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Rick Hess Straight Up

Education policy maven Rick Hess of the American Enterprise Institute think tank offers straight talk on matters of policy, politics, research, and reform.

Money & Finance Opinion

The For-Profit Question

By Rick Hess — May 24, 2010 3 min read

So long as we recognize that it is no wiser to romanticize them than to demonize them, we absolutely ought to welcome for-profits into the education sector. For that reason, recent administration moves to favor nonprofits and public operators and to marginalize for-profits, in areas such as i3 and higher education, are problematic.

For-profit providers rarely make an explicit case for their own existence, because they’re so busy trying to curry favor with public officials and because parents are so worried about for-profits’ public image. There’s much discussion of choices and love of at-risk children, but little adult discussion of the benefits implicit in for-profit provision. While I’ve spent my entire working life in the employ of public entities and nonprofits (making me a peculiar defender of for-profits), I thought it’s worth taking a moment to say a few things about for-profits that really should be said.

While they certainly boast their own set of potential weaknesses, for-profits also have unique strengths. Several of these are particularly relevant today. First, because for-profits seek to earn competitive returns for investors, promising entrepreneurs are positioned to tap vast sums through the private equity markets. Second, for-profits have a relentless, selfish imperative to seek out and adopt cost-efficiencies where nonprofit managers will typically move more gingerly (witness last week’s hand-wringing about whether districts can possibly find ways to trim five or six percent of their teacher workforce). Third, for-profits have self-interested cause to expand (e.g. “scale”) more rapidly than nonprofits. Fourth, a focus on the bottom line means that for-profits are more willing to shift their efforts or reallocate resources when circumstances warrant. In short, the discipline of being for profit can make organizations more nimble and quick-footed, whether the question is growth or a change in strategy.

Nonprofits have little incentive to become “early adopters” of cheaper or more uncertain tools and techniques. For example, if substituting online training for in-person professional development is found to be almost as effective and far cheaper, it seems only sensible to adopt it and redirect the new dollars to more useful pursuits. Of course, such shifts are often slowed up because managers may have personal relationship with trainers, veteran employees may like their workshop travel or distrust online training, and clients may resent the perception that they are being short-changed. Such pressures exist at both for-profits and nonprofits, of course. Without investors to reap the benefits of new efficiencies and push aggressively for cost savings, nonprofits tend to make the switch much more slowly (typically, they instead retain old training methods and layer a bit of the new on top). Self-interest tends to encourage a more aggressive pace at for-profits.

Of course, the uneven record of the private sector in the last decade reminds us that for-profits have significant limitations--to say the least. The incentive to cut costs can translate into an incentive to cut corners. The urge to grow can lead to unacceptable compromises in quality. These are real concerns that require careful attention. Nonetheless, while ideologically-inspired opposition, unproven business models, and the uneven financial results of some for-profits have raised questions about for-profit ventures, we should not therefore imagine that nonprofits can readily match their dexterity, capacity for scale, and aggressive cost cutting. There is an important role for public entities, nonprofits, and for-profits alike in the vast expanse of American schooling.

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