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Turning A Crisis Into An Opportunity: The Strategic Response of KIMEP to the Financial Crisis

Paper Presented to "Higher Education under Financial Crisis: Strategies and Development" Roundtable The Beijing Forum 2009

Chan Young Bang, PhD, President of Kazakhstan Institute of Management, Economics and Strategic Research (KIMEP). Ewan Simpson, PhD, Executive Director, Office of the President, KIMEP. Leon Taylor, PhD, Adviser to the President, KIMEP. Michael Quinn, Communications Director, KIMEP.

Abstract The article highlights the strategic response of the Kazakhstan Institute of Management, Economics and Strategic Research (KIMEP), based in Almaty, Kazakhstan to the challenges posed by rapid negative changes in its operating environment. The turnaround strategy is discussed in detail, with an emphasis on how KIMEP restructured following this model. Restructuring focused on eliminating institutional weaknesses that emerged during an extended period of significant growth. KIMEP was able to successfully restructure and position itself for the recovery with an aggressive development strategy thanks to a reserve of trust in its management held by key constituencies. This trust was built over many years due to the transparency of operations, unity of purpose in the management team, the integrity of the chief executive and the democratic, action-oriented, decision making processes which characterize the management system. This culture of honesty, integrity and transparency made the decisions defensible. This set of circumstances is difficult to replicate but fundamental for success.

KIMEP1 was founded in 1992 on the initiative of the President, N.A. Nazarbayev to train managers and leaders to support the transition of Kazakhstan to the market economy. Chan Young Bang. PhD, the current President of KIMEP, was its founding Executive Director, drawing on his experience in US academia and his work as Vice Chairman of the Economic Expert Committee under the President from 1990-1992. KIMEP was privatized in 20002 and is financed largely by tuition fee income. KIMEP follows the American model of education with a curriculum delivered almost entirely in the English language, offering degree programs at the undergraduate and graduate level in business and social sciences and a doctoral program in business. The governance system also follows the American model and is characterized by transparency, integrity and participative decision-making processes which aim to engage all key stakeholders.

Granted full independence in operations by the government of the Republic of Kazakhstan, KIMEP experienced significant growth in the post-privatization period 2000-2008. In 2008 growth stalled, driven by a series of external shocks and internal inertia. Factors such as a major shift in the dynamics of demand leading to a structural imbalance in its academic programs, adverse demographics, the early onset of the financial crisis in Kazakhstan, the global recession, devaluation of the national currency and a series of disputes over taxation combined to threaten the financial viability of the organization.

In the period 2008-2009 KIMEP overcame these challenges and emerged a leaner, more focused organization. This paper demonstrates how the Institute developed and implemented its turnaround strategy, which had the goal of ensuring financial viability without compromising the educational experience or its participative, transparent management culture. Restructuring led to refocusing of programs to better fit with market demand and major operational cost savings. This has placed it in a strong position to take advantage of the resurgence of the Kazakhstani economy. The paper illustrates the critical importance of process, showing how the core principles of transparency, integrity and democratic, actionoriented management founded on trust from key stakeholders were a critical factor in the successful implementation of a radical turnaround and reinvestment strategy without compromising academic integrity, cultural norms or financial viability.

1. Introduction 1.1 KIMEP Origins The Kazakhstan Institute of Management, Economics and Strategic Research (KIMEP) was founded on the initiative of President Nazarbayev in 19923 to offer graduate-level management and administration programs that would train executives, managers and civil servants to lead Kazakhstan in its transition to a market economy.

Privatized in 2000, KIMEP is a tuition driven university operating in Almaty in the Republic of Kazakhstan. KIMEP follows the American model of education with a curriculum delivered almost entirely in the English language, offering degree programs at the undergraduate and graduate level in business and social sciences and a doctoral program in business. The governance system also follows the American model and is characterized by transparency, integrity and participative decision-making processes which aim to engage all key stakeholders. KIMEP has the largest concentration of Western-trained terminal degree holders in the CIS.

The institution has five separate colleges and departments, offering undergraduate and graduate degrees in business, law, economics, finance, accounting, public administration, political science, international relations, journalism and mass communication. Currently, 4,500 students are enrolled at KIMEP.

While KIMEP initially received considerable grant funding from the EU TACIS Program, USAID and the Soros Foundation, almost all of the current operational revenue of the Institute is derived from tuition. Many organizations offer scholarships to individual KIMEP students and grants to faculty for research at KIMEP, but KIMEP receives no institutional support from external sources.

1.2 KIMEP Growth and Expansion, 2000-2008 During its first eight years of operation, KIMEP exclusively offered graduate-level programs, granting a Masters Degree in Business Administration, a Masters Degree in Public Administration and a Master of Arts Degree in Economics. Student numbers were relatively low, with the largest graduating class of this period containing only 209 students. In 1998 the peak of this period, KIMEP had 461 students enrolled and 82 part and full-time faculty members.

In the run-up to privatization in 2000, it became clear that the model of a graduate institution was not financially sustainable. Graduate-level education required a proportionally large number of professors with doctorate degrees, incurring large costs for a small revenue base. Continuing this institutional model depended on external funding in the form of grants, which could not be renewed indefinitely.

Two four-year undergraduate programs were added in the fall of 1999 to expand KIMEPs revenue base and support its graduate programs. Undergraduate programs generated

economies of scale, allowing both doctoral and non-doctoral faculty members to optimize teaching hours. Graduate students were also incorporated into the undergraduate program as teaching assistants, offering graduate students practical experience. The pool of potential future graduate students also grew, as KIMEP began training undergraduates who were capable of enrolling in its graduate program immediately after graduation.

The addition of the undergraduate programs began a wave of intense expansion. The first class of undergraduates more than doubled KIMEPs student body; 424 freshmen were enrolled in the fall semester of 1999, in addition to 392 graduate students, and each successive class of students added an average of 300 students to the total student population. By 2003, the total number of students had increased by 1215, which led to a total revenue increase of 454m KZT ($3m)4. To match the significant increase in demand brought on by a growing

student body, four more academic programs were added, along with an additional 96 faculty members. To increase efficiency and bring KIMEP closer to the American model of higher education, KIMEPs academic departments were reorganized under three separate colleges: the Bang College of Business, the College of Social Sciences, and the College of Continuing Education.

