Introit

Managing and Capitalizing on Risk

Oliver Wyman, an international management consulting firm, and the Financial Times have released their 2010 Global Emerging Risk Report, which is based on a survey of 650 senior executives in companies around the world. This white paper examines what executives consider to be the biggest risks to their businesses and evaluates the methods used to identify and assess potential threats.

I will dedicate my next several posts to an analysis of this white paper, suggesting how independent schools might apply or interpret the data contained therein.

Effects of Inflation on Independent Education: Prepare Now

The consensus appears to be that the Federal Reserve is intent on creating inflation as a means of staving off the threat of deflation. With all the talk of QE-2 (not the ocean liner, but rather, Quantitative Easing Part II), we as independent schools ought to be planning for the consequences.

What are those consequences?

• Higher prices for basic necessities (food, clothing, shelter) for families
• Basic necessities will cost schools more as well; dining plans will have to increase in price
• Utility costs will increase
• Increased prices (price appreciation) will bring pressure to bear on governing boards to increase faculty and staff salaries, as a means of keeping up with overall price appreciation for families
• Tuition increases will become a super-sensitive lever for schools. We will face internal and external price appreciation, yet be scrutinized by families who are price-sensitive (since many schools are at the price-saturation point already), and who will expect any tuition increase to be equal to or less than CPI.

The question becomes: "how do we plan for high inflation?"

First, we need to speak with those individuals who were heads of school during the inflation of the late '70s and early '80s. They lived through a significantly inflationary period. Almost any one of them will say that a 7% increase for faculty was unwelcome, as it was too low, relative to overall price appreciation. Their experience of having lived through it would be some source of comfort, perhaps, for school heads and boards.

If your school is already at the price-saturation point for your market, what is the board's plan to counter the effects of inflation that is being created on purpose by the Federal Reserve? For example, your school's endowment will suffer, since a high rate of inflation means that any return you might have will be forced into negative territory in actual dollars.

What to do in the meantime? (Figure 18-24 months for inflation to begin to take hold)

1. Endowment -- a) consider whether to decrease your annual draw to a minimal percentage; b) start raising more money for overall endowment; c) be sure that your portfolio includes weightings in areas that will weather inflation, such as commodities, precious metals, and perhaps foreign currencies.
2. Annual Budget -- construct a rubric that will allow your school's commitment to salaries to mimic a marathon: in other words, create estimates of what your competitors will be able to afford to pay faculty in the event of high inflation, over the long-run (say, five years). If your belief is that they will suffer enrollment declines in the event of high inflation, then it stands to reason that they will be unable to offer salary increases that keep pace with inflation. So, will your school be able to offer such increases, i.e., in keeping with CPI? If not, what metrics will you use to determine what your school will be able to afford? Think of it in terms of five years, so as to stretch out faculty salary dollars. Make sure that your faculty will come out ahead of the faculty at competitor schools, and you can use this data to provide some confidence to your faculty during inflationary times. It goes without saying that you should consider avoiding taking on any new debt, unless the opportunity of a lifetime is staring you in the face.
3. Classroom Materials -- prepare faculty with the  mindset of "making do" for a period of several years, cutting down on classroom materials expenses. In terms of textbooks, consider going to all electronic books, which are significantly cheaper.
4. Bricks and Mortar -- give serious consideration as to whether to expand your physical plant. In the event of high inflation, will your school be able to bear the increased costs of additional plant, let alone concomitant price increases in utilities, building materials, and such?
5. How We Do School -- is there a way that we can continue to provide high-quality education, yet by means of a different  model, one that allows us to contain and reduce costs? Where will the price-conscientious families go during a period of high inflation, if they're still willing to pay for an independent education? Do we touch the sacred cow of "18 max in a class"?

As a reminder, "inflation" means "an increase in the supply of money." We have inflation already, as evidenced by the M2 Chart below. The gray area shows how much the M2 increased during the 2008-09 recession (via quantitative easing):

What schools should be anticipating next is price appreciation, as a result of inflation. Did you notice that the M2 continues to increase in the "post-recessionary" period in which we find ourselves?

I'm concerned that schools are still dealing with the effects of the Great Recession, but are about to be whalloped by a significant increase in prices across the board. Families that are already price-sensitive may become even more so.

