Wisconsin Public Television University Place Entrepreneurialism In Society  Mike Knetter: "Entrepreneurial Thinking in Financing Public Universities"  October 6, 2010 UP 495    cc >> I'm Jeanan Yasiri. As we begin today I'd like to extend thanks to our partners in supporting this course: The UW Office of Corporate Relations, the UW College of Engineering for their technical support, and financial support from the Ewing Marion Kauffman Foundation which is committed to advancing academic education in entrepreneurship. Additionally, we'd like to thank our media partners, Wisconsin Public Television and their University Place crew for taping today's lecture. Today I'm very pleased to introduce our special guest Mike Knetter. Mike is the Albert O. Nicholas Dean of the Wisconsin School of Business. And on October 16, Mike will take on the new role of president and CEO of UW Foundation. As dean of the Wisconsin School of Business, Mike Knetter orchestrated the novel $90 million Wisconsin naming gift, the expansion of Grainger Hall, and the restructuring and improved national standing of the full-time MBA. He has published widely on international and macro economics, he's served as senior staff economist for the President's Council of Economic Advisors under both George H.W. Bush as well as Bill Clinton, and he serves as a director with American Family Insurance, Wausau Paper and Northwestern Mutual. He is a graduate of Rhinelander High School here in Wisconsin, completed his undergraduate in math and econ at UW Eau Claire and he earned his PhD in economics at Stanford. His academic career began at Dartmouth College when he became a full professor, department chair in finance and economics and eventually associate dean at the Tuck School of Business. 

As I mentioned a moment ago, on October 16, Mike will take the helm as president and CEO of the University of Wisconsin Foundation, a nonprofit organization that serves as the official fundraising organization for our great University of Wisconsin. I asked Mike to speak to us about the circumstance that is facing public universities today and the need for entrepreneurial thinking in financing higher education. Please join me in welcoming Mike Knetter. [APPLAUSE] >> Mike Knetter: Thank you very much, Jeanan. It's a pleasure to be here in your class today and a pleasure to be with all of you. I prepared a bunch of PowerPoint slides because that's what we're used to doing at the business school but I thought maybe we could start out today with me asking you a few questions about what brought you to Madison, maybe what public university actually means to you, and what it means to you to be entrepreneurial. So I guess first I'd like you to think about maybe what factors made you choose to come to this university. Because obviously you had a choice. Elliott Karp, I see your name tag, so what made you choose to come to the University of Wisconsin-Madison? >> It's a great school, a great education. >> It's a great education. 

So the quality of education is part of it? >> Definitely. >> Okay. Anything else? Victoria? >> It was far enough away, but close enough to home. I'm from Green Bay. >> Okay, location was appealing to you. Good. Other factors in the back? >> A good social culture. >> A good social culture. Carefully worded. Carefully worded. 

[LAUGHTER] A good social culture. Education is a great investment. It does have its consumption value. That's how economists would say that. There's good consumption value here at UW, I can tell. You guys seem happy. So high quality education, location, extracurricular activities. Other things? >> Can I answer? >> Sure you can answer. >> It was cheap. >> It was cheap. 

>> For in-state tuition. >> For in-state tuition. >> Relatively cheap for the quality of education. >> When you say relatively cheap, relative to what? A car? Other educational alternatives? >> Other education. >> There are cheaper in-state universities. >> Not as good as this one. >> Not as good as this one. So it's high quality, but good value. Maybe. Okay. 

Thank you. I think that's a good set of factors. I want you to think for a second, suppose you didn't get into UW Madison and suppose you didn't get into the University of Minnesota, if that preposterous thought ever occurred to you. So let's take those two off the table. Think about what would have been the most likely place you would have attended. I'll give you 10 seconds. Think about where you imagine you would have gone if you didn't go to the University of Wisconsin-Madison, or the University of Minnesota in the Twin Cities. Okay. Does everybody have something in their head? Okay. How many of you would have decided I'm not going to college at all then? Nobody. 

How many would have decided, I will go to a different campus in the UW system? Get your hands up kind of high. I'm going to say that looks like maybe a quarter of you. Jeanan? Okay. How many of you would have likely gone to a private university? Get your hands up a little higher. Okay. And how many would have likely gone to a public university outside of Wisconsin or Minnesota? I would say it was about a quarter for the first one, and I guess about 3/8 each for the other two, private and non-state public flagship. So a quarter would have gone in the UW system and then maybe 3/8 each to the other two options. That's interesting to me, because you said good value. And when you start talking private schools or non-state publics, taking Minnesota off the table, those are much more expensive propositions than UW-Madison. So I think the word "public" appears in this thing twice and then entrepreneurial and innovation appear in that title twice. 

