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This article by Barbara Fox was prepared for the November 13, 2002 edition of U.S. 1 Newspaper. All rights reserved.

ETS Earns Its MBA from the School of Hard Knocks

Twenty years ago Educational Testing Service employees

were happily ensconced on a bucolic campus with great pay and benefits.

Three years ago they were biting their collective nails, nervous about

job security and predicting gloom and doom. "When I came,"

says CEO Kurt F. Landgraf, "ETS was a part of history, a cost-plus

operation that operated in a secluded marketplace. The College Board,

our largest customer, was about to leave us. We were taking money

from our investment portfolios to survive."

Founded in 1947 as a not-for-profit organization, the world;s largest

private educational measurement institution administers more than

12 million tests annually and has a workforce of 2,100 employees in

Princeton, similar to an entire county government, except that 20

percent of these workers have graduate degrees. But in 1993 the federal

government effectively ended a 35-year contract to handle financial

aid forms, and ETS suffered through its second-ever layoff, 10 percent

of the workforce. Next, converting pencil tests to computers caused

financial havoc and more staff cuts. After years of gloomy rumors,

employee nerves were rubbed raw and morale was "suboptimal,"

says one official, "as measured by their behavior and willingness

to change."

By the time Landgraf arrived in August, 2000, the specter of bankruptcy

loomed. On his second day, in fact, he was forced to arrange a bank

loan to meet payroll. "That’s how I knew what I had stepped into,"

he says in an interview from the 360-acre campus on Rosedale Road.

Even more worrisome was the fear that — despite years of a hand-in-glove

relationship with the College Board — ETS might lose its lucrative

contract for the SAT test, worth more than 40 percent of its revenue.

Fresh from the corporate world, Landgraf made tsunami changes. He

reduced costs by "kicking the anthill," dislodging the employees’

entrenched expectations. Now ETS workers are acquiring the rah-rah

zeal that can result from canny orchestration of perks and take-aways,

carrots and sticks. As he makes ETS look more corporate and takes

it into new markets, Landgraf aggressively positions the company as

a not-for-profit center of educational reform.

Externally Landgraf set out to repair the relationship with the College

Board and launch ETS into such new markets as K-12 testing. Then,

like manna from heaven, the Bush administration’s "No Child Left

Behind Law," making K-12 testing mandatory, helped Landgraf turn

red ink to black. He ticks off the wins:

"What had been a $450 million company will be $1 billion

this fiscal year."

"We have the new SAT contract for 2005 and it is a competitive

contract, using performance milestones."

"We won the K-12 assessment contract for California —

the largest in the world — and also for Georgia and Maryland."

(At the time of the interview the third and fourth grade test contract

for New Jersey had not been awarded. Pointing to Governor McGreevey’s

promise to favor New Jersey companies, Landgraf said he would be "very

disappointed" if ETS does not win that contract. An announcement

is due the week of Monday, November 18.)

"We have gone international with a $70 million contract

in China and offices in Europe and expect to move into India and Panama.

In four to five years, 40 percent of our revenues will be from outside

the U.S."

"We increased the R&D budget from $2.5 million to $40 million."

Even with the less generous budget, ETS researchers were spared the

usual hassles of going after government and foundation grants to support

their research.

"We reinvested over $75 million in infrastructure and research,

hired 675 people, and expect to hire 1,000 people in three years,

mostly in Princeton," he says.

Kurt Landgraf might have some education credentials

on his resume, but this Mr. Fix-it is all business. He has stocked

one wall in his corner office with corporate mementos from previous

jobs: an Inuit sculpture from DuPont Alaska, a Don Quixote figurine

from his staff in Puerto Rico, a football signed by Joe Paterno from

a charity event, and a glass eagle sculpture given when he left DuPont.

His high-powered executive style contrasts with the academic backgrounds

of the four previous presidents: Henry Chauncey from 1947 to 1970,

William Turnbull from 1970 to 1981, and Gregory Anrig from 1981

to 1993. Landgraf’s immediate predecessor, Nancy Cole, is a psychometrician

whose previous jobs had been as a teacher, college administrator,

and executive for a competitive test-making organization.

Landgraf put in 20 years as a pharmaceutical executive, so he had

been earning the big corporate bucks for a long time. At DuPont he

lost a classic corporate horse race to determine the new CEO. Coming

from the new pharmaceutical division, Landgraf was positioned as the

outsider, while Charles "Chad" O. Holliday was the DuPont

insider. When Holliday got the CEO job in 1998, Landgraf became chairman

and CEO of DuPont Pharmaceuticals.