What's a Wired Education Look Like?

The October 2010 issue of Wired contains a thought-provoking article on "Wired University." For the fun of it, but also based on sincerity of convictions, the authors offer what they term "the neoliberal arts." The courses include:

• Statistical Literacy - in which students learn how to parse polls, play the odds, and embrace uncertainty
• Post-State Diplomacy - in which students learn how to practice statecraft without states (they learn how to understand new leaders and constituencies)
• Remix Culture - in which students learn how to analyze and create artworks made out of other artworks
• Writing for New Forms - in which students learn how to adapt their message(s) to multiple formats and audiences: human and machine
• Waste Studies - in which students learn how to become smarter consumers, investors, and conservers
• Domestic Tech - in which students learn how to apply hard science and engineering to everyday life, including making, repairing, and upgrading everyday physical objects

Irrespective of whether you believe these courses to be realistic, they represent the authors' foray into re-evaluating extant curricula and what purposes those curricula fulfill. Technology has finally become the disruptive innovation everyone thought it would be some fifteen years ago; now it has enough strength to force change simply because it exists. Moore's Law is very real!

Is your school re-evaluating its overall curriculum, including proposals for new courses that might make sense for students to have in this day and age? How are you blending the traditional with the modern?

Trends in Productivity

Continental Airlines recently ran a print ad that featured Robert McGarvey, who is a blogger for the airline (yes, such a thing does exist!). McGarvey attended five technology conferences is four cities over the course of a month, and shares his discovery of trends highlighted at these conferences:

• Anywhere, anytime, any device -- a new "connectivity mantra." Wireless carriers, he writes, are scurrying, trying to make this promise a reality, although they're not quite there yet. Soon they will be, though. Question: what does this 'mantra' mean for independent schools, in terms of curriculum design and execution in the classroom?
• Cloud computing. The "shift to the cloud means that the generation-long hegemony of desktop computing has been shattered. [...] A local device pedigree (e.g., operating system) becomes less relevant." Question: what does this development mean for IT departments in our schools?
• Smartphones with EQ. The time is coming when your smartphone may be able to exhibit a degree of emotional intelligence, perhaps detecting that we are angry, and respond by initiating "a calming meditation session." Perhaps far-fetched, but folks are working on it! Question: Were it to become a reality, what might that mean for schools in terms of allowing students to keep their phones "on" during the day?
• Mobile workforce. "By 2012, 1 billion of us will work somewhere other than a traditional office." Society is becoming progressively more mobile; it will continue to increase exponentially. Question(s): should schools assume that education is immune to this trend? How might we capitalize on it? What does that mean for bricks-and-mortar mindsets?
• Travel trends. "Travel is getting more personalized [via devices and new platforms], better suited to your needs." The reasoning behind the belief in 'disruptive travel trends' is the population growth in India and China, and the approaches to travel that such population growth (and entry in the workforce) means. Question: how might schools approach the issue of travel abroad for their students and faculty?

Overarching question: what do these trends mean for productivity in the independent school workforce?

Moore's Law - Now It's Getting Serious!

Gordon E. Moore, the founder of Intel, highlighted a long-term trend in his 1965 article, "Cramming More Components Onto Integrated Circuits" (Electronics Magazine, April 19, 1965). He noted that the number of components in integrated circuits had doubled every year from 1958 to 1965, and he predicted that this very trend would continue. This notation and prediction was called "Moore's Law" by Caltech professor Carver Mead, several years after the publication of the now-famous article.

Moore thought his prediction would be good for another ten years or so. In reality, his prediction turned into a tool that the industry used to forecast increases in processing power.

In 2001, the computer industry predicted that Moore's Law will continue--believe it not--for several more chip generations, probably until around 2030, at least. In 2005, Moore himself added that exponential growth cannot continue indefinitely, although some futurists believe that it could apply for the next 600 years or so.

So, it's a question of exponential growth for the foreseeable future.

Independent schools are now seeing exponential growth in the use of technologies that we did not anticipate when we began using the internet regularly in the mid- to late-1990s. Talk about exponential growth! If we take what computer engineers are telling us--namely, that chips will grow in power exponentially for at least the next twenty years or so, we can understand that the changes we've seen recently in our schools (and in our students) will continue to grow exponentially as well. Can we truly fathom the investment in technology that we need to make as schools: advanced hardware (how about that computer replenishment policy?), wireless network updates, professional development funds to teach teachers how to integrate the exponentially-increasing technologies, and so forth?