I must have gave Jeanan that title. I didn't really know what I was going to talk about when I gave her that title. You know how that is. You agree to speak and you say let's say it's going to be this. But what does it mean for a university to be a public university to you? What does it mean to be public? In what sense is this public? It's not like a public beach exactly. I don't think anybody can just show up here. What does it mean that we're public? >> State funded. >> State funded. >> Commitment to the community. >> I've already heard that I don't have to repeat it, do I, because I'm doing this with the microphone. 

>> Open to more people. >> Open to more people. So, something about who pays for it, there's some tax money involved, that's part of the publicness. Maybe open to more people. So we have maybe a slightly different mission than a private school would have. We have some orientation of our mission that is to do things for the community and to give more people an opportunity. And I think that's really important, that mission aspect of being public, to me. One of the things that I was reminded of when I moved back here from Dartmouth is that public universities take on all the really risky human capital projects, like I was. They weren't predicting great things for me when I left Rhinelander High School, I can assure you of that. So I was kind of high risk, I had some potential, there was going to be a lot of variance around the outcome though. 

Because a lot of things could have gone off the rails just given life as it was in 1978 in Rhinelander and my family circumstances and everything else. I got pretty lucky as to how things turned out. So they take on riskier human capital projects and a lot more of them. We graduate as many people in a year as Harvard, Princeton, Stanford and Yale combined at the undergraduate level. That's a big difference. Public universities, especially like the Big Ten group of schools, they have provided a huge amount of the human capital in the labor force of this country. We're a high volume, lower touch operation. There are other dimensions besides the financing and mission sometimes that we might think of about publicness. One would be, is it a publicly operated institution? You could have a public purpose mission but not be operated by the state. We could pursue that mission, that could be our strategy. 

We're going to be kind of an outward facing university, we're going to take a lot of students, give a lot of people opportunities, might even get some state funding, but maybe we don't need to be fully regulated by the state. Could be, doesn't have to be. Or you could be entirely run like a state agency. And say we don't actually even want any private money because that would contaminate the publicness of what we are. So there's that aspect of publicness as it's kind of who makes all the operating decisions and who makes the strategic decisions. What role does the state really play in this? So it's important to think about all those aspects of what it might mean to be a public university. Because each one of them is kind of a choice about how much of that you do or don't do. And you ought to think about is it really important to you that the university uses state procurement rules whenever it buys something? Maybe it is, maybe it isn't. Is it really important that we're part of the state personnel system for purposes of paying someone or deciding what they're worth? And when you're in the state personnel system, I'll just tell you, one of the consequences is it's very hard to change someone's pay. You have to go through very cumbersome processes and get a million people to sign off on changes in duties. 

I'll never forget when I moved here from Dartmouth to be dean, the first year I was in my job there was no pay plan. Meaning the state didn't have enough money to fund raises for the normal merit process. So there wasn't like a pool of money where on average everyone in Grainger Hall could get a 2% raise and I would, with the faculty, kind of decide who got what. It was 0%. Or maybe it was 1% that year but they said you had to do it across the board for everyone. Well we had other private money and I had an associate dean who had done an extraordinary job that year, and she did it without, she refused to take any temporary adjustment in pay, which I could have gotten for her the year that she was undertaking those duties. And she did such a good job I said I can't not reward this. So I wrote an explanation of why I wanted to give her a $5,000 raise, and we had private money to pay for it. And I got an email back from the personnel system that said by statute we cannot reward merit in this budget cycle. What? Seriously. 

You cannot reward someone for doing a good job by statute because by statute they gave the 1% raise and you weren't allowed to differentiate among people and so didn't matter if you had the money, you couldn't pay it to someone. I could have manufactured a different reason. I could have done a whole different set of paperwork and made the case that she was inequitably paid relative to her peers and that it was some kind of discrimination that I was now reversing. But you get the point. At Dartmouth the dean would think about what's this person worth, did they do a good job, should I reward them? They'd think about it for five minutes and they'd do it. At Wisconsin, it went on for months and I eventually I just kind of gave up. That's what it means to be state operated some days. So you might want to think about that. What does it mean to be entrepreneurial? That's a word that gets thrown around a lot today. I guess in this class in particular. 

