Sixty years since its birth, the spectacular growth of the admissions exam mirrors the rise in popularity of the MBA degree, arguably the most successful educational product of the post-war period.
By John A. Byrne
(Poets&Quants) -- Sixty years ago on Feb. 6, 1954, slightly more than 1,000 people sat down in 100 different places around the world to take a test for the very first time. It was the precursor to the Graduate Management Admission Test (GMAT), the de facto entry exam to the best business schools in the world.
Back then, the 1,291 prospective students paid just $10 each to take the paper-and-pencil exam. It was offered only three times a year in five countries, and candidates had to wait three to four weeks to get their results. Only 54 business schools accepted GMAT scores at the time.
Today, the computer-adaptive GMAT costs $250 a pop and if a test taker wants the results sent to more than five schools, there's an additional $28 charge for each score report. The test is offered year round at more than 600 sites in 113 countries. Anxiety-ridden test takers receive their scores within five to seven days, and more than 2,100 schools all over the globe now require the GMAT for admission.
The growth of the test itself mirrors the spectacular rise in popularity of the MBA degree, arguably the most successful educational product of the post-war period. The credential's prosperity has made the GMAT a hot "product."
For the organization that oversees the test, the Graduate Management Admission Council, profit margins on the exam are even better than the margins Apple (AAPL) makes on the iPad and the iPhone. GMAC says it collected $87.7 million in fees in 2012, yet it cost the organization only $45.7 million to administer the test, according to documents filed with the Internal Revenue Service. The effective gross profit on the actual exam is roughly 47.9%, nearly 11 points higher than Apple's current gross profit margins.
All told, GMAC reported that its "program service revenue" came to $92.7 million in 2012, up from $88.5 million a year earlier. The organization's "investment income" alone amounted to another $30.7 million. When you kick in other revenue, GMAC recorded total revenue in 2012 of $125.1 million, up from $92.7 million a year earlier. Though it is a non-profit and does not have to pay taxes, the organization reported a tidy $22.4 million in cash after paying all its expenses for the year.
GMAC says the expenses to administer its test do not include such things as test design, score reporting, test taker accommodations, and the cost of running its website, where test takers register for the exam. "These are all activities that are intrinsic to the delivery of the test and are not covered in those operating expenses," says Rich D'Amato, vice president of corporate communications at GMAC. "In addition, there's [a] smaller expense group around fulfilling our responsibility -- part of our being a nonprofit -- to invest in [the] promotion of graduate management education as a field of study."
The reported expenses on the test do not include another very big line item in the organization's budget: its salaries and benefits to GMAC staffers. In 2012, GMAC's total compensation amounted to $25.9 million for a staff that numbered only 141 people.
At the very top of the non-profit are some very generously paid people. David Wilson, who until Dec. 31 of last year was president of the GMAC, was paid $1,914,845 in salary, benefits, and deferred compensation in 2012, more than three times the $662,000 that Harvard Business School Dean Nitin Nohria made in 2011. Indeed, Wilson made substantially more than Educational Testing Service President Kurt Landgraf, who was paid $1.3 million in the same year for leading an organization with total revenues that are eight times greater.
What's more, at least 15 other officials at GMAC make at least a quarter of a million dollars a year in pay. Margaret Jobst, an executive vice president, made $539,058, according to GMAC's government filing. Julia Tyler, an executive vice president for global market development, pulled down $562,378. Robert Rosecrans, chief information officer, made $465,327. In all, six-figure bonuses were paid to nine GMAC officers, including a $448,000 bonus for Wilson, whose 2012 annual compensation was especially inflated due to $745,485 in deferred pay.
GMAC defends those salaries, saying that they are not out of line with what peer organizations pay their top leaders. "We are a global revenue generating enterprise with a not-for-profit mission," says D'Amato. "We were recruiting to 'build' a company, not just staff an existing organization in a very competitive recruitment market."
The majority of GMAC's staff, including its most senior officers, work on two quiet floors of a modern office park in Reston Town Center, Va., where Google (GOOG), Rolls-Royce, and the College Board also lease space. The brightly lit facility features what its architects call a "monumental" open staircase with a two-story waterfall structure, a cafe, and a testing center.
Such generous compensation and treatment at a non-profit comes largely because of GMAC's near-monopoly on the entrance test for graduate business programs. "It has been a very healthy business because of the growth in the underlying industry," explains Paul Danos, dean of Dartmouth College's Tuck School of Business. "People have to take the test to apply to the best business schools. But several thousand schools don't require the test. The question is: Do schools see a value in it, especially schools that will grow in India, China and Latin America?"
In fact, many of the newer business schools in developing economies do not require the GMAT, in part because of the test's cost. Devanath Tirupati, dean of the Indian Institute of Management in Bangalore, estimates that as much as two-thirds of the global market for business programs doesn't require the exam. "The GMAT is too expensive and not accessible," says Tirupati, who notes that the cost of the more widely popular Common Admission Test (CAT) in India is about 1,500 rupees, or less than $25, compared to about 15,000 rupees for the GMAT. Nearly 175,000 students took the CAT last year in India. And 195,000 people took the CAT exam in 2012, while only 22,803 Indian residents took the GMAT that year.