Thanks to a variety of favorable conditions, including a strong economic climate, a growing number of available high school students5 and ministerial support, these trends continued unabated until 2008. During this period, the number of students annually increased by an average of 600 students per year, an average of 18%. Revenue increased by an average of 27% per year. KIMEP continued to increase the number of academic programs offered, adding a BA in International Journalism in 2003, a Doctor of Business Administration in 2006 and a Master of Arts in Teaching English to Speakers of Other Languages (TESOL) in 2007.

KIMEPs growth in revenue was accompanied by institution-wide expansion. Skyrocketing enrollment numbers drove an intense demand for professors, especially those with Ph.D.s from Western academic institutions. In total, the number of faculty members grew by 165 (i.e. more than tripled) from 2000 to 2008. KIMEP also invested in facilities, spending 450m KZT ($3m) on a new library and 1,500m KZT ($10m) on a new teaching facility. These projects were completed in 2006 and 2008, respectively.

The kind of growth summarized in Figure 1 was a rare phenomenon and a challenge for any management team.

Figure 1: KIMEP Growth Indices 2000-2008 (Students, Faculty and Revenues, 2000=100

700 600 500 400 300 200 100 0 2000 2001 2002 2003 Students 2004 Faculty 2005 2006 Revenues 2007 2008

Throughout, the institution was threatened by overexpansion and inefficient allocation of resources, which was only spurred on by each successive year. In 2000, KIMEP had an operating revenue of 494m KZT ($3.3m) and a total operational costs of 441m KZT ($2.9m). In comparison, KIMEPs revenue for 2008 was 3,308m KZT ($22m), 660 percent larger, with costs of 3,067m KZT ($20m).

2. The Context for the Crisis


The performance of KIMEP is closely linked to economic performance. As a tuition-driven institution, enrollments are dependent upon the capacity of students and their families to pay. In a country where per capita incomes are around 1m KZT ($6,700) per annum, undergraduate tuition levels of 795,000 KZT ($5,300) per annum represent a huge investment6. Understanding the performance of KIMEP therefore demands an understanding of the economic context in which it operates. In this section, the key factors are outlined. Forecasting KIMEP enrollment is complicated by two factors: long-run uncertainty about the transition of Kazakhstan to a full-fledged market economy; short-run uncertainty about the global downturn.

2.1 Long run uncertainty. Over the past two decades, few economies have changed as radically as that of Kazakhstan. The Soviets had tried for 80 years to convert this huge, thinly populated country into a global exporter of wheat and cotton. The purpose was to earn foreign currency with which the USSR could import machinery. This campaign met with limited success. Among other consequences, the campaign delayed Kazakhstans evolution to a modern, services-oriented economy. Even today, Kazakhstan lacks the institutions required by an information-intensive economy, such as a body of corporate law that has withstood the test of time. The lack of such institutions hinders economic growth and subsequently some income-driven demand for higher education.

In the 1990s, the transition of Kazakhstan to markets might have failed, had geologists not discovered major new deposits of oil and natural gas in the north and east of the Caspian Sea. The farm sector, which probably would have remained the countrys largest employer had the fossil-fuels sector failed to flourish, is still resistant to reform. Due to its backwardness,

agricultures share of national output value (gross domestic product) has fallen from 27% in 1992 to 6% in 2008. It has been displaced, on almost a one-to-one basis, by the services sector as Kazakhstanis steadily migrate from the farms to the cities (Figure 2). Figure 2: Kazakhstan: Farming and Services - Share of GDP 1992-2008 (%)
70,0 60,0 50,0 40,0 30,0 20,0 10,0 0,0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Farm Services

Notes: Farm: Value of agricultural products produced in Kazakhstan, expressed as a percentage share of KZ GDP Services: Value of services produced in Kazakhstan, expressed as a percentage share of KZ GDP Source: All data are from the World Bank, World Development Indicators, at www.worldbank.org (accessed Sept. 18-25, 2009).

The economy is diversifying more rapidly than might be evident from a single-minded focus on the primary sectors. As a consequence, Kazakhstan recovered from the Nineties

breakdown of the market transition more rapidly than the rest of Central Asia did (Figure 3).

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Figure 3: GDP per capita, Selected CIS Countries


12000 10000 8000 6000 4000 2000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Kazakhstan Tajikistan Kyrgyz Republic Uzbekistan Russian Federation

Source: All data are from the World Bank, World Development Indicators, at www.worldbank.org (accessed Sept. 18-25, 2009).

In the long run, this recovery may generate a rising demand for higher education, but the picture is obscured by demographic changes. As elsewhere in the Commonwealth of

Independent States, birth rates fell and death rates rose in Kazakhstan during its difficult transition to markets. One consequence may be shrinkage of the pool of high school

graduates by as much as a fifth in the coming decade. This pool is KIMEPs potential market for undergraduates.

2.2 Short-run uncertainty Kazakhstan is exposed to a bleak environment. Kazakhstan has a small open economy. Exports comprise 70% of the $100 billion of products produced each year (Figure 4).

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Figure 4: Kazakhstan: Exports and Imports as Share of GDP (%)


80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 0,0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 E xports Imports

Notes: Exports: Value of exports from Kazakhstan, expressed as a percentage share of KZ GDP Imports: Value of imports into Kazakhstan, expressed as a percentage share of KZ GDP Source: All data are from the World Bank, World Development Indicators, at www.worldbank.org (accessed Sept. 18-25, 2009).