"I grew my division from $50 million to $2 billion, and it sold

for $8 billion to Bristol-Myers Squibb," says Landgraf. "When

I lost the bid for CEO, I didn’t have a party, but it was the best

thing that ever happened to me. I am doing something that is extraordinarily

significant. I love it here."

Landgraf has the zest for accomplishment sometimes seen in those who

did not have privileged childhoods. He lived in an orphanage in Newark

until he was adopted by a blue-collar family. He graduated from Rahway

High School and landed an athletic scholarship to Wagner College.

Graduating in 1968, he served as a Navy pilot, came to ETS in a junior

marketing position from 1970 to 1974, then moved to the Upjohn Company.

Along the way he went to Harvard’s Advanced Management Program and

earned several master’s degrees (in economics, educational administration,

and sociology, from Penn State, Rutgers, and Western Michigan respectively).

He joined E.I. DuPont de Nemours and Company in 1980. As president

and chief executive officer of DuPont Merck Pharmaceutical Company

in the early ’90s, he grew the business tenfold in three years and

also created a diverse and inclusive organization, as documented by

a 1993 Harvard Business Review case study. In 1996 he became chief

financial officer and later executive vice president and chief operating

officer of DuPont and chairman of DuPont Europe, with responsibility

for DuPont’s consumer health presence in electronic commerce through

its venture with WebMD. After he lost the race for CEO he stayed two

years and sold the drug operation to Bristol-Myers Squibb.

In an interview in July, 2000, Landgraf vowed to improve ETS’ image,

saying that if the world does not respect ETS as much as it used to,

he would use his last ounce of energy to fix that. He admits that,

outside Princeton, the testing organization is sometimes considered

arrogant, reclusive, and elitist. Landgraf says he is fixing the arrogant

part: "Before we told our clients what they needed. Now we give

them what they need."

Same with reclusive. "We have developed an image in the marketplace

that something secretive is going on here, but from now on ETS will

be completely transparent. There is absolutely nothing, repeat nothing,

that I will hide. Nothing but good goes on here. This is an extraordinary

place that does extraordinary things."

The elitist label is a hangover from founding days. In the 1920s Ivy

League colleges tried to use the early SAT tests to identify less-privileged

students, but the public saw the SAT as an intelligence test. In recent

years, with affluent students paying for test-taking tutors who guarantee

to raise scores by 100 points, the fairness critics have had a heyday.

"ETS was founded on egalitarian principles," insists Landgraf,

"and the people here by and large have socialist leanings. A highly

educated, highly motivated, extraordinary group of human beings work

here because they want to do good things in society." One of his

first acts was to strike a blow on behalf of students with disabilities

— one of his five children is in that category. These students

can take extra time on a test but their files were "flagged"

to reveal that. Not any more. "I viewed this as discriminatory,"

says Landgraf. "And I have instituted a task force on fairness.

We are champions in how we develop and administer our tools fairly

and equitably."

Another egalitarian move was to abolish executive parking spaces "Those

who lead by rank, fail," says Landgraf, harking back to his military

service. "Those who earn the respect of others will succeed."

He took away some other significant perks from top level officers,

such as sabbaticals, and he also did away with a special benefits

plan. "What I like to think I did is that I made this more egalitarian,

reducing the differences between officers and employees. It was not

equal. The hierarchy was broken."

Landgraf also abolished a number-based evaluation system that he considered

unfair because he believes no human being should be represented by

one number (five for excellent or two for below average). "Rankings,

when number oriented, tend to stick," says Landgraf, acknowledging

the excruciating irony in this, given that his company makes its money

from grading people by numbers. The new evaluation system is much

tougher but allows more fluidity: Groups of managers rank everyone

in their departments, and the lowest 10 or 20 percent get no raise

and may need to fight to keep their jobs. They can start fresh next

year and work harder to get a raise. Some objected, Landgraf says.

"We have had people leave who didn’t like the idea. And those

who are not up to our new standard, we help them leave with dignity."

About 100 people left voluntarily.

Landgraf has a no-nonsense north Jersey accent and prides

himself on being a straight talker. "He is very clear," says

one employee. "He says, if you don’t like what I an doing, let

me get your hat."

In spite of this hardnosed approach, Landgraf earned a warm spot in

the hearts of most ETS employees with the 2001 Christmas party. No

ordinary party, this. Buses transported 2,600 people to the convention

center in Somerset — virtually all the employees, including all

the temps. "That December event was a first of its kind,"

he says. "Last summer we had 7,500 at a family picnic, but December

was the one time a year when all ETSers got to come together in one

place."

It was expensive, not just for buses and food but for the 25 prizes

ranging from $2,500 to $10,000 per person. People are still talking

about those prizes, and in case anyone might forget, the pictures

of the winners are up on the wall in every building.