It's an exciting time to be in schools.

However, school folks tend to be poor at reasoning about exponential growth. Consequences, anyone?

When it comes to the decisions that we'll need to make about technology, what will be our "time to decision" when it comes down to brass tacks? In a world with discontinuous, exponential change, our tried-and-true linear approach to decision-making will no longer work. In other words, we will have to realize that we can't plan for an exact process to handle exponential growth; we can only plan for a system that allows adaptation to occur.

Au revoir, linearity, at least for now...now that exponential growth is getting serious!

Best Practices or Leading Practices?

Think of how often we hear the term "best practices" within school communities, be they independent, religious, or public. Boards want heads of school who can identify and implement best practices in their schools. Principals want faculty members to implement best practices in the curriculum; parents want to see the same.

But what are best practices? They're what everyone else is striving to do, aren't they? To be sure, they are functional, and they produce results. However, given their ubiquity within schools and systems, aren't they merely guaranteeing that schools--regardless of the type of school--will produce homogeneous results? To beg the question: how, then, do we differentiate ourselves?

What we should be striving to implement in schools are leading practices. We don't want to be merely "good," we want our schools to lead the way in instructional and educational excellence, don't we?

Best practices are easy to find; leading practices, however, are more elusive. Some schools that have leading practices aren't willing to share them, for example. What is more, the wish to employ leading practices calls for innovation as a cultural trait; some schools (perhaps many?) don't have such a trait. The term "innovation" creates fear and anxiety rather than optimism and openness of mind.

Does your school employ best practices or leading practices?

If you would like to pursue leading practices, where would you start? Would the normal path of seeking support for such a notion be the appropriate starting point, or does that path need to be reconsidered?

The Complexity Gap

The "complexity gap", according to the IBM CEO study I highlighted in yesterday's post, represents the differential between how much complexity leaders are expecting to see over the next five years and how prepared they feel to handle that level of complexity.

79% of leaders expect high or very high levels of complexity over the next five years, while 49% say they feel prepared for this expected complexity.

The complexity gap, therefore, stands at 30%. That's not an insignificant percentage.

If this year's NAIS Annual Conference was a solid indicator, independent school leaders are experiencing this same phenomenon. However, if schools are not embodying creative leadership, busily reinventing customer relationships, and/or building operational dexterity to take advantage of the marketplace, what are they doing to address the complexity gap?

Following is a list of "food for thought". Some ideas are mine; some are drawn from the IBM study, but are just as relevant for our schools.

• Remaining insular is a short-term option, which may or may not lead to success
• Experimentation is now called for -- and not over five to ten years, but rather one to two years
• Ambiguity is here to stay, perhaps long-term
• Approaches to problems need to be original rather than traditional
• Strategy may need to be continuously re-conceived
• Disrupting the status quo will be necessary, in many cases
• Schools can't afford to become bogged down in uncertainty; execution of new/updated programs and projects will become the expected standard
• Culture change in schools, which has always been a challenge, simply has to occur
• Our business model is not absolute; it must adapt to the change that surrounds us

How will your school craft and recast itself as a creative organization, and how will you balance that need with school tradition and culture?

Leadership in a Complex World

IBM just released a piece of research from late 2009 and early 2010, Capitalizing on Complexity: Insights from the Global Chief Executive Officer Study. The study dovetails nicely with what we've been hearing and/or experiencing in independent schools during the same time frame. Leadership is the key, going forward; not the leadership to which we've been accustomed, but leadership that is creative. Permit me to provide some highlights from the executive summary (the entire document is worth the read, I assure you, as there are many parallels with school leadership).

As a preamble, the document states, "In our past three global CEO studies, CEOs consistently said that coping with change was their most pressing challenge. In 2010, our conversations identified a new primary challenge: complexity. CEOs told us they operate in a world that is substantially more volatile, uncertain and complex. Many shared the view that incremental changes are no longer sufficient in a world that is operating in fundamentally different ways."