The economy depends heavily on world income (Figure 5). Since independence, the simple correlation between world and Kazakhstani income per capita has been .89. The source of global economic growth was the slow but steady economic recovery in the early 2000s of the United States. The U.S.A. normally accounts for a third of global demand. recovery benefited Kazakhstan by lifting global prices for oil and gas. Kazakhstani economy was half again as large as in 2004. The American By 2007, the

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Figure 5: Kazakhstan and the World Economy, Gross National Income per Capita, 1991-2008
11000 10000 9000 8000 7000 6000 5000 4000 3000 2000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 KZ World

Notes: Kazakhstan: Gross national income per capita in current international dollars, for Kazakhstan, using purchasing power parity World: Gross national income per capita in current international dollars, for the world, using purchasing power parity. "Purchasing power parity" adjusts exchange rates so that a dollar would have the same purchasing power no matter where it is spent. Such a dollar is an "international dollar." The purpose is to enable comparison of Kazkahstan's income to those of other nations. Source: All data are from the World Bank, World Development Indicators, at www.worldbank.org (accessed Sept. 18-25, 2009).

Despite the governments attempts at diversification by subsidizing factories and farms, the fastest-growing sector of the economy has been services. Much of the growth in this sector derives from spending by the extractive sector. One element of the services boom has been a strengthening demand for the Western-style instruction that has made KIMEP prominent in Central Asia. One indicator of this potential market is the soaring number of Internet users per 100 residents (Figure 6).

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Figure 6: Kazakhstan: Internet Users per 100 population 1994-2007

14,00 12,00 10,00 8,00 6,00 4,00 2,00 0,00 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Internet Users

Source: International Telecommunication Union, World Telecommunication Development Report and database, and World Bank estimates, sourced from World Bank, World Development Indicators, at www.worldbank.org (accessed Sept. 18-25, 2009).

Another element of the market transition was apparent overexpansion of finance. As in most of the non-European region formerly under Soviet control, Kazakhstans financial markets remained anemic well into the 2000s. Kazakhstani firms financed most real investment by borrowing from the countrys five dominant banks. Foreign financial investors in search of high returns had no choice but to lend to these banks; interest rates in the U.S. were too low to attract many investors. This surge of hot money in Kazakhstan temporarily lowered the banks borrowing costs and tempted them into high-risk lending to the construction and real estate industries. Abetting this trend was a secondary market for such loans, organized and subsidized by the central bank. Real estate prices in the countrys financial center, Almaty, rose sixfold in two years, attracting yet more hot money from abroad. By 2007, most bank funds had been provided by foreigners for terms much shorter than those for which they had been lent out.

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The stage was set for the bursting of the real estate bubble and the inevitable collapse of the banks. The dive in oil prices in 2008 pricked the bubble. Generally, commodity indices fell by nearly 60% in 2008 (Figure 7). The most conspicuous victims were Kazakhstani banks that had relied on petrodollars to finance their lending.

Figure 7: Selected Commodities Index of Price Trends 2004-2009, 2004=100

500 450 400 350 300 250 200 150 100 50


04 05 06 05 07 08 08 06 07 20 05 06 07 04 08 09 5 7 6 8 05 07 05 06 07 08 08 09 06 00 00 00 00 09 20 ay 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 l2 l2 Ju l2 20 Ju l2 20 20 20 ov ov ov ov ov ar ar ar ar Se p Se p Se p Se p Se p ay ay ay ay Ju Ju ar n n n n n Ja Ja Ja Ja M M M M Ja M M M M M N N N N N M Ju l2 00 9

Co p p e r

A lum in ium

O il

N ic k e l

Z in c

Source: IMF data.

The government responded with a too-big-to-fail policy. It bought three of the largest lenders BTA, Alliance, and Astana Finance. Creditors have reluctantly accepted the losses that the government has imposed upon any settlement, since the lenders otherwise would be insolvent. Nervous investors abroad continue to remove their funds from financial industry of Kazakhstan, perhaps by as much as a sixth in the winter of 2008-2009.

Bowing to the inevitable, the government devalued the tenge by a fourth in February 2009. This reduced dollar outflows according to formal statistics, at least. However, the

governments decision to borrow hundreds of millions of dollars abroad, rather than tap the National Fund of petrodollars, left some investors wondering whether the Fund is already over-extended.

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In addition, the government concentrated its fiscal stimulus on the banking and construction industries the over expansion of which had probably precipitated the initial crisis. This largesse to unprofitable industries may aggravate long-run, or structural, unemployment; it may also divert public funds away from education.

These events threaten KIMEP enrollment in three ways: The collapse of oil export revenues, and the related shock waves, may cost Kazakhstan nearly $40 billion, or 40% of annual gross domestic product. Although simple correlations between enrollment and income appear negative, the dataset is too small to permit controls for other possible determinants of enrollment. It is

reasonable to think that a sudden reduction in national income of $40 billion may lead to sharp cutbacks in the immediate consumption of such durable goods as higher education, since these goods may easily be purchased later.

The collapse of the banks cut off loans to potential students and to KIMEP itself. Students from poor families may suffer the worst, since they may lose, to recession, savings that might have paid for tuition. In the extended downturn of the Nineties, the share of income going to the poorest fifth of Kazakhstani residents fell swiftly, from 7.5% in 1993 to 6.7% in 19967.

The parlous condition of banking casts doubt on whether families will be able to obtain student loans later or for an extended time. This poses continuing challenges for KIMEP enrollment even after the first signs of economic recovery.

3. The KIMEP Model: Applying the Turnaround Model in a Culture of Trust.

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In addressing the challenges posed by the internal and external dynamics noted above, KIMEP implemented a turnaround model within their current operating paradigm8. In essence the model followed the steps shown in Figure 8.

Figure 8: KIMEP Turnaround Model

Paradigm

Stra tegy De v e lo pm e nt

Im plem e nta tio n

Pe r fo rm a nc e

If unsatisfactory
Ste p1: Tighte n C o ntro l

Ste p2 : Re v ie w Stra te gy

Ste p 3: Aba n do n pa ra di gm And fin d a ne w o ne

Source: Johnson, G., Scholes, K (2002) Exploring Corporate Strategy, pp79, Prentice Hall 6th ed.