Not just bigwigs got prizes, but "ordinary people" too. An

administrative assistant who was helpful in easing a department through

a transition got an award called "fantastic support and assistance."

Someone who had a good idea about how to use a better computer program

got a technology award. Someone who was an excellent trainer of new

employees got the award in "helping each other succeed." There

were awards for saving money, growth, new product, social accountability,

and for just plain being smart.

Not the sort of expenditures you would associate with a not for profit,

but Landgraf defends them: "I need highly motivated, well compensated,

highly productive employees. Exactly the same that Bristol-Myers Squibb

needs. I was chairman of a pharmaceutical company and this business

is no different from a pharmaceutical company. We both deal in intellectual

capital. So whatever I do to raise productivity results in lower costs.

Not-for-profit is a section of the IRS code, not an operating style."

The calculated generosity seem to be working. Last year top officers

got five and six-figure bonuses (Landgraf’s was $366,886, which is

more than his annual salary of $345,900.) But all employees participated

in a gain-sharing plan, paid out on a percentage of success grid.

In September each worker received a bonus of six percent of his salary.

Also managers can give discretionary "spot awards" that can

be on an employee’s desk within a day. And medical and dental benefits

that had been slashed were restored.

Landgraf encourages doing good. On the theory that hands-on work kindles

bigger monetary contributions, every employee gets a day off with

pay to volunteer for his or her favorite charity. Landgraf himself

is on more than a dozen boards and belongs to the Alexis de Tocqueville

Society, open to those who give at least $10,000 to the United Way.

In fact, he is helping to found Mercer County’s chapter by hosting

a reception on Tuesday, November 19.

To get across his policies Landgraf has been having twice-weekly luncheons

with small groups. For major announcements he tapes a video of a small

employee meeting, where he makes a presentation and answers questions.

The remaining employees watch this video, by department, while Landgraf

and his entourage of officers make the rounds to appear in each department

and answer their questions.

"At the same time I took some things away," says Landgraf.

"We are now an employment-at-will company. It was very paternalistic.

I significantly restricted four-day employment. The number of people

working a four-day week was exceptional. Some still work four days

but based on family need, but not `I feel like it’."

Landgraf made other sweeping changes. He brought in

Bruce Gilbertson, vice president of operations, to cut costs but says

"cutting costs is not how I look at it — it is becoming more

productive and efficient. We instituted the Six Sigma quality program.

Through an accountability system we are requiring improvements in

productivity and efficiency across our organization. That has resulted

in making us financially stable." He added the $40 million profits

from the last fiscal year to ETS’ reserves, which had been depleted

by its famine years, and they now total $200 million."

He outsourced all the information technology operations to Texas-based

Computer Sciences Corporation, which bought all of ETS’ current hardware.

The initial contract saved $15 million, but the jury is out on whether

ETS will continue to accrue savings with this tactic. Some of the

jobs migrated to Delaware, but Landgraf says that all ETS-ers were

offered jobs at CSC.

ETS’ perennial critics, such as the Cambridge-based National Center

for Fair and Open Testing (Fairtest), continue to nip at its heels.

Fairtest points to what it calls Landgraf’s "capitalist" for-profit

motives. Objecting to his hopping on the No Child Left Behind bandwagon

and into the profitable K-12 testing market, it decries the high-stakes

testing required by the No Child Left Behind Act. According to Fairtest,

large scale tests are a bad idea in general, and ETS is just one of

several culprits that make them.

"In the past ETS had been extremely critical of the trend to use

K-12 tests to make high stakes decisions — graduation and teacher

rankings, for instance," says Robert Schaeffer, public education

director of Fairtest, "but ETS has totally changed course."

Landgraf indeed has gone very public about his support for K-12 testing,

both in testimony at the Capital and in full-page advertisements in

the Washington Post and the New York Times. Together with a "briefing

book" for political candidates on educational issues, they are

among the ways he showcases ETS on the public policy scene. Sharon

Robinson, former executive vice president, now heads her own new division

in Washington, D.C., the Educational Policy Institute, to do advocacy

research on issues of importance to ETS such as literacy, appropriate

use of testing, and reduction in the achievement gap.

ETS’s nonprofit status may draw new criticism, particularly because

many of ETS’ K-12 competitors, such as Harcourt Brace, are for-profit

companies. In 1962 the Internal Revenue Service issued a decision

that ETS was a legitimate nonprofit organization that had education

as its primary goal. A 1997 New York Times article said this decision

"exempted ETS from tens of millions of dollars in federal income

taxes, the same as a major foundation or charity." (Left unsaid

was that paying these taxes would surely increase test-taking fees.)