So what does it mean to be entrepreneurial? Mikaela, you've got the name plaque up. Entrepreneurial, when I say that word, what comes to mind. >> Taking risks or like innovative new ideas. >> Taking risks, pursuing innovative new ideas. I don't want to punish the people with just name tags up. Delta Olympics, spring 2009 t-shirt. >> Like creating a new idea or a better idea. >> So you've got an idea. Is it just the idea that makes something entrepreneurial? Nicholas? >> No, I think it's the hard work that you put behind something, putting your best effort forward and taking failure when it comes. >> Okay. 

So it's the hard work you put into it. Sometimes you fail. To me, it's sort of taking an idea and harnessing the full value that idea has for people. And that could be through a nonprofit organization, a political campaign or a business. But you've got an idea of how to solve somebody's problem, maybe, better than anyone else has been able to solve it and make their life better. And usually for the idea to actually have an impact, you're going to have to build some kind of organization to deliver the power of that idea to people in a way that can change their lives. So when you think of organizations, whether they're businesses or just any organization, if I said give me an example of an entrepreneurial organization, what pops into your head? Amanda? >> TOMS Shoes. >> TOMS Shoes. >> I'm wearing them. >> You're wearing them? Okay. 

I don't know anything about TOMS Shoes, but I'm willing to believe if you're wearing them at some point someone was entrepreneurial. They discovered a way to add value that met some need that you had. Anything else come into anyone's mind? Entrepreneurial organization, example? Monique? [INAUDIBLE] >> I'm sorry? >> Habitat for Humanity. >> Habitat for Humanity is an entrepreneurial organization, exactly. So they see a need out in society and they're able to mobilize resources and organizational infrastructure to get some things done that have a lot of value to people. Very entrepreneurial. Matthew? >> Just some of the smaller businesses that students created around campus. >> Okay. What's your favorite one? Not the one with alcohol. Don't say that. 

>> Even like the crepe lady on University. >> Crepe lady on University. [LAUGHTER] StubHub. Is that something? Okay. Well, okay. I was guessing someone would say like Google, for example. I guess they're not entrepreneurial anymore, they're old. But, to me, entrepreneurial is really when you're able to come up with an idea that solves an important problem that people care about and then mobilize the resources and the organizational power to deliver value to that population. Okay? I guess that, to me, is what it means to be entrepreneurial. What does it take to do that? It takes a lot of commitment. 

Sometimes it takes incentives, really, for people to do those things. With Habitat for Humanity I think a lot of the incentives are you feel like you're doing something that is inherently worthwhile, often for a population of people who would have difficulty achieving that dream for themselves. So you'll often find people there not necessarily working for the financial incentives but for the positive feeling they get from making a difference in those people's lives. If you're doing something else that has, maybe you're serving a population that's fairly well-off, Habitat for Humanity isn't building homes for investment bankers. Now that would be a really tough sell. We're going to do volunteer work and build homes for people with a lot of money. Good luck with that. Those people have a need, they probably want a really nice house, but you're not going to mobilize people around that idea unless you paid them a lot of money. So there are people who build homes for really wealthy people but they get paid well too. So when you're starting to serve populations that aren't maybe particularly needy, usually people need to be compensated for delivering that value, for building that organizational infrastructure. 

And that's what businesses do. That's when you're outside of the nonprofit sector. So what about UW? Is the University of Wisconsin an entrepreneurial organization? Is it a nonprofit? Is it kind of like Habitat for Humanity? Is it more like TOMS Shoes? Is it more like Google? Is it like GM? A big behemoth? What do you think? Is the UW, University of Wisconsin-Madison an entrepreneurial organization? No one has to answer that publicly. [LAUGHTER] I won't. All right, so I wanted you to think a lot about what means to be public and what it means to be entrepreneurial, think about those examples, and then let's think a little bit about the university's case. I've got a few slides here. If you're reading the papers on campus and elsewhere, you probably know that Chancellor Martin is proposing that the university's relationship with the state maybe needs to change a bit. And so my slides are really geared toward making the case for what that change might look like and why it might matter for the state and for students. And I think it's very, it fits very well with the theme of this class, because at the core of it I think we'd like the flexibility to run our operations with more freedom from state regulation. So what I was describing about trying to give someone a $5,000 raise because they did a good job but I couldn't do it, because that year we didn't have a discretionary pay plan, even though I had the money privately raised to do it. 