Some business deans also express concern that the GMAT fails to measure attributes of candidates that are as important as the quant and verbal skills the test assesses. "I think we need different instruments to identify different skills today," says Santiago Iniguez de Onzono, dean of IE Business School in Spain. "If we want to attract entrepreneurs, then the GMAT is useless. It mostly measures analytical skills, but if you think about the importance of leadership, innovation, creativity, and entrepreneurship, the GMAT doesn't measure that."
Much of the success of the organization behind the test can be attributed to David Wilson, a tall, lean Canadian accountant who was recruited to become president and CEO of GMAC in 1995. Wilson, who in his early career had been a B-school professor at the University of Texas and Harvard Business School, had just taken an early retirement from Ernst & Young. He had left his job as national director of professional development and was thinking of returning to teaching when he got a call from a Korn/Ferry headhunter during the Thanksgiving Day holiday in 1995.
Though GMAC was little known outside the business school world, its early roots could be traced to a meeting between nine business school deans and the Educational Testing Service in 1953. The pow-wow was arranged to discuss the possibility of an exam that would assess applicants on their potential for success in business and management courses. But it wasn't until 1970 that the deans of 30 graduate business schools launched the organization as independent from ETS. GMAC, however, didn't even have an office until 1982, when the council hired its first president, Bill Broesamle, then an associate dean at UCLA's business school. He worked out of a small office in Santa Monica, Calif. with five employees who largely oversaw one very large external contractor, the Educational Testing Service. "Many people didn't know what GMAC was," says Broesamle.
Wilson, who has an MBA from UC-Berkeley's Haas School, saw the promise of the opportunity, interviewed with board members in Los Angeles, New York, and Cleveland, and was eventually offered the job to become the second president and CEO of the organization. Now 72 years old, Wilson, recalls that the organization's total revenues in 1995 were about $14 million, of which $12.3 million went to ETS. "Even the guidebooks and budget was prepared by ETS and they managed our money, too," he says. "We would ask for a couple of hundred thousand every month to pay for payroll and our lease."
Wilson moved the organization to an office park in the Washington, D.C. suburbs of Virginia and set out a three-pillar strategy for growth: 1) To go global, 2) To embrace technology in all aspects of the business, and 3) To put GMAC on a solid financial footing. Back then, the organization had little more than 45 days of cash to run its business.
One powerful trend that Wilson had in his favor was the meteoric growth of the MBA degree. Some four decades ago, U.S. colleges graduated near equal numbers of lawyers and MBAs. Today, MBA grads outnumber J.D. grads by nearly four to one. And with many law schools struggling to fill classes, that ratio is likely to tip further in favor of the MBA. Outside the U.S., the growth in both business schools and the degree has exploded.
For the past 18 years, until Dec. 31, when Wilson retired as GMAC's top official, he had been the most visible cheerleader for the MBA degree. As he puts it, "What the MBA allows people to do is to build a foundation. You can use the degree to change your career or to accelerate your career."
Once in charge of GMAC, Wilson immediately applied his accounting skills to his biggest cost center, ETS. Among other things, he noticed that ETS was selling 140,000 copies of three guidebooks with the GMAC imprimatur. "I couldn't understand how you could sell that many copies each year and lose money," says Wilson. It was largely because two of the guidebooks -- on schools and financial aid -- were money losers, and in this pre-Amazon era, ETS was responding to fax requests to ship copies of the books. Wilson also put the organization's money management to bid and moved that task away from the testing contractor.
Despite the group's limited resources at the time, he also pushed forward to eliminate the rather limiting paper-and-pencil test and move to a computer exam that would adapt to each test taker's answers. The effort cost GMAC between $10 million and $12 million, but once GMAC was able to launch its new test in 1997, the organization could deliver the same exam everywhere, every day.
The single biggest contributor to the growth of the organization took place in 2003, when GMAC broke with ETS. Some 12 years later, Wilson vividly recalls the details of the rupture. On Nov. 11, 2001, he received a phone call from the CEO of the testing service. "He said they were closing six test sites in Europe and it wouldn't affect me," says Wilson. "On Dec. 7, the head of the program and the CFO would come and talk to me about it. When they came down, they said they were closing 116 sites. They weren't there to seek our input. They were there to advise us."
ETS' decision undermined Wilson's global ambitions. But his contract with the firm required him to give ETS two years notice if he wanted to fire them. The existing contract would end in just three weeks. So he went to ETS' Princeton, N.J., headquarters to negotiate a two-year extension so GMAC could, in his words, "learn a whole lot more."
Wilson put together a task force, hired Booz Allen to oversee the study project, and brought aboard 11 MBA interns to take apart every facet of what ETS actually did to administer the test and deliver the scores. Half way through the study, at the end of 2002, he created four study groups to examine together with ETS such issues as next-generation technology for the exam, global reach, test security, and customer service. "But the next generation group kicked it down the road like a tin can. They didn't want to change, and we had real issues."
