By Michael Horn, ContributorForbes - January 31, 2014: (Click here to read entire article.)
Frederick M. Hess, the director of education policy studies at the American Enterprise Institute, and I coauthored this piece.
Julie Petersen’s piece, “For Education Entrepreneurs, Innovation Yields High Returns” in Education Next (full disclosure: we are both executive editors at the journal that published the article) ignited the familiar hand wringing and invectives about the proper role of for-profits in education in the Twitter-sphere this past week.
The piece does a terrific job profiling three education entrepreneurs who created for-profit companies that all had successful exits in recent years: Larry Berger, who started Wireless Generation, which was sold to News Corporation in a $360 million deal and now underpins News Corporation’s Amplify division; Jonathan Harber, who started SchoolNet, which Pearson acquired in a $230 million deal; and Ron Packard, who started K12, Inc., which went public at the end of 2007 and had revenues of $848 million last year. Peterson also raises some tricky and important questions—and seeks to draw some lessons from the success of these entrepreneurs—about a sector that is desperate for innovation from entrepreneurs and yet one that has been famously resistant to the innovations they have to offer.
Although there have been some signs in recent years that public school educators may be starting to open their minds about working with entrepreneurs who start for-profit companies, the all-too predictable reaction from many on Twitter about the “disgust” of reading about “exit stories” from entrepreneurs in education, provides some clues as to why the sector has been so resistant to working with outside innovators.
But as we wrote in our recent book, Private Enterprise and Public Education, the conversation around for-profits in education all too often misses the boat—on both sides of the conversation.
Critics often accuse school reformers of “privatizing” public education. When for-profits enter the conversation, those same critics level more serious charges and often accuse those companies of having one motive: making money off of the backs of kids.
On the other hand, when education entrepreneurs who have chosen to incorporate as for-profits are asked why for-profit, their answer is typically benign and makes the case that there is very little difference between for-profits and non-profits. As Daphne Koller, CEO of Coursera, a for-profit education company, said in an interview with EdSurge, “The notion of for profit and nonprofit is a red herring.”
But if that’s the case, then why bother with for-profits in public education at all? If they are all the same, then do for-profits bring any unique benefits? If the answer is no, then we could allow only non-profits and government-run organizations to operate with public education funds to ease the skeptics’ worries.
Ultimately we conclude that Koller has a point. In many ways the delineation between for-profit and non-profit is a red herring—that is, when it comes to asking whether an organization is good or bad or of high or low quality. There are plenty of for-profits that do great things in education with public funds, and there are several that don’t; but the same is true with both non-profit and governmental organizations. Stating whether an organization is for-profit or non-profit says little about whether it is doing good things for students.
Indeed, the charge that for-profits are only about making money off the backs of kids doesn’t make much sense. Sure, for-profits certainly want to make money. No surprise there. But to make money, they need to sell products and services. To do that successfully, there have to be willing buyers on the other end of that transaction. If buyers find their products to be of no value, then the companies won’t make money, which gives them an incentive to fulfill the jobs to be done of their customers and build and deliver great products and services.
That said, because laws and regulations govern public education and the government is the ultimate customer for for-profits in public education, policy shapes demand. One of our big conclusions then is that if we have sensible policies and quality control mechanisms that foster smart demand, for-profits can indeed be a force for good.
Non-profits though have these same dynamics in many ways, as they have to create sustainable business models that perform services that their customers—sometimes donors who may not be their users—value.
But that returns us to the original question we posed. If there isn’t much difference between for-profits and non-profits, then why bother taking the risk with folks who are out to make a dime on behalf of shareholders (in the case of for-profits)?
The answer is that because for-profits have owners, they bring some unique strengths compared to non-profit and governmental organizations, including the ability, on average, to attract capital far more easily—not unimportant in a field where people are always clamoring for more dollars. With the ability to raise capital more easily comes an ability to scale faster and to attract top talent with different types of compensation packages. With a focus on the bottom line and a consequent need to provide customers with something for which they are willing to pay, they are often able to move more nimbly in the pursuit of serving the customer, innovating, and boosting productivity. These can be tremendous assets worth explaining and harnessing properly in public education.
By the same token, the volume also explains that these assets are the flip side of real weaknesses. Because for-profits seek to make money and grow, their desire to cut costs and boost productivity can, at times, cause dubious actors to cut corners or market themselves in deceptive ways. If policies incentivize bad things, then for-profits may scale readily by doing work that is not beneficial to society. Similarly, the incentive to grow can cause for-profits to be less rooted in community institutions than non-profits, less stable, and more willing to cut services or personnel.
What this all means is that ultimately the conversation of for-profit vs. non-profit vs. governmental organization is the wrong one. Instead we should be exploring policies that focus on student outcomes and create a climate that rewards good actors and punishes the bad—regardless of tax status. It also means that for-profits need to be a part of the equation so that the public can leverage their unique strengths.
Pieces like Petersen’s that explore the success stories—and draw appropriate lessons from those successes along with raising real questions—can only help us do just that.
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