So getting more flexibility that way. Also, importantly to you, from both a cost and a value or quality standpoint, being able to run the educational side of our, let me just call it a business, because at some level, the University of Wisconsin is a business. It's a public/private partnership, but it is a business-like organization. We would like to be able to run the educational side of our enterprise with the same kind of incentives that operate on the research side of the enterprise. Which is, if we come up with a proposal that someone would like to fund, we can bring that money into the university and spend it to deliver the value that was promised in the grant proposal for the research. Well in education there's something similar. If we've got an educational product to sell, we'd like to be able to manage that business in the way that makes the most sense to us while being accountable to the state for certain targets like, have to have a certain number of Wisconsin kids, you've got to give them a discount off the full sticker price for out-of-state students, but maybe the regents shouldn't have us in the straightjacket of tuition that all the other system campuses are in. So we would like what I would call more strategic autonomy to propose what the tuition prices ought to be and propose what the mix of enrollments ought to be subject to oversight from, whether it's the regents or the governor or whoever, that would be for others to decide. But the way it works now we don't really get to make those decisions. They're typically handed down from the regents and if you look at the history of it, all the campuses get the same percentage increase. 

So that's why when I asked your TA, well, what about going to one of the other system campuses, they're even a little bit cheaper, she doesn't think that they're good value at that price, relative to UW-Madison. What does that mean? This is under-priced education relative to what the alternatives are in the landscape. And so that has consequences. Because I would argue the most important thing we've built here, the thing that's hard to build isn't necessarily affordability, anyone could have a low priced university, the question is can you have high quality? That's something where there's a pitched battle going on and it's very hard to get in the set of elite universities. We're there now but the only way we're going to stay there is if we change the revenue model of the university but still do that in a way hopefully that would preserve the core values that we care about as a public institution. Okay? So the Badger Partnership case to me rests on a few observations. One is that our university today stands as a model for what is one of the best public/private partnerships anywhere on the planet, really. It's one of the top 20 universities in the world. And yes it's a public university but don't kid yourself, it's a public/private partnership and you're a part of it by paying tuition. You're paying a pretty steep user fee these days. 

Still a good deal, but it's a meaningful part of our budget. And we get an enormous amount in gift and grant funds from outside the university. And gifts funds, in particular, from alumni are a big part of our budget and they help build this partnership. I would also argue that another important part of the case is Wisconsin as a state has struggled a bit for the last, I would say 30 years. If you go back to 1980 our state was in a pretty good position, especially if you went back to 1970, because we had a really good manufacturing base, great in agriculture, very low employment historically, not a lot of social problems in the state, and we were well above average income levels, and I'd say really high quality of life. But over the last 30 or 40 years globalization and technology change have really altered the economic landscape in a way that's been, it's made it much more challenging for manufacturers to sustain profit margins in pricing power because of global competition, and that makes it hard to sustain wage growth and earnings growth in a manufacturing enterprise. Now, our state's manufacturers have done way better than most in the country. We still retain a higher percentage of jobs in manufacturing which is a great credit to our manufacturers. But we haven't supplemented that part of our economy with enough jobs that require college degrees, with enough jobs in what we would call the emerging knowledge economy sector. Most of the wealth creation in America over the last 30 years has gone on in that sector. 

Five of the 20 largest market cap companies in America were founded after 1975. You may not think that's a big deal, you'd be lucky to find one company in that set in any other country on the planet. Five of the largest companies in America are that young. Most companies that are that size have been around for 50, or a hundred, or more years. So this has been a very dynamic economy, but a lot of wealth creation in a newly created firms, almost all in the knowledge economy space or they're applying the capabilities of the knowledge economy to change the distribution system and deliver value that way. So companies like a Wal-Mart, or a Home Depot, or Lowes, that have gotten big fast, Target, Kohl's, they're all built on distribution models that make effective use of cutting-edge technology. Wisconsin's kind of lost out in that part of the picture, and I would say, when I say the state needs the university more than ever, it's in the following sense: The state needs this university more than ever because if it's going to find a way into more jobs in the knowledge economy space, it's going to be on the back of the kind of research that goes on here, in large part. And it's going to be with the kind of students that come out of this university. Right now, a lot of those students leave the state when they finish their undergraduate degree, because there aren't enough jobs in this state requiring a college degree. But we're creating the intellectual property and the labor force needed for that to happen, and we probably need to do a few things differently to catalyze more economic activity. 