The article called ETS "a highly competitive business operation,

as much multinational monopoly as nonprofit institution, one capable

of charging hefty fees, laying off workers, and using sharp elbows

in competing against rivals."

At that time then-president Nancy Cole used product percentages to

defend ETS: "The bulk of our revenues come from areas in which

there is not direct competition from for profits." Now the ratio

is changing. ETS beat out Harcourt Brace for the lucrative K-12 contract

in California, for instance.

Landgraf has every intention of maintaining the nonprofit status and

insists that salaries and bonuses have nothing to do with taxes. Lawrence

Township enthusiastically proclaims ETS a good neighbor because it

makes free-will contributions, $2 million over the past 10 years.

ETS has just promised to build its part of a 20-mile bike trail that

will go through Hopewell. On the federal level ETS contributed $750,000

to sponsor international student centers in foreign countries.

Landgraf inherited some perennial problems exacerbated by technology,

such as cheating in Asia on the computer version of the Graduate Record

Examination. That has temporarily been fixed by limiting Asian students

to pencil and paper versions. ETS’s rush to market was responsible,

charges Fairtest’s Schaeffer. "They screwed up a lot of people’s

lives and cost themselves a lot of money by putting a defective product

on the market. They knew from the beginning that the technology was

susceptible to fraud."

Landgraf has kept most of the management team but also brought in

a handful of new vice presidents: Arthur C. Chisholm, a DuPont alumnus,

for IT; Yvette Donado for HR; Leslie Francis, formerly on Jimmy Carters’s

White House staff for corporate communications and public affairs;

T.J. Elliott, chief learning officer; and John Stuppy, from Sylvan

Learning Systems to vice president of product development. "The

officers who report to me are all aligned around two things or they

don’t work here — the social mission of ETS and my desire to make

this a competitive, efficient, commercial operation," he says.

When ETS landed the California K-12 testing contract, Landgraf retrieved

the for-profit ETS subsidiary, K-12 Works, and folded it back into

the ETS organization for "reasons of scale" and "to build

the brand," he said. K-12 Works had been spun off in January 2000,

just before he came. K-12 contracts reached the $100 million mark,

and in May 2002 Landgraf consolidated those contracts into a new not-for-profit

unit, called K-12 Assessments, headquartered in Texas and headed by

John Oswald, formerly of Harcourt Brace Jovanovich and Houghton Mifflin.

Other recent contracts include $84 million to coordinate the work

of four other firms to come up with the "nation’s report card,"

and $1.3 million over three years to give GED exams to 13,000 New

Jersey students. (It already has similar deals with Arizona and California).

Also new are a training program and test for paraprofessional teachers’

aides who must seek certification under new federal law.

About to be signed is the contract with the College Board for the

2005 SAT. Today’s high school freshmen won’t have to answer the dreaded

multiple choice questions that use verbal analogies. Instead they

will deal with reading comprehension questions and an essay component.

The software for scoring these essays was developed for the writing

achievement tests.

Landgraf emphasizes the competitive nature of the contract. "We

are doing away with an old structure which provided a cost-plus mentality,"

says Landgraf. "Governor Caperton (the College Board president)

deserves that kind of service and we deserve to give it to him, and

we are in a position to do it because we invested in our operation.

We can stand up to the scrutiny of the independent marketplace. For

53 years our contracts had been built on foundation of a partnership

that was inappropriate in this market. It made us inefficient and

made us pass the costs along to kids."

His most long-lasting change may be a $100 million capital expansion

program to replace the three 1950s two-story buildings — Wood,

Brigham, and Conant — with multi-story buildings. Researchers

and test makers accustomed to their closed-door enclaves may find

themselves in a new environment. "It’s not like we are working

in a hovel, but the best way to rehabilitate these buildings is to

put new ones up," he says. "And they are not conducive to

an interactive work space."

"I love the mission of this place, I love the fact that it is

viable again. I love the fact that, on the new employee survey, I

have never seen results so extraordinary. Compared to the toughest

sectors in the corporate world, ETS is lala land," says Landgraf,

brandishing his "LaLa Land" stone that someone actually had

engraved for him with those words on it.

"What you should really strive for in your life is significance,

doing something that’s important," says Landgraf. "I think

this is an extraordinarily significant place, a center of educational

reform. Our assessments are the foundation of the No Child Left Behind

law. ETS needs to be here to make our country better."

His favorite word is "done."

Educational Testing Service, Rosedale Road, Princeton

08541. Kurt F. Landgraf, president. 609-921-9000; fax, 609-734-5410.

Home page: www.ets.org


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