As the discussion below will illustrate, KIMEP successfully realigned itself after stage 2. It was not necessary to fundamentally alter the paradigm. However, this was not known at the time and all options were open. The fundamental elements of the operational paradigm which formed the context for the actions of 2008 and 2009 are shown in Figure 9.

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Figure 9: KIMEP: Operational Paradigm


KIMEP seeks to deliver education of the best quality and value for money possible in English following an American curriculum emphasizing ethical leadership, creativity, problem-solving, teamwork and independence of thought within operational constraints such as: the fact that it is the only US style institution operating successfully in the CIS countries; the need to compete in international markets for expertise; severe limits on revenue per unit given the low per capita income of Kazakhstan lack of non-tuition revenue streams given the infancy of the corporate giving culture within Kazakhstan. To deliver this output, the management of the Institute place great store in developing unity of purpose and an engaged culture9 of self-improvement amongst employees to focus on delivery of the mission. Management systems are based on consultation, integrity and transparency with all key stakeholders in the process such as students, parents, employees and the external community engaged to ensure the broadest possible consensus.

Building and maintaining trust is the foundation of the operational philosophy. While the growth of the Institute can be taken as a proxy for trust and satisfaction, more direct evidence of the views of key constituencies is shown in Figure 10. These show satisfaction with operating culture and education provided. Figure 10: Attitudes of Key Constituencies
Faculty 2008 Institutional Morale Institutional Integrity Quality of Management Management demonstrates integrity KIMEP is fulfilling its mission Quality of Leadership of President Staff 2008 Executive Leadership is strong Executive Leadership is professional Students 2009 I would recommend this course I would recommend this faculty member I would recommend KIMEP as a place to study Score out of 5 3,6 3,7 3,9 4,0 4,1 4,2 4,3 4,3 4,3 4,3 3,7

Sources: KIMEP Quality Assurance and Institutional Research Unit internal reports, available at www.kimep.kz

This trust based cultural paradigm was tested by the need to fundamentally review whether KIMEP could continue to operate successfully given the unfavorable environment as noted

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previously. The discussion below details the process that was undertaken and the key role which the cultural context of the organization played in implementing the turnaround strategy.

3.1 The Response to The Crisis The discussion below details the process which KIMEP undertook in its turnaround strategy. Essentially this comprised three stages: 1. Initial assessment and cost cutting within current operations 2. Strategic review and cost restructuring 3. Investment in the new strategy. The process timeline is summarized in Figure 11.

Figure 11: Turnaround Timeline


May 2007 -December 2008 December 2008 -August 2009 September 2009 -present

Init ial Asse ssm e nt and C ost C utt in g in C urre nt ope ratio ns

Strate g ic Re v ie w and C ost Restruct urin g

Inv e stm ent in the N e w Strate gy

Crisis

Recovery

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3.1.1 Initial Assessment In the summer and Fall of 2007, as noted above, the first signs emerged that there were serious structural problems in the Kazakhstan economy. KIMEP management began to take stock of the implications of the challenges. While overheating was occurring, KIMEP enrollments continued to grow, reaching a peak of almost 5,100 registered students in the Fall semester of 2007. During the Fall semester, as inflation rose significantly, a note of caution was introduced to the financial planning process. No new major capital investments were planned for the academic year 2008-2009 as the external economic signals suggested challenging times ahead. Instead, a decision was made to invest heavily in the development of the faculty of the Institute, particularly in the Bang College of Business, based on the view that the key to continued success was investment in quality to enable KIMEP to enhance its reputation for affordable high quality education.

3.1.2 First Round Cost Review Assumptions on enrollments, did, however presume continued growth, fueled by a freshman class of similar proportions to that enrolled in the Fall of 2008. When Fall came, this proved over-optimistic. The freshman class was just over 900, 33% below that of the previous year (Figure 12).

Figure 12: Freshman Enrollments, 2004-2008, KIMEP.


1600 1400 1200 1000 800 600 400 200 0 2004 2005 2006 2007 2008

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Revenue estimates were reassessed and a budget review committee appointed by the President on August 25 2008 to revisit spending projections. This was the first sign that external factors were impacting the Institute negatively.

Cautious optimism was replaced by pragmatism as it was clear revenue targets would not be met. The culmination of this was a reduction in the revenue projection of 9%. The budget committee also recommended cuts in projected expenditure of 10% to bring the budget into balance. Consultations followed with senior board members, members of the business community, student representatives and senior faculty. The revised budget, which incorporated a previously unaccounted deficit, saw a reduction in the projected operational surplus to under 75m KZT ($500,000) compared to previous projections of over 300m KZT ($2m).

At an open meeting with faculty at the end of October 2008, the President set out the challenge both for the current year (2008-2009) and the next (2009-2010). At this point, it was assumed that operations in 2009-2010 would remain at broadly the same levels as in 2008-2009. As previously, the commitment to no major capital expenditures was restated. Previous commitments on anticipated payroll increases were reined back and hiring only authorized in areas where there were serious deficits. A review of administrative staffing and control systems was announced to ensure their fitness for purpose. The academic program was instructed to schedule more cost effectively. In addition, plans were announced to build a larger contingency into the 2009-10 budget, fixed at 5% of revenues.

In November 2008, a draft budget for 2009-2010 was presented to the Board of Trustees and approved by them following consultation with faculty and students and internal approval by the KIMEP Council. This projected revenues at 4,110m KZT ($27.4m), 13% higher than the level projected for 2008-2009. This also anticipated a reduction in the number of students by just over 200 or 4,5%. Revenues were projected to grow due to an increase in tuition of 16%

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on average. KIMEP was seeking to increase the yield per student rather than having more students to maintain revenue growth.