We've got some going, which I'll talk about in a minute, but we need more. So that, to me, is kind of ironic that when Wisconsin really needs its research university, the state fiscal situation is such that it really can't afford to pay for it anymore. Similarly, just when the value of higher education is greater than it's ever been because of these technology transfer possibilities, universities kind of anchor the knowledge economy in many parts of the country, whether it's Research Triangle Park in the Carolinas, Route 128 in Boston, Silicon Valley, universities are also incredibly valuable today because the wage premium that's earned by a college graduate in today's labor market is about 50 percentage points higher than it was when I graduated. So the returns to education have just exploded. So normally if you're in an industry whose product have become much more valuable in the last 30 or 40 years, the normal situation is you got so much money you don't know what to do with it. That's what would happen if we were in a private sector industry that had this explosion in demand and value. But ironically, we sit here at the University of Wisconsin saying, wow, we're going to have another year of budget cuts. Our revenue streams are in total really impaired which seems odd. We're the 17th best university in the world in terms of total impact, according to some important rankings, at a time when higher ed is at its zenith and we're sitting here saying we're running out of money. How can that be? Well, it we were really an entrepreneurial organization, that probably wouldn't be happening right now. 

That's my answer. And so I think that's another part of our case. So the solution to this, to me, is really we need to think and become more of an entrepreneurial organization, both in how we run our operations and in how we generate resources, in order to maintain the quality that's been built over 160 years. And I would hate to see us squander that. Because that, again, that's the hard part of that equation that we just talked about which makes this a great place to be. High quality and good value. You can be good value at any level of quality. I went to a school that's good value, Eau Claire, but it's not this level of quality. It cannot create the kind of career opportunities for students that we create here. And it takes that level of quality in scale to deliver that kind of experience and opportunity to students. 

And it takes that level of quality in scale to generate over a billion dollars a year in out-of-state funding that comes into this university. Not just from federal grants but philanthropy, out-of-state tuition, other sources of revenue. So in making the case that we should be treated differently, I guess one has to think a little bit about why should we be treated differently than another state agency? Because that's kind of how we're regulated now, like the DNR, Department of Commerce, Corrections, they're all different state agencies and they conform to procurement regulation, capital building projects regulation, human resource regulations, kind of treated the same way. So you have to somehow explain why are we different than another state agency? Well, I would say major research universities, number one, are in a globally competitive market. When we're trying to acquire students, faculty, research grants, you name it, we are competing with other entities around the globe. It's a very crowded and hotly contested marketplace. So that is a little bit different. If we were the Wisconsin Department of Natural Resources I'm not particularly worried the Illinois Department of Natural Resources is putting me out of business. It's not going to happen. I've got my territory. 

Wisconsin Department of Corrections, you got your territory and your mission. And so regulation in those cases is there in part, in part, not just to assure good performance, I don't mind being accountable for performance, but also to make sure we're spending our money on the right things because without competition to discipline behavior, who's to say the DNR isn't going maybe waste some resources and hire extra staff or overpay somebody? So you need cost regulation. If you're in a really competitive market, if the leadership is held accountable for quality, there's no wasting resources that can go on really. Obviously in any organization you can second guess decisions made yesterday about whether those were the right things to spend money on but it's a layer of regulation that I think makes, there's a qualitatively different reason for it in corrections or the DNR than there is in our case because they don't face that market for competition. The other thing that's different is our market for research in educational services, things that we do and sell, we sell research to the federal government to the tune of almost a billion dollars a year. We sell educational services to all of you. Some of you are in-state, some of you are out-of-state. The market we have for those products is almost limitless. It does not end at the border. So we could be a very entrepreneurial organization and capture a lot more value in that space if there was a reason to do so, if there was an incentive. 

And I would say it's important for our stakeholders that we be allowed not just to compete in that global competition but to be successful because that's what makes this place valuable, that's what makes you say this is a different level of quality than UW Eau Claire. We're not interested in being the best university in the state. We're interested in being one of the best universities in the world, and that's ultimately what people are interested in having. That's what makes us unique. So it is important that we go out and compete there. So it's important to me that we're not just a good service delivery of public education. This university is striving to be one of the best in the world. And that doesn't happen easily. The other thing you have to ask is what's special, forget about the state agency thing, there's another dimension to all this talk that's interesting which is why UW Madison? Why not all the system campuses? And I don't pretend to speak for them. I know a lot about Eau Claire, I went there, I'm on the Chancellor's Advisory Board there, I care a lot about its future, it's a different place though. 

And what's different about a research university, I would say our scale, just the sheer size, and our quality create extraordinary opportunities for students and graduates. The market we make in talent when people graduate from this institution is meaningfully different than the market you can make with your graduates from a smaller campus, whether it's Eau Claire or another system campus or even a small private school. It's just different. I had a nephew just finished, he went to a nice private school in the south, it was small, he paid a lot of money and he graduated and it was like he never even talked to an employer. I went to his graduation and it was like he hadn't even thought about it yet. What the heck is going on down here? But they're a small out of the way campus and that's not really what they do. They don't really make the market in opportunities and that's important. So that really is different than the other campuses, the opportunities we create. Another thing that's different is the economic impact we have. There's a lot of economic impact studies done on things like Lambeau Field like how much revenue does the Lambeau Stadium bring into the Green Bay area. 

