Thunderbird: A Case Study In Organizational Decline

Angel Cabrera, Thunderbird president from 2004 to 2011[/caption]When Angel Cabrera, a Spaniard who had been dean of IE Business School in Madrid, succeeded Herberger later in 2004, Thunderbird remained 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. Like any organization, the moment you spend more money than the revenues you generate you are in trouble. We had to work very hard. There was an imbalance in our budget.”

Cabrera, who was the youngest Thunderbird president ever at age 38 when he assumed the leadership role, told the school archivist during the 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. Our savings account is still weak and we need to be working on that.”

Cabrera left Thunderbird to become president of George Mason University in July of 2012, just as the school ended its fiscal year with a $4 million loss, a complete reversal from the $7.6 million surplus reported in the previous year. He departed three years into a five-year extension of his employment contract.

To raise cash, the school attempted to sell some of its 160-acre campus, only have 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.

THUNDERBIRD SAYS THE DEAL IS ABSOLUTELY NECESSARY TO ITS FUTURE

Penley, who became president in November of 2012, maintains that the partnership is absolutely necessary due to all the challenges the university is facing in a still 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. As a result of high opportunity costs, students are voting with their feet and are choosing one-year MBA programs, masters programs and online MBA programs. So schools must shift with that shift in demand. We might be nostalgic or love what the two-year MBA does, but every MBA program that’s successful doesn’t have to be a two-year program.”

In March of this year, Penley announced that beginning this fall it would offer a core MBA curriculum that can be completed in 12 months and will cost about $20,000 less than its current 20-month program (see Thunderbird Moves To A One-Year MBA). With the help of some $13 million of Laureate cash, the school also plans to create new online and undergraduate programs while also expanding its global footprint by reaching more students all over the world. Penley said Thunderbird is looking to launch campuses in Paris, Madrid, Santiago, Sao Paulo and Asia.

THE DEAL WILL GET $24.5 MILLION IN DEBT OFF THE SCHOOL’S BALANCE SHEET

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 when its $79.9 million in expenses overwhelmed  $75.9 in revenues.

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.

A SHANGHAI ALUMNI GROUP PREFERRED THE SCHOOL TO CLOSE RATHER THAN DO THE DEAL

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 partner 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. “I think it would’ve been a great disappointment to our founder General Yount and all the students who went here in the late 40s and 50s if the school had come to an end rather than finding its way to enlarging it’s capacity to really deliver solid high quality educations to students. So I completely disagree with anyone who would say, ‘I would rather see it closed.’”

DON’T MISS: BUSINESS SCHOOLS WITH THE WORST PLACEMENT RECORDS OF 2012 or THE $4.3 MILLION BUNCH AT THUNDERBIRD