3.1.3 Strategic Review and Cost Restructuring At the beginning of January 2009, it was clear that the bad news was piling up10. Initial revised budget projections pointed to a potential multi-million dollar deficit if enrollments did not meet the projections and spending plans remained in place. To assess the options, the President appointed a Strategy Committee comprised of faculty and senior administrators to review operations across the Institute on January 8,2009 with the following remit: To monitor the external environment and review current projections related to KIMEPs performance; To review administrative and academic operations and where necessary make recommendations to ensure that value for money was being generated both for KIMEP and its customers while providing the best quality service to students, faculty and all employees. The President further instructed that recommendations for any changes in budget and strategy should be place by mid February 2009 with a full revised budget and strategy to be presented to the Board of Trustees in April 2009. An intensive period of consultation then followed. The Strategy Committees initial report was submitted in late February 2009, making twenty-one recommendations. The most important were: That a fundamental review of financial planning be carried out and the projected 2009-10 budget be set aside; Immediate expenditure controls should be put in place and all budget allocations for 2008-2009 set aside; A hiring freeze should be implemented and all salaries should be capped until January 2010;

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All operations should be reviewed to identify potential improvements and cost savings, with operations market tested where relevant to ensure value for money;

Every effort should be made to maximize cash flow in Summer by building the summer school program to the greatest extent possible;

Academic management should be restructured to focus on programs rather than departments;

Suspend majors, programs and degrees not in demand, remove duplication of courses and implement scheduling reform to maximize the use of faculty in the classroom;

Where necessary, reduce the number of faculty on the payroll if their services are not in demand;

Maintain financial aid at 5% of total revenue to support as many students as possible who are unable to pay for their studies.

These findings were given impetus by further external developments. As noted above, on February 4, 2009, the national currency was devalued by 25% overnight against the US dollar. This further eroded the competitive position of KIMEP making retention of international faculty a serious challenge.

On receipt of the Strategy Committee report, the President called an open meeting with the faculty on February 23, 2009. At this meeting, the President announced that he had decided to set aside the 2008-2009 budget and take personal control of all expenditures. Faculty were informed that he had accepted the recommendations detailed above and that he had created a Task Force to review the proposals made by the Strategy Committee, make further recommendations on how to proceed and oversee implementation. The Task Force was chaired by the Executive Vice President and staffed by senior independent faculty. Each of the recommendations of the Strategy Committee were reviewed and recommendations made in a series of nine reports to the President.

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A two track process was then instituted. The Strategy Committee continued its work in developing a mid term (three year) strategy and financial forecast, while the Task Force began to implement the recommendations. Each of these is dealt with in turn below.

3.1.4 The Task Force The Task Force supported the recommendations that there was a need for restructuring of the academic administration to reduce bureaucracy and duplication and that the portfolio of programs offered (and specializations within these) needed to be rationalized. This first phase of restructuring led to recommendations that twenty-three professorial faculty be made redundant, with faculty payroll savings of 246m KZT ($1.64m). The President approved this recommendation and faculty were notified in March 2009 that their employment would be terminated at the end of the academic year in August 2009. This action was taken in areas where there was limited demand for educational services, particularly in areas such as operations management and political science. Other decisions were made on the basis of lack of fit of faculty with changing program needs and on cost grounds for particularly high paid faculty. The decision process in terminating faculty is a good illustration of the participative management model which is fundamental to the KIMEP operational paradigm. A nine stage process was undertaken to ensure consensus when these difficult decisions were made (Figure 13). At all levels objective criteria based on service demand and performance were the only acceptable measures of assessment. This was a critically important element of the process. If the process had used other criteria such as personal preferences or biases, the credibility of the whole process and of the Institute itself would have been undermined. Objectivity led to defensibility.

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Figure 13: Faculty Termination Process

President

8
Task Force

2 3 1

Strategy Committee

4 Stages:
Colleges

1: President Commissions Strategy Committee 6 2. Strategy Committee reports to President 3. President commissions Task Force 4. Task Force consults colleges 5. Colleges consult departments and faculty 6. Departments and faculty make recommendations to Colleges

Departments and Faculty

9
Terminated Faculty

7. Colleges make recommendations to Task Force 8. Task Force make recommendations to President 9. President issues termination letters

Other key actions implemented by the Task Force included: Rationalization of the central administration, combining functions and saving almost 75m KZT ($500,000). Redundancy of eighteen instructors in the Language Center due to shrinking demand. Rationalization of financial management systems, linking HR, accounting and finance systems to generate efficiencies and more effective reporting. At the same time, tight financial controls remained in place, with all expenditures requiring the approval of the President.

3.1.5 The Fallout

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While every effort was made to engage with all interested parties throughout the process, through meetings with faculty and administrative staff, students and parents, it was inevitable given the scale of change that there would be some discontent, particularly among students. A number of senior faculty who were popular were among those terminated. Entryist groups 11 opposed to the concept of KIMEP and jealous of its success piggybacked on student discontent. In addition, some faculty who were terminated sought to manipulate the media with some success accusing the management of the Institute of gross incompetence. This culminated in a staged student protest fuelled by an inflammatory article published in a newspaper12. This situation was made worse by the intervention of the state authorities who were concerned that in the face of the global crisis, students might respond with violence 13. A series of personal and political agendas converged on KIMEP, most of which had little to do with the organization. In response, the management met with students and explained their position. Public statements explaining the situation were made and the President called a press conference where he set out the case for change in detail14. This was negatively reported as the press jumped on the bandwagon often with blatant misrepresentation. The state authorities also played the populist card, with the mayor of the city asserting that no faculty should be terminated15. These assaults continued throughout the summer of 2009, culminating in the publication of a report in Newsweek16 which suggested KIMEP had carried out its redundancy program on the instruction of the Government due to the need to remove troublesome faculty. This article was contested and Newsweek issued an apology17.

Despite the opposition to the process, KIMEP management continued to confirm their determination to restructure in the best interests of the students and the organization. Public statements were issued to the KIMEP community18, students19 and parents20, outlining the case for change. This consistency was a critical part of the Institute staying the course and built on the consensus developed throughout the process with the Strategy Committee, Task Force and management all constant in their message of why restructuring as adopted was necessary. This is analyzed further below.