People do all this hocus-pocus multiplier analysis and say, oh, yeah, it added $4.7 billion to the local economy. Maybe, but that money came from somewhere, right? And if all the people that went to Packer games on Sunday and spent that money were people from Wisconsin, there's no multiplier effect for Wisconsin. Don't kid yourself. They would have spent the money somewhere else. So there really isn't a multiplier for Wisconsin in that case. There might be for Green Bay in Brown County but not for the state. What's different about UW-Madison among the system campuses, we bring in over a billion dollars a year of money from out of state sources. That money gets spent here and that is net new job creation for the state. So if I'm a state resident, I ought to care about that because that's generating a lot of employment, a lot of income, and lot of jobs and a lot of opportunity for us to build our own knowledge economy companies that isn't going to happen at a smaller campus. That's a reason why things are different here. 

So that in-flow creates a lot of jobs and income. It also attracts investment and it helps facilitate company formation, which we'll talk about in a second. So this is a picture of the research activity. Federal and nonfederal sources of funds. Again, total research activity over a billion dollars a year. Federal research projects, actually if we extend it out to the most recent data is well over $600 million a year. And there are other federal programs that we run for students and faculty that take our total federal revenues up over $800 million a year today. That's all out-of-state money. Those taxes have been paid in. If we didn't have a great university here to compete for and win those awards, they'd be going to other states. 

The technology transfer that goes on generates a lot of revenue on the campus. Jeanan used to work for WARF, she could tell you more about it later, but suffice it to say we rank fifth in licensing revenues among all universities. Last year, or in 2008, I'm sorry, we had 272 licenses and options yielding income. So these are inventions that occur in labs that are patented and licensed with the assistance of WARF, and then WARF gets royalty income or license fees for those inventions. And WARF exists, in part, to manage that revenue and disperse it back to the university to fuel further research and education projects. Some of the more tangible things that happen are start-up companies. The research park is home to many of those, certainly not all of them, but there's 126 companies out there today. Most of them, I think about 75%, have a University of Wisconsin connection. 4,000 people working there at very good salaries with still a lot of up-side. That's a very young research park at this point. 

And I think you'll see more and more of that kind of activity going forward as Madison develops. This slide shows you kind of where things have gone in public finances here at the university. 1988-'89 Fiscal Year, 35% of the state's, I'm sorry 35% of the university's total expenditure was traceable to state tax money. Tuition was 13%. Gifts, grants, segregated funds 11%. Federally sponsored programs 27%. And all other 93 million, that includes different auxiliary operations like housing and food service, etc. You can see the big changes in the share of the budget are that the gifts, grants and segregated funds have almost doubled as a share from 11% to 20%, while the state share has fallen from 35% to 19%. Tuition has gone up a little bit as a share. The sticker price of tuition probably feels like it's gone up a lot, but as a share of total activity here on the campus and total revenue it's gone up two percentage points over that period. 

But we've gone from a $750 million operation to almost $2.5 billion operation. So it's a very big enterprise. But you can see the shift in who's paying the tab and what the Badger Partnership that the chancellor is advocating seeks from the state and our stakeholders, really, is greater flexibility to create more efficient and cost-effective operations. That is, while we value our public mission and we appreciate greatly the amount of public financing that's in our budget, that isn't quite what it used to be as a share of this operation and we would prefer to have more flexibility on managing expenditures. So we would prefer not to be in the state personnel system. We'd prefer not to be necessarily in the procurement system if we can buy things more quickly and at lower cost in other ways. We'd prefer to probably run our capital projects than have the state provide an extra layer of regulation and oversight at a pretty hefty fee. So we would like that flexibility. We'd like the state to continue funding certain portions of our operations that they have historically but not necessarily provide new revenues for new initiatives. We're happy to sort of take that on ourselves and do that using tuition and private funding. 

