Mention the Educational Testing Service, and most people think of the SAT, the Scholastic Aptitude Test that millions of high schoolers sweat over each year in hopes of lofty scores to help ease their way into colleges. But if ETS President Kurt M. Landgraf has his way, Americans will encounter the testing giant's exams throughout grade school and right through their professional careers.
Landgraf, a former DuPont executive brought to the organization in 2000 to give ETS a dose of business-world smarts, has a grand vision for the cerebral Princeton (N.J.) nonprofit. Worried that the backlash against college testing means a lackluster future for the SAT and other higher-ed ETS exams, Landgraf has been trying to diversify into two growth markets: tests and curriculum development for grade schools, where the federal No Child Left Behind Act has spurred national demand for testing, and the corporate market, where Landgraf sees potential growth in testing for managerial skills. By 2008, he hopes expansion in these two areas will more than double ETS's $900 million anticipated 2004 revenue. "My job is to diversify ETS so we are no longer reliant on one or two major tests," he says.
But the 57-year-old executive faces plenty of tough questions of his own. While every state is clamoring to develop effective primary- and secondary-school tests because of the 2001 federal law, most aren't willing to pay more than the $5 or so per student they now spend. Although ETS has been competing at that price and winning contracts, its expensive test-development methods mean it's losing money in the process.
Landgraf is pursuing growth largely by buying or setting up for-profit subsidiaries. In theory, the idea makes sense: leap into growth markets where you have something to offer and use the proceeds to subsidize the parent nonprofit. But reality is another thing. Earnings seem far in the future, and the new pursuit of profits may clash with ETS's academic culture and its mission to help provide equal access to education.
The new corporate mentality that Landgraf brought from DuPont, along with a few former colleagues, has roiled some of ETS's 2,700-person professional staff. It also leaves the group open to complaints from its for-profit rivals, which might resent being undercut by a company with a tax advantage. Wonders Sharon M. Oster, co-director of the Program on Nonprofit Organizations at Yale University: "To the extent that the earned-income venture becomes large, it does make people sit back and ask if it's really a nonprofit anymore." Landgraf says that as long as the nonprofit arm is fulfilling its mission, for-profit work, which could become 50% of ETS's business, is defensible.
Certainly, ETS's board members, mostly experts and educators, thought the place needed a jolt of energy. Landgraf's predecessor, Nancy Cole, worked to cut a bloated cost structure that had run up debt. But during the boom years of the late 1990s, ETS directors saw the success of many private rivals in the education business and thought more could be done. It "was an organization that was adrift," says Arthur Levine, president of Teachers College at Columbia University, who retired from ETS's board in 2002.
Now, Landgraf is pushing for a major revamp of the business. Today, ETS's core college products comprise 70% of revenue, including the SATs, Graduate Record Examinations (GRE), Advanced Placement (AP) Program, and Test of English as a Foreign Language (TOEFL). Landgraf plans to shrink that share to 25% over the next three years. But some of that shrinkage has come in unanticipated ways. In December, ETS lost a $200 million GMAT contract it had held since 1953 to Pearson Vue, a unit of Pearson (PSO ) PLC. The Graduate Management Admission Council, which owns the test, cited better technology, a more competitive price, and superior security of test results as reasons for the move.
The loss came on top of an earlier setback in 2003, when the College Board awarded a multimillion-dollar contract to grade the soon-to-be-required essay section of the SAT II to Pearson, which offered a better price.
Landgraf isn't finding it much easier to break into K-12 testing and for-profit curriculum assessment. Two years ago, ETS snagged big contracts in California and New Jersey to write and administer grade 3 through 11 testing as well as high school exit exams -- high-profile assignments given urgency by the No Child law. So far, though, the cost of the California contracts is running five times more than what ETS had expected, says Matthew Stein, an analyst at Eduventures Inc., an education research group. Landgraf concedes that the contracts aren't profitable.
They also pose a potential problem for his for-profit push. In January, ETS shelled out $8 million for Pulliam Group, a for-profit leader in curriculum assessment and teacher training. The deal will help ETS with a pending contract to assist the Los Angeles Unified School District on curriculum and teacher development. But some California officials worry that the move puts ETS on both sides of the state's testing efforts, since it will be designing curriculums whose results will be measured in part by ETS-designed tests. "It does [raise] the question: Are they giving away the trade secrets, since they are the keeper of the state exit exam?" says Geno Flores, head of accountability for California's Education Dept. Landgraf says there's no problem and that ETS will keep the two jobs completely separate.
Even if no conflicts materialize, it could be difficult for Landgraf to achieve his ambitious growth goals. Because the K-12 market is booming, ETS should be able to make a decent return in for-profit activities such as curriculum design and teacher development, where its vast intellectual capital and research capabilities give it an edge, says Eduventures' Stein. (The McGraw-Hill Companies, which owns BusinessWeek, competes in the K-12 market.)
But K-12 testing is another matter. ETS has been gaining a foothold but losing money on $5-a-head testing. Long-term, Landgraf hopes he can convince states that buy at that price to trade up to a better product that uses more of ETS's vaunted testing expertise. Trouble is, doing it right can mean shelling out up to $250 a head to design tests built around a state's curriculum. And few states can spend that kind of money. If they don't, however, ETS may only grow with the K-12 market, at about 15% a year. That would still leave Landgraf far short of his revenue-growth goals.
Landgraf insists that without significant change, ETS's future would be in jeopardy. Hugh B. Price, a former trustee and recently retired National Urban League president, agrees. "If you don't tend to the economic viability of the enterprise, you can occupy a space in the graveyard of nonprofits." The question is whether Landgraf's high-risk efforts will renew the venerable institution -- or divert it entirely from its original mission.
By Jennifer Merritt in New York