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This opposition must be kept in context. While many threats were made, not one terminated faculty member took legal action against the decision. Only one faculty member was formally supported by students in their appeal against termination. Those faculty who did appeal were informed that the decisions were taken by the President on the advice of the Task Force who were in turn following the recommendation of line managers (Chairs, Deans and the Vice President of Academic Affairs) This highlights the value of the process summarized in Figure 13. By ensuring that all constituencies were aware of the process and consulting with the management of the Institute at all levels before decisions were finalized, a coalition in support of the process was developed. Thus a robust case was made and understood before the decision was publicized. In no case was a decision reversed. Three faculty were re-hired due to unexpected departures of other faculty.

3.1.6 Investment in the New Strategy The Strategy Committee produced a report that recommended a development framework within which KIMEP will build on the foundation achieved to date, developing a sustainable financial base and continuing to invest in quality to achieve world class status. The key was financial sustainability and improving the competitiveness of the Institute by raising the quality of the program and thus its graduates, while leading by example in its management style and systems. The Strategy is structured around four goals which are shown in Figure 14 below, which seek to position the Institute to take advantage of the economic recovery when it happens.

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Figure 14:

KIMEP Strategy to 2012

Goal 1: Develop students equipped for professional success in leadership positions with the capacity for lifelong learning in the contemporary world Goal 2: Develop and maintain faculty well equipped to support the development of the Institute Goal 3: Create standard setting programs based on core ethical principles to ensure the role of the institution as a leader in education, research and innovation Goal 4: Development effective and efficient management systems and lead by example.

The Strategy was also accompanied by a three year financial forecast which assumed operations at a smaller scale of 3,200-4,000 students, and revenues adopting a path below the historical trend. Student numbers were assumed to drop by up to 20% on 2008-2009 levels. Staffing was assumed to be constant and only minor capital expenditures approved. This cautious projection sought to instill fiscal conservatism after the years of massive growth. The foundation for this projection was a further revision of the budget for 2009-2010 which was presented to the Board in April 2009. As noted above, this had assumed that 2009-2010 operations would be at broadly the same level as 2008-2009. The revision took a much more pessimistic view, reducing the revenue forecast from 4,100m KZT ($27.4m) to 3,315m KZT ($22.1m), a reduction of 20%. In addition it was recommended to pay off a carried forward deficit of 255m KZT ($1.7m) from 2008-2009 with a contingency of 5% of revenue, 165m KZT ($1.1m), a 47% cut. Payroll costs were reduced by 21%, capital expenditure by 40% and operational expenses by one third. This was approved by the Board in April of 2009.

In the Summer of 2009, due to an intensive campaign to maximize summer revenues, an additional windfall was generated, with revenues 24% above target. This, combined with the major cost cutting initiative detailed above, meant that KIMEP was entering the year with a small operating surplus for 2008-2009 of 51.1m KZT ($394,000).

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3.1.7 Building for the Recovery With the onset of the Fall semester, registrations were higher than the most pessimistic projection of a 20% reduction, with enrollments only 7% down on the previous year. The net result of this was that the revenue projection for 2009-2010 was revised upward from 3,315m KZT ($22.1m) to 3,705m KZT ($24.7m). Combined with a greatly reduced cost base, this provided room for an additional investment in areas where there are identified needs. The President requested the Strategy Committee to make recommendations on adjustment to expenditure plans as a result. After consultation with Board members and senior faculty, the President, with the support of his management team, agreed a range of changes to the budget approved by the Board in April of 2009 which aggressively positioned the Institute to begin to again invest in further improving the quality of the educational experience. Building a research culture is fundamental to building a truly world class institution. Funds were set aside for investment in resources and research projects to increase the level and quality of research output from faculty. To ensure retention of key faculty, compensation was increased by 10% to partially counter the impact of devaluation. This was retrospectively applied to the beginning of the academic year (August 2009). A commitment was also given that in Fall 2010, a further increase of up to 15% in faculty compensation would be made to reinforce the competitive position of KIMEP in the international labor market. Merit increases of up to 10% were awarded to high performing administrative staff to ensure that they stay with the Institute. Such was the scale of the turnaround that additional resources could be put into attracting new faculty in areas of need such as finance, accounting and economics. For Spring 2010, up to 15 new faculty positions were approved.

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To complement the improved salary offer, a relocation allowance of up to 750,000 KZT ($5,000) per faculty member was introduced to further improve the competitive position of the Institute.

To make sure that the best students can study at KIMEP, financial aid for needy students was reinforced with an increase of a further two percentage points or 85.5 m KZT ($570,000).

Investments in sports facilities on campus are planned to improve the quality of the student experience. When completed, these will form a core part of a revised and expanded marketing effort to attract students to study at KIMEP.

To accelerate the target of fiscal stability, contingency funds were increased from 5% to 8% of revenue, totaling just under 300m KZT ($2m).

While each of these initiatives may seem relatively minor, taken together they represent a bold strategy to further develop KIMEP as a world-class center of learning and research. This is particularly the case when external conditions are uncertain, both in terms of the uncertain economic recovery and future trends in demographics which continue to pose challenges. These changes were announced to the faculty at an open meeting on September 3, 2009, further confirming the transparency of the process.

4. Assessment This paper has set out in detail the response of an independent private higher education institution in Kazakhstan to external environmental shocks. The response taken and the success achieved to this point has to be understood within the established cultural context of the organization. The importance of the free hand which the management had within this context also cannot be underestimated. As a an independent institution, KIMEP was able to make rational choices based on efficiency and supply and demand factors to a much greater degree than a state financed institution could. In a real sense, the students as consumers are

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the masters in this situation, not the government or trade unions or any other special interest group.

The response built on the trust developed over a series of years of growth. The structure of the response was fashioned on the same principles of integrity, transparency and participative decision making. The restructuring was successful only because of the context in which it took place. The same principles which built trust in the growth years were applied in difficult times.