So what we'd like to do is maintain our margin of excellence in research and education, that's that high quality piece, through non-state revenues, efficiency savings, enabling us to create more opportunity for students and increase the level of export of research and education from the state and our contribution to the state economy. And when I say non-state sources of revenue, I mean non-state government sources of revenue. So one source would be, potentially, higher in-state tuition. So why would the state want to go along with something like this? Well, I think preserving quality and scale of this university is essential to preserving the kind of opportunities that we create to people and the value of the exports that we deliver. Okay? To students, I think it really is, tuition flexibility means a higher sticker price, that's obviously bad. All else equal, you would rather pay less for the same quality. Everybody understands that. But make no mistake, with a higher price comes a higher obligation on the university's part to deliver greater value because everybody knows students are value shoppers. With a higher price also as a public university with a public mission comes an obligation for us to develop the financial aid mechanisms to ensure that we can still attract the very best students from this state in particular without regard to need. But when you charge more, it was very interesting to watch the chancellor discuss the Madison initiative with students last year because it was, I guess, like being able to look at the tape from my own experience with differential tuition at the business school which we enacted two years earlier. 

There had never been a time when we had more engagement in communication with our students about what they wanted out of our educational offerings. Because if we're going to charge more, we need to make sure that we're delivering the kind of value that students want. Let me give you a very coarse example of what that means. Back in the 1970s the university actually took more students than we do today. Enrollment was, in total, up closer to 50,000 on this campus. And tuition price was really low. And if you talk to people who went to the university then it was very common that you could not get into the classes or the major that you wanted. It was very common that if you did you might go five years, six years before you're done. And when you're charging $450 tuition a semester, it's pretty easy to say to somebody, hey, you're not really paying much, you don't have any right to complain, go major in something else. And that's really kind of what things were like. 

You don't have much need to be accountable to somebody if they're not paying much for what they're getting. Really changes the dynamic when you increase sticker price a little bit. The other thing, a more entrepreneurial education business, it would make us more innovative and productive in education in the way we are in research. Right now our research enterprise is actually run with the kind of incentives that you might think exist in a business. If I'm a faculty member running a lab and I apply for a grant and I win a million dollar grant, the money comes into my lab, I control the resources, I pay a tax to the university because the university is probably providing space and there are rules around, it's called the overhead on a grant, there are rules around what the university charges because certainly the university is providing the platform from which the faculty member is working. But the rest of that money is under the faculty member's control to carry out the mission of the research product they're delivering. The education side of our business, the analog would be, if I've got successful programs at the business school that are in high demand in the community and we start running part-time degree programs here and there that people value and want to pay for, we should decide what the price is, bid for that business, if we win that business, deliver the service and be paid for it so that you can cover the cost of your operations and grow and thrive and be an entrepreneurial enterprise and chase value creation. Maybe through distance education. In our system there's no natural mechanism to ensure that happens. Tuition revenue is generated and it gets bundled up with the whole pool of system tuition revenue and it doesn't automatically flow back to the place where the value is created. 

Completely different than a research grant. So if you ever thought, gosh it seems like faculty seem more concerned about their research or interested in their research than their teaching, maybe that's one reason why a faculty member might feel that way. Right? Doesn't really matter how many people showed up to hear me today or whether you liked it or not, it's not going to change the resource environment at all. That's probably not healthy. I'd like to see more balance between those two things, personally, I think that would be healthy for our organization. Because it's really valuable to have instruction that delivers great value to people. And if somebody's really good at that, that's a great asset to the university, but it's impossible in our current financial model for that to be really recognized or manifested in the right way. So when you think about whether it would be good for the university to be more entrepreneurial in the educational mission, don't just think about that's kind of like a one time, all right tuition might go up, maybe they'll pay a little bit more attention to us, think about what it does longer term culturally for the organization. When I came here I was struck by the fact that when budgets weren't what we hoped they would be, the natural instinct of leadership was to say, gosh we haven't explained how great the university is well enough to citizens or the governor or the legislature because we need more money. And being from Rhinelander, I get out a little bit in this state, and when I drive around the state I think to myself how the heck did this state build a university this good. 

They put a lot of money into this over the years. Most people in the state aren't going to have a child that goes here, and yet we get a lot of tax money as a base to start from. A lot of the best universities in the world don't get any. So just the way the economy has evolved, I feel like if we think we don't have enough resources to maintain quality, we should be looking around at each other and asking ourselves, alumni, students, administrators, is there something we can do to take greater control over this situation and be more entrepreneurial and earn our way to excellence. So I think it's time to stop looking at other people because unlike Habitat for Humanity, I don't think the rest of the state is looking at UW-Madison, saying boy those are some really needy cases that we need to take care of there. We should really be giving more tax money. Let's face it, people that get into this university or went here over the last 40 years are the lucky people in this society today. Much more so than they were 40 years ago. When I was deciding whether to go to college or not, and that wasn't 40 years ago but it was a while ago, the margin between going to college and not going to college was not nearly as stark as it is today. I thought seriously about not going because I could have secured a job, a union job, at the paper mill in my hometown. 

