to cause a global financial crisis strikes Jacobs as an insane thought. “Our students,” he says, “are a delight to be with. They are smart. They are hard-working, and they are hard-playing. They are very nice and good people.”

There are some critics, though, who think the MBA boom has been a bit crazy, too. With the economic collapse came a lot of worry over both the quality of the education and the future of the degree. A recent book, Rethinking the MBA, by three Harvard Business School professors and researchers, for example, noted that many MBAs today are intellectually disengaged, focused more on getting  jobs and extracurricular activities, than academics.

Jacobs shakes his head. “That has always been true of Harvard,” he says, even though the critique is aimed more generally at MBA education. “That hasn’t changed. They (the authors of the study) probably weren’t around (many years ago) so they might not know that has always been the case. Stanford is the same. If you asked that question 15 years ago, you’d get the same answer. That is not a trend. That has always been the case. My sister had her own granddaughter here years ago and she was angry as hell at me because she could never get to see her when she was getting her MBA. There is no free time. Who is kidding who?

“I don’t think a management school is the mathematics department,” he continues. “What you are learning is different. You are learning how to get along with people, how to work with people. And then you learn how to produce and how to innovate. You are learning a different set of skills which don’t seem like an intellectual set of skills. But it’s very radical stuff.”

What about the often perverse obsession with landing a high-paying job? “Look, everyone understands that MBAs are not going to get three or four job offers anymore. Some won’t even get one offer, and yet you have people who are putting out a lot of money and giving up two years of their lives. When things are really tough, getting a job or an internship is a very important thing. When I was a young instructor, I used to be angry at  (students who missed class to go to a job interview or a recruiter reception) so it just shows you how long this has been going on. It’s not something new. It’s just the phase of a cycle. I think i would do the same thing if I were a student. I don’t like people who complain about that.”

Meantime, many schools have launched what their deans often call “revolutionary changes” in curriculum, partly in response to criticism of MBA education during the economic collapse. Stanford, for example, launched a new core curriculum in which it offerred incoming students three levels of courses, from basic to highly advanced, to account for the wildly differing backgrounds of its students.

Jacobs seems not all that impressed. “The truth is, we’ve been doing that for 15 years. We’ve had turbo classes or regular in the core. It’s stupid to keep people with financial backgrounds sitting around for basic courses. And then you have people who are poets asking what is two and two and how do you figure that out. You need regular courses for those students.”

Though Jacobs believes that the return on the MBA will continue to fall, he’s still highly optimistic about the future of management education. “There is plenty to teach,” he says flatly. “The world keeps changing, and the nice thing about management education is we change with the times. When things start to move, we move. Now if you keep giving them the same thing, like finance 101, it’s going to be dead someday.” He pauses, only to correct himself. “Maybe,” he adds, “I’m not even sure of that. If we can’t change and stay up to date, we don’t deserve to survive.”

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