This consistency maintained trust when major changes were made. If a radically different authoritarian, oppositional model had been implemented which was at odds with the operational culture there could have been a very different and much more negative outcome. The process reinforced the consensual culture and built a stronger unity of approach because of its consistency.

In addition to the care which was taken over the implementation of change within the organization to ensure that the goals were achieved while minimizing negative side effects, a further lesson was that continuous attention needs to be paid to financial management and cost control. In the key period of change 2007-2009, six revisions were carried out to institutional budgets. This led to major changes in revenue projections, payroll costs, operating expenditures and capital investment plans (Figure 15).

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Figure 15: KIMEP Budget Projections 2007-2009 (1000 USD)


2008-9 (1) N ovem ber 2007 Carried forward Deficit Total revenue Payroll Operational Expenses Financial Aid Capital Expenditure Contingency / Net Result 0 24 793 14 158 3 610 978 4 470 1 576 2008-9 (2) A pril 2008 0 25 136 16 377 3 699 978 2 071 2 011 2008-9 (3) Septem ber 2008 0 24 226 17 511 3 884 1 021 1 414 396 2009-2010 (1) Novem ber 2008 0 27 398 18 410 4 475 1 200 1 220 2 094 2009-2010 (2) A pril 2009 -1 761 22 059 14 538 2 971 960 726 1 103 2009-2010 (3) N ovem ber 2009 644 24 675 15 168 3 266 1 527 1 243 4 115

Note: For convenience a fixed exchange rate of 150 Kazakhstan tenge to the US dollar is used

This attention to detail was essential and has positioned KIMEP well for the recovery, balancing investment in key areas such as faculty and increased financial aid for students while building contingency funds and operating with a reduced cost base. (Figure 16). Figure 16: KIMEP Key Financials 2004-2010 (projected), 1,000,000 USD
2004-5 Total Revenue Faculty Payroll Capital Expenditures Other Operating Costs Financial Aid Net result 9,1 5,1 1,8 1,8 0,3 0,1 2005-6 13,1 6,6 3,8 2,4 0,4 -0,1 2006-7 16,2 9,3 3,5 2,9 0,6 -0,1 2007-8 21,2 12,1 6,3 4,2 1,1 -2,5 2008-9 (preliminary) 2009-10 (projected) 24,3 24,7 17,5 15,2 1,4 1,2 3,9 3,3 1,1 1,5 0,4 3,5

Note: For convenience a fixed exchange rate of 150 Kazakhstan tenge to the US dollar is used

While it is too early to definitively say, there is some evidence from the ongoing process of strategic review in late 2009 that the operating paradigm has been reinforced rather than undermined by the radical changes of 2008 and 2009. KIMEP has emerged from the storm stronger and fitter for the challenges of the recovery.

Building on this experience, the Institute has taken the decision to move forward in its development with a focus on further improving the quality of the education it offers. It has chosen a balanced path between fiscal conservatism and investing in the recovery. KIMEP has chosen to invest in faculty where there is student demand and reward those who have contributed. In addition, new funds have been made available for research to stimulate further activity based on the understanding that research improves not only the work environment but

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also the quality of classroom instruction. Greater attention is being paid to the development of international partnerships to further embed KIMEP in the global education community.

This focus on quality even when the recovery is uncertain is a calculated risk, but essential given that the core of the Institutes competitive advantage is the quality of the education it offers. This is all the more important given the demographic challenges in the years ahead as the post independence birth rate collapse from the early 1990s feeds through the society. KIMEP will have to work harder to attract students as the pool will be considerably smaller.

The core values of integrity, transparency, participation, stakeholder engagement and independence in operations are not easy to replicate. Competitors cannot easily build this culture. While the case of KIMEP is very specific it confirms a key maxim of competitiveness strategy products can be replicated with relative ease but cultural norms cannot.

The case also confirms that if these factors are not in place, then the organization may not be able to undertake such reforms without undermining operations. KIMEPs management was able to draw strength from credibility built over many years of significant growth. If it had not had this, the result may have been very different.

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References Barker, V.L., Duhaime, I.M. (1997) Strategic change in the turnaround process: theory and empirical evidence, Strategic Management Journal, 18,1, pp13-38. Blumenstyk, G. (2008, December 19) Economic Downturn Brings Prosperity and Opportunities to For-Profit Colleges, Chronicle of Higher Education, 55.17, ppA13A17. Brown, A. (1998) Organizational Culture, FT/Prentice Hall. Chronicle of Higher Education, Moodys (2009, January 9) Responses to the Downturn: A Chronicle-Moody's Survey, Chronicle of Higher Education, 55.18, pA14. Cothran, D. (1981, December) Program Flexibility and Budget Growth: The Case of the California Community Colleges, The Western Political Quarterly, 34.4, pp.593-610. Dennison, J. (1987) Universities under Financial Crisis: The Case of British Columbia, Higher Education, 16.2, pp. 135-143. Grinyer, P., Mayes, D., McKiernan, P. (1990)The Sharpbenders: achieving a sustained improvement in performance, Long Range Planning, 23,1,pp116-125; Grinyer, P., Spender, J-C (1979) Turnaround: Managerial Recipes for Strategic Success, Associated Business Press. Gumport, P. (2003, March) The Demand-Response Scenario: Perspectives of Community College Presidents, Annals of the American Academy of Political and Social Science, 586, pp. 38-61. Guthrie, J. (1985, Winter) The Educational Policy Consequences of Economic Instability: The Emerging Political Economy of American Education, Educational Evaluation and Policy Analysis, 7.4, pp. 319-332. Hammond, M. (1984, May-June) Survival of Small Private Colleges: Three Case Studies, The Journal of Higher Education, 55.3, pp. 360-388. International Monetary Fund, (2009, April) Commodity Price Index includes both Fuel and Non-Fuel Price Indices, retrieved from World Economic Outlook Database at www.imf.org (accessed September 29, 2009)