What troubled Wilson more than any other issue was the security of the test. "Without a doubt, one of the most important things we do is provide schools with the assurance that the candidate who shows up on campus is the same candidate who took the test," says Wilson. In 2003, as GMAC's study of ETS and its procedures continued, the biggest scandal in the history of the GMAT erupted. A New York-based ring of five men and one woman were arrested for taking the test hundreds of times on behalf of other test takers in exchange for money. Federal and state investigators found that between January 2001 and July 2003, they sat for a total of 590 exams administered by ETS. A tip led investigators to the ringleader, Chinese-born Lu Xu, who was filmed on camera at a test center in Columbia, Md., not far from GMAC's headquarters in Tysons Corner, Va.
"He was testing as himself in this case, and he was trying to capture questions with a camera velcroed underneath the desk," recalls Wilson. "We got his hard drive and discovered that he and a cadre of proxy test takers would take the exam up and down the northeast," recalls Wilson. "He [Xu] took it 160-odd times, sometimes for a lady, when he wore a bad wig, and sometimes for a man. He took the test with a forged driver's license or a passport."
Quickly, however, a conflict arose between Wilson and ETS officials over how to handle the problem. "ETS wanted to send a standard neutral test cancellation score letter to the schools," says Wilson. "Scores get cancelled for all kinds of reasons. You could have a brown out. You could have a tech failure. You could have somebody spill Pepsi on a keyboard, or you could have a candidate get sick partway through the test. But they would not change the letter for us to explain why these candidates had their scores cancelled."
Furious, Wilson says he personally called the deans of every business school to which the scores were sent and told them the truth. He explained how Xu and his friends were caught and how the scores for the 160 applicants -- retrieved from Xu's computer hard drive -- were bogus. "One dean said, 'That is fascinating," says Wilson. "'We are just now in our boot camp and we can't figure why this one guy who scored well on the test is struggling so much on the easy stuff.' Another guy was doing a summer internship for the dean on ethics." The suspected cheaters weren't corralled, however, because of a lack of evidence.
GMAC put the business up for grabs. ETS fought it out with three other rivals and lost its contract. The emerging winner was Pearson VUE, a part of Pearson Plc, the largest commercial testing company and education publisher in the world. Wilson contracted with ACT (American College Testing) based in Iowa for the development of the test, while Pearson took over the administration and distribution of the exam.
The break with ETS led to a substantial increase in staff for GMAC. Today, the organization has in-house capability to do test design, research, marketing, and technology support. "We had to start managing our own research to build our own test questions so we added a psychometric group," explains Wilson. "We built a more efficient algorithm for choosing the questions."
Wilson successfully fended off an aggressive effort by ETS to grab market share away when it began in 2011 to promote the Graduate Record Examination (GRE) as an alternative to the GMAT. ETS conceded recently that only 2% of surveyed respondents sat for its exam with the objective of applying to an MBA program. Wilson plowed ahead, launching in 2012 a next-generation GMAT exam with a new section called Integrated Reasoning, which measures a candidate's ability to evaluate information. In an R&D effort lasting more than three years and involving dozens of business school deans, admissions officials, faculty, and corporate recruiters, GMAC spent $11 million to get the section into the test.
All these changes occurred while GMAC became far more candid than ETS ever was about a test taker's ability to improve their performance on the test. Reminded that ETS used to tell prospective students that they couldn't really study for the exam, Wilson lets out a laugh. "There's no question that you can do better on the test if you study for it. That's a good thing. It's like any sport or any skill." GMAC's own research shows that 60 to 100 hours of study can improve a person's score by an average of 30 points. "There are some who jump by 100 points because they hadn't prepped at all," adds Wilson, who was succeeded as CEO on Jan. 1 by Sangeet Chowfla, a former executive at HP (HPQ).
By all accounts, Wilson has done a spectacular job in making GMAC a highly professional organization with a secure financial footing. "I would give him the highest grade you could imagine," says Bill Broesamle, Wilson's predecessor at GMAC. "We had little staff, no infrastructure, and no reach beyond ETS. I think it had run its course. Dave was right to go in a much different direction."
For his successor, there is much uncertainty at GMAC. Can the organization find a way to test for innovation and creativity in prospective students? Will the exam survive competition from less expensive alternatives in emerging economies? Will the inevitable unbundling of education through free MOOC courses and online programs lessen the need for an entry exam altogether? If anything, thanks to Wilson, Chowfla has inherited a stable and strong organization with the financial clout to weather a storm.
Ask Wilson what his proudest accomplishment is over the 18 years he served as president and CEO and he will immediately give credit to the team he put together. "I managed to find 150 of the best people in the world," he says, "and they have pretty much carried me over the years."
But he has also managed to create a significantly larger non-profit, with 30 times the number of employees he inherited, along with some very generously compensated employees. When a prominent business school dean was recently asked to guess what Wilson made in a year, he said about $400,000, which is not much more than one fifth of the reported compensation for GMAC's president and CEO in 2012.