Hard Lessons At For Profit Schools

First, go only where invited, and then don't overpromise

After four stormy years, the rancorous end was almost predictable. With city police shielding them from angry parents in a packed grade-school auditorium, Baltimore's Board of School Commissioners decided on Nov. 30 to cancel the remaining year of a contract for Education Alternatives Inc. to manage or administer 12 of the city's schools.

Small wonder that the board pulled the plug on one of the most ambitious experiments in private management of public education. Having promised big cost savings and rapid improvement in students' test scores, EAI, opponents charged, delivered little of either. Instead, its performance dealt a "serious blow [to] the entire for-profit education industry," crowed Heidi Steffens, senior policy analyst at the National Education Assn., a leading teachers' union that opposes turning schools over to outsiders.

Can public schools and the profit motive coexist? Certainly, EAI's report card isn't glowing: The nation's biggest school-management company lost the fight to renew its contract at a Florida school in June and still is battling Hartford over its performance-based compensation. EAI's stock now trades below 6, down from a peak of nearly 49 two years ago.

Yet Americans remain frustrated with educational performance that has failed to keep pace with steady spending increases and greater demand for skills in the workplace. Many remain willing to entrust outsiders with reform. "We ought to have the courage to look further afield for help," says Louise A. Sundin, president of the Minneapolis Federation of Teachers. In Minneapolis, Boston, Mesa, Ariz., and other cities, private managers are scoring modest successes in public schools. A handful of companies now oversee some 77,000 students and are quietly picking up new management contracts (table).

They're not making much money yet. But they are learning, slowly, what will fly. While EAI attempted in Baltimore and Hartford to take over large chunks of the systems, competitors hope to get better results by managing individual schools. Where EAI clashed head-on with unions and board officials, other companies are inviting those key players into the process--or else avoiding conflict altogether by entering schools only where support is strong.

PATCHY RESULTS. The biggest lesson: EAI overpromised on results. Now rivals know they have a better chance at effecting reform if constituents don't expect improvements overnight. "It is romantic to think you can hit tough goals quickly," says Peter Hutchinson, whose Public Strategies Group Inc., a St. Paul consultancy, took over the Minneapolis system in 1993. PSG has helped redesign a curriculum, reduced disciplinary problems, made peace with teachers, and righted the system's finances. But overall academic results have been patchy: Reading and math goals haven't been met, and the gap between grades of white students and those of minorities continues to widen.

More modest measures are also the byword of the Edison Project. Onetime media magnate Christopher Whittle originally envisioned Edison as a network of 1,000 new private schools. But when his Whittle Communications collapsed in 1994, financing for Edison evaporated. Whittle lowered his aims and now runs just four schools, with contracts in hand to manage two more next year in Dade County, Fla., and one in Colorado Springs.

Edison's strategy is still ambitious--nothing less than to redesign the public school curriculum. But Whittle says he's learned to pick his spots. "We don't go where we aren't invited," he says. Willing school districts get a program heavy on teacher training, technology, and family involvement. At Edison's Boston Renaissance Charter School, housed in a 13-story downtown building, students spend a third longer in class than peers at other city schools. A new pay plan under development likely will give teachers raises based on merit rather than seniority. And red tape is circumvented. Teacher Esterjuana Gliwinski is overjoyed by the changes: "Anything you need, within reason, you can order. There's no need to go through the bureaucracy." This year, 2,100 students applied for 630 spots.

Other companies are seeking out niche opportunities. Sylvan Learning Systems Inc., which long has provided education services to corporations and through its fee-based storefront centers, now runs intensive tutorial sessions for lagging students in 57 public schools, mainly in Maryland and Illinois. Kids get chits for toys and other awards when they do well; system administrators get Sylvan's guarantee that students will pull in better grades.

Ombudsman Educational Services Ltd., meanwhile, specializes in dropouts and discipline problems, putting kids through three hours of computer-based teaching a day in spartan off-site classrooms. "These kids have the opportunity to get out of the mainstream and catch their breath," says Frederic W. Skoglund, an assistant superintendent in the 70,000-student Mesa district, one of 150 systems that pay Ombudsman $15 to $18 a day for each student. "The vast majority are able to come back [to school]."

VAST POTENTIAL. Although modest, such successes likely will help break down resistance to for-profit school management. As that happens, capital could flood into an industry whose potential vastness already has captivated Wall Street. Lehman Brothers Inc. has a team of analysts and investment bankers studying the industry. Donaldson Lufkin Jenrette Inc.'s Sprout Group venture arm raised $12 million for Edison in 1994. Now, Sprout Vice-President Patrick J. Boroian thinks the business is on the verge of exploding. "This reminded us of the health-care industry 20 years ago," he says.

Investors are counting on long-term payback from the sheer volume of schools that can be turned around, but they won't likely see fat margins. Whittle warns: "we should expect 7% to 12% [pretax] margins. Beyond that we run into political resistance." He expects Edison to move into the black by 1998, after losing $6 million this year on revenue of $12 million. Meanwhile, PSG has yet to make money, though it has earned two-thirds of the pay possible under its performance-based Minneapolis contract.

EAI, which lost $7.4 million on $213.6 million in sales for the fiscal year ended last June, has a new lesson plan. "Perhaps we sold ourselves to the wrong prospective users--large, highly political, and heavily unionized districts," says Chairman John T. Golle. Now he is pursuing schools in Washington, D.C., but he also wants contracts in suburbs or rural areas such as Wappingers Falls, N.Y., and Hillsboro, N.H. He likely won't find any less contention there, though. Wherever there are parents, teachers, and politicians, passions run high--and progress, even for the profit-motivated, is bound to be slow.

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