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International Telecommunication Union (n.d.) World Telecommunication Development Report and database, and World Bank estimates, retrieved from World Bank, World Development Indicators at www.worldbank.org (accessed September 18-25, 2009). Johnson, G. (1992) Managing Strategic Change; strategy, culture and action, Long Range Planning, 25,1, pp28-36. Johnson, G., Scholes, K., Whittington, R. (2005) Exploring Corporate Strategy, Prentice Hall. Kerr, C., Gade, M. (1986) Response to Decline and to Change: The USA Experience, European Journal of Education, 21.1, pp.67-79. Kissler, G. (1997, July August) Who Decides which Budgets to Cut?, The Journal of Higher Education, 68.4, pp.427-459. Lovett, D. Slatter, S. (1999) Corporate Turnaround, Penguin Books. Matthews, O., Nemtsova, A. (2009, August 17) Beware of Big Ideas Newly nervous postSoviet states crack down on Western schools, Newsweek. Plakhina, E. (2009, March 27) Mir-prepodavatelyam, voina-menedjeram, Respublika, #11 (146). Schein (1997) Organizational Culture and Leadership, 2nd Edition, Jossey Bass. Selesneva, E. (2009, April 28) Akim raskritikoval rukovodstvo KIMEP, Vecherniy Almaty. Shieh, D. (2008, December 5) Economic Woes Add Hurdles for Niche Colleges, Chronicle of Higher Education, 55.15, pA14. Tatimov, M. (2009) Glava gosudarstva i problemy narodonaseleniya, Arys. Wheeler, D., Strout, E. (2008, February 8) Colleges Prepare for Fiscal Downturn, Chronicle of Higher Education, 54.22, ppA1-A15. Wilson, R. (2009, February 6) Downturn Threatens the Faculty's Role in Running Colleges, Chronicle of Higher Education, 55.22, ppA1-A8. The World Bank, World Development Indicators, Retrieved from www.worldbank.org (accessed Sept. 18-25, 2009)

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Notes
1

Until 2000, KIMEP was a state owned institution, when it was privatized as a not for profit joint stock company under an entrusted management contract awarded to Chan Young Bang, PhD, the current President. As of 2009, Dr Bang holds a 60% shareholding, with the remainder held by the government as a silent partner. In order to ensure the long term future of KIMEP, Dr Bang has agreed to transfer ownership of his shareholding to a public foundation, named the Bang Education Foundation. The Government has agreed to sell its remaining share which will also be transferred into the care of the Public Foundation. Under the Charter of the Foundation, it is not possible to trade the shares of KIMEP. The Foundation will hold the ownership of KIMEP in trust for the people of Kazakhstan. Should it be liquidated, all assets will be invested into scholarships for Kazakhstani youth to study in the USA and Europe.
2

See footnote 1. See footnote 1.

All currency calculations are based on the current exchange rate of 1 US dollar to 150 Kazakhstan tenge for ease of reference.
5 6

Tatimov, M. (2009). Glava gosudarstva i problemy narodonaseleniya. Kazakhstan: Arys While KIMEPs tuition is relatively expensive compared to average Kazakhstani incomes, it is important to note that for this investment, students are trained by Western qualified faculty according to a US-style curriculum in English. When compared with US private institutions, where total annual costs can range up to $55,000 per annum, KIMEP provides tremendous value for money.
7

Source: World Bank World Development Indicators

This discussion is based on: Grinyer, P., Spender, J-C (1979) Turnaround: Managerial Recipes for Strategic Success, Associated Business Press; Grinyer, P., Mayes, D., McKiernan, P. (1990)The Sharpbenders: achieving a sustained improvement in performance, Long Range Planning, 23,1,pp116-125; Lovett, D. Slatter, S. (1999) Corporate Turnaround, Penguin Books; Barker, V.L., Duhaime, I.M. (1997) Strategic change in the turnaround process: theory and empirical evidence, Strategic Management Journal, 18,1, pp13-38.
9

The interplay of culture and strategy has an extensive literature. This discussion is framed around the ideas of Schein (1997) Organizational Culture and Leadership (1997), 2nd Edition, Jossey Bass; Brown, A. (1998) Organizational Culture, FT/Prentice Hall; Johnson, Johnson, G. (1992) Managing Strategic Change; strategy, culture and action, Long Range Planning, 25,1, pp28-36 and Johnson, G., Scholes, K., Whittington, R. (2005) Exploring Corporate Strategy, Prentice Hall.
10

In November of 2008, a five yar taxation audit was begun, covering the years 2005-2008. Under an arcane part of the tax legislation of RK, higher education institutions must generate at least 90% of their total revenue from degree program tuition. Otherwise they must pay corporate income tax on all income. When the report was received in December of 2008, the tax authorities found that KIMEP was liable for corporate income tax totaling 200m KZT plus penalties according to their interpretation of the Institutes accounts. KIMEP launched a legal campaign to reverse this decision. As of September 2009, this dispute is ongoing and will be resolved by the Supreme Court.

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Notes
11

The Ar-Ruh-Khak Foundation sought to influence.

12

Evgeniya, P., (2009, March 27). Mir-prepodavatelyam, voina-menedjeram. Informacionnoanaliticheskiy. Respublika, #11 (146). Retrieved from http://www.respublikakaz.biz/files/news/pdf/182.pdf
13

The state authorities sought to coerce the KIMEP management into signing a memorandum committing them to suppress student protests. KIMEP refused.
14

Press conference held April 3, 2009

Yessimov article Selesneva, E., (2009, April 28). Akim raskritikoval rukovodstvo KIMEP. Vecherniy Almaty. Retrieved from http://www.vecher.kz/?S=4200904280920
15

16

Matthews, O., Nemtsova, A., (2009, August 17). Beware of Big Ideas Newly nervous postSoviet states crack down on Western schools. Newsweek. Retrieved from http://www.newsweek.com/id/209961
17

Matthews, O., Nemtsova, A., (2009, September 21). Beware of Big Ideas Newly nervous post-Soviet states crack down on Western schools. Newsweek. Retrieved from http://www.newsweek.com/id/209961.
18

February 23, 2009 March 30, 2009 March 5, 2009

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