And that looked pretty attractive. As it turns out, that would have been a huge mistake. I had friends that graduated from high school with me that were academically in my neighborhood. I'll never admit they were as good as I was, no, but the difference between going to college and not going to college turned out to be enormous in a lot of respects. Now, maybe they're just as happy. I'm not judging that, but just the opportunities you get in life from a college education they are totally different. It isn't about explaining to the people of Wisconsin how great the university is. They're probably tired of hearing about that. And they probably think these people are really lucky to go there and we should probably say thank you for what you've put into this, we appreciate if you continue to do that and then we'll decide how good we're going to be from there. So that's, to me, what an entrepreneurial university would be. 

We could still have a public mission, we could be very committed to all those values, we can still have some public financing, we can certainly have public accountability to the stakeholders including the state, but I'd like a little bit more freedom in terms of strategic autonomy and how we manage our operations. So that's my message about public universities and entrepreneurial, and I've talked for a long time. I did ask you a few questions at the beginning, and I've still got eight minutes, I think, where I can take questions from you. I don't know if Jeanan has questions. >> I was going to say the students know to just wave their hand and I'll hand the mic off to folks who do have questions, and we do have just a few minutes for your questions. You know, Mike, as you're talking about it and talking about the Badger Partnership, the need for more flexibility so that we can be more efficient and effective, what will that take? Is it legislative action? Is it is a change in culture of how we do business within this very large institution? Is it all of the above? >> Yeah, it's all of the above. I was reading the book "The Big Short," by Michael Lewis. I don't know if any of you have read books on the recent financial crisis, but if you're going to read one, read Michael Lewis' book. He also wrote "Moneyball," which is the story of how they started using quantitative methods to value baseball players and the Oakland Athletics and Red Sox won the World Series kind of on the cheap by using better analysis. Anyway, we wrote a great book about the financial crisis, and one of the guys that he quotes in the book is kind of the right-hand person of Warren Buffett, the famous investor, Charlie Munger, who is a really sharp guy. 

And Munger says in his book, all my life I've probably thought incentives were more important than anyone that I ever worked with and every day I realized I've underestimated how important they are. And I read that and I thought, God that is so true, because I'm the dean whose background is economics, business school, I think about incentives all the time, and every so often I'll just see something that we do here and I'll think, wow, you could only do this in a place where you just don't have incentives in the right place. And you just can't overestimate, culturally, what it means when most people feel powerless to affect the size of the pie that we earn for our educational mission. It just doesn't matter really what anyone does. It's weird. And I realize you guys probably don't wake up every day thinking about this. You came to the University of Wisconsin, you got classes, you get up and you go. But as someone who is kind of managing what we have and thinking about what would it take for us to do a lot more distance education, you realize you're just pushing this rock up a hill because there's no mechanism for anyone to kind of earn anything and I don't just mean salary but just revenue that would come into their department naturally from adding that value. And it just changes how people think. And I can't say enough about how important that is. 

>> Hi, Mike, my name is Alex. I was just curious, you're starting your new job with the UW Foundation, do you have any specific plans for changes that you might be implementing to try to get the ball rolling on some of this stuff that you say needs to change? >> Well, I'm kind of on my way out in talking about that because, of course, UW Foundation is not the university, it's a supporting organization. If the changes I'm advocating occur it's putting a lot of pressure on me in my new job. So I don't have a conflict of interest here, people. I should be saying, my God the state needs to do more for this place because alumni are doing too much already. That would make my job easy. I'm making my job hard if things change the way I'm proposing, but I believe that that's the right change, I believe that's the way we'll have the best university and ironically I believe that's the way it will be the most affordable for people. Our tuition has been just low enough that we've never thought financial aid was a priority. And our tuition is yet way too high for a lot of people in this state. So we've got to get our mind around that, and I think the chancellor is the one that ultimately is really carrying this message and doing a great job of it and she'll be the one that carries that work on and I'll certainly be her strategic partner in my new role, but I'll probably be a less visible messenger at that point. 

>> Well, I want to take the opportunity to thank Mike so very much for joining us today. He is in a transition between his role as dean of the School of Business and of course his new role as president of the Foundation. And we're also very excited to have you in that role and congratulate you on that. And, of course, you're going to need something for your new office so I'm going to hand that to you. >> Thank you. Well, a Wisconsin mug. You can never have enough of those. This is a different shape and style. I've only got business school logoed stuff, so I appreciate this. It's kind of got no particular allegiance. 

>> We knew you'd need that. Thank you for being with us. >> Thank you, I appreciate it. [APPLAUSE]