• Today's complexity is only expected to rise, and more than half of CEOs doubt their ability to manage it.
• Creativity is the most important leadership quality.
• The most successful organizations co-create products and services with customers, and integrate customers into core processes.
• Better performers manage complexity on behalf of their organizations, customers and partners.

The point of the IBM study is to suggest how leaders can capitalize on complexity. It identifies successful companies/leaders as Standouts. These Standouts:

• Embody creative leadership. "Creative leaders invite disruptive innovation, encourage others to drop outdated approaches and take balanced risks."
• Reinvent customer relationships. "In a massively interconnected world, CEOs prioritize customer intimacy as never before [...]. CEOs said that ongoing engagement and co-creation with customers produce differentiation."
• Build operating dexterity. "CEOs are revamping their operations to stay ready to act when opportunities or challenges arise [...]. Flexible cost structures and partnering capabilities allow them to rapidly scale up or down."

The danger, as one might expect, is a mindset that cannot handle such complexity or change. As the CEO of one energy utility put it, "Most people are looking backward, wishing it was still like it always was."

It isn't.

Can we draw a lesson from the IBM study? Are our schools committed to upsetting the status quo, inviting disruptive innovations into our classrooms and board rooms, all in an effort to make our relationships with families more intimate, thereby helping us to maintain (or even grow) market share? Or, are we looking backward, wishing it was still like it always was?

Curriculum Overhaul: I Double-Dare You

The Financial Times ran an article on Monday that is germane to the conversations we're having in independent schools right now. As author Linda Anderson writes of Richard Lyons, Dean of the Haas School of Business at UC-Berkeley, he "recently announced an overhaul of its [Berkeley's] core curriculum."

Think about how such an announcement would go over in your school community. It would take a carefully planned approach, not unlike a mixture of strategic planning and development-style campaign feasibility studies.

"Sweeping changes have been announced that emphasize creativity, experimentation and problem-solving as well as experiential learning. Behind this revamp are four defining principles, the bedrock on which the redesigned program stands: question the status quo; confidence without attitude; being students always; and thinking beyond yourself."

Naturally, for independent schools, the question remains: how do we marry our extant curricula with these emphases? After all, we cannot abandon entirely what we have; we need a framework, and most of us will want to remain faithful to the tradition/spirit of the school, while acknowledging the needs of our graduates.

As Lyons says, what is needed is "a person who can think outside, who says there has got to be a better way to do this and I am willing to step outside that boundary."

Our brick walls in independent schools will be the usual suspects:

(1) will we compromise our admission standards in order to attract this sort of student?

(2) how do we grade students in this redesigned system?

(3) will we lose our "perceived ranking" in our community?

(4) will our SAT/ACT scores be affected adversely by this approach?

Success will come from visionary leadership, new mission statements as tools of guidance, and a cultural reshaping of independent schools from the inside-out. It will also come by means of a willingness to confront the aforementioned brick walls (not an exhaustive list, to be sure). This effort will be people- and time-intensive, and it may represent the defining moment of an early 21st century headship.

As Lyons says, "The world feels different from the world of my parents. It seems to me that as I look out into the future, there are [many] unsustainabilities in the system."

Control Culture No Longer Works

Henry Ford was famous for his assembly-line model of automobile production. In short, he was able to keep costs down and enable the average person to buy a Ford because he controled the process by means of simplicity: you can have any color you want, as long as it's black. Standardization was the name of the game. Control the process of production and keep it simple. One model, standardized parts (i.e. they did not have to be custom-fitted, as had been the case previously), a predictable manufacturing process, etc.

The control culture that Ford epitomized is similar to the culture in a number of independent schools: our product is X, this is how we provide it, you can have anything you want here so long as it's what we provide.

The problem, however, is that the control culture no longer works for our schools. As technology has progressed--and has become more disruptive, independent school families have become accustomed to greater choice and greater flexibility, to the point where they're looking for those characteristics in our schools.

Families are working on a "collaborative culture" model (they want input, in some way), and a "control culture" model no longer serves their wants/needs. If your school operates in the control culture model, can you see how you might be seeing a drop in enrollment, perhaps exacerbated by the current economic climate?

Control culture schools need to move toward becoming collaborative culture schools, although the trick will be for each school to determine just how collaborative it wants to be. Some will be more, some will be less. Schools will continue to remain diverse, just as before, but they will be diverse in different ways.