Management Firm Finds Schools a Tough Sell

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When John T. Golle walked into his home office one day recently, he had just logged 10,000 air miles visiting four school districts in three days, and he expected to be on the move again soon.

The chief executive officer of Education Alternatives Inc., Mr. Golle is a salesman with a tough sell: getting public educators to take the revolutionary step of entrusting their schools to his publicly held company.

For the past five years, Education Alternatives has been involved in an effort to assume the operation of public schools and manage them in a way that produces profit.

The small Minnesota firm believes that it can run public schools more efficiently than the public sector has done, find enough savings to put more money into instruction, and yet still yield tidy returns for its investors.

To date, however, the firm has had limited success in getting school boards to sign on the dotted line.

"This is the most difficult thing that I have attempted to do in my adult business career,'' said the 48-year-old Mr. Golle, whose company must succeed in the fields of both education and business and wade through what he calls "a quagmire of special interests'' if it is to survive at all.

But even if it survives only in a small way, Education Alternatives could change the way in which the nation operates its public schools.

Moreover, stock analysts say, the company could grow rapidly and reap sizable profits by tapping into only a small portion of the more than $220 billion that the nation spends on elementary and secondary education each year.

"If this thing wins, it is going to win huge,'' said Carol M. Clark, the director of research for John G. Kinnard & Company of Minneapolis, a securities and investment brokerage firm that underwrote a stock offering for the company and has recommended the stock to its investors.

Michael T. Moe, who has closely followed the company as a financial analyst for another one of its underwriters, the brokerage firm Dain Bosworth Inc. of Minneapolis, said it is "in the right place, at the right time, with the right service.''

The company's success, investors say, would mean competitors would surely follow.

But some observers remain unpersuaded by such claims.

Denis P. Doyle, a senior fellow at the Hudson Institute in Washington, said stock analysts' speculation that Education Alternatives may someday turn huge profits shows "how little Wall Street knows about education.''

Corporate Origins

Education Alternatives emerged in 1986 out of an abandoned attempt by Control Data Corporation, a Minneapolis-based computer company, to develop innovative new schools.

After two years and more than $1 million in research costs, Control Data had developed what it called the "Tesseract'' approach to learning, but then decided to focus its attention on its core business, computer manufacturing and service. It sold Education Alternatives to Mr. Golle, the co-founder of a leading human-resources-development firm.

Tesseract takes its name from a term used in Madeleine L'Engle's renowned children's novel, A Wrinkle in Time, to describe a fictional corridor for dimensional travel. The program is trademarked, but many elements of the approach come from established pedagogy.

The cornerstone is individual attention, with one teacher and one instructional intern working with each group of 30 students, and teachers developing a "personal education plan'' that sets educational goals for each child.

The Tesseract approach also asks students to derive much of their learning from computers, books, and real-life experiences. Regarding parent involvement as vital, it requires teachers to hold four conferences with parents each year and to communicate with them regularly.

The company opened its first private Tesseract school in Eagan, Minn., in September 1987, but was deterred from its plan to build a chain of private schools by the high brick-and-mortar costs involved. It divested itself of the Eagan school and another it had opened in Phoenix, but has retained management of them.

Education Alternatives then shifted its strategic focus to providing school management, consulting services, and educational products and made its first common-stock offering, 1,663,690 shares at $4 each, in May 1991 and its second offering, 425,000 shares at $7 each, last June.

Slow Start, High Risks

The firm landed its biggest deal yet in July, when it contracted to operate nine public schools in Baltimore. At the time, it was under contract to help operate a public school in Dade County, Fla., and was continuing to manage the private schools in Minneapolis and Phoenix.

Late last month, Education Alternatives announced it had significantly reduced the rate at which it was losing money over the last year and said it might turn a profit in the new fiscal year. Its stock, about four million shares of which are traded over the counter under the NASDAQ symbol EAIN, had climbed to more than $11 per share, nearly triple its original price.

Moreover, the company was conducting a feasibility study to determine if it could manage several Palm Beach, Fla., schools. It had also recently added John T. Walton, the son of the late Wal-Mart Stores founder, Sam Walton, to its six-member board after he purchased 100,000 shares, or 2.5 percent, of the company's common stock.

But even the firm's staunchest enthusiasts concede that they see high risks in investing in the company.

For its first five years, Education Alternatives failed to turn a profit, generate a positive cash flow, or succeed in its pursuit of a contract to manage an entire district. It has invested more than $8.5 million, but still has not demonstrated that it can profitably run public schools at their current funding levels, as it says it can.

Mr. Doyle of the Hudson Institute suggested that Education Alternatives may have difficulty making the labor-intensive education industry more efficient, and he noted that concern over the welfare of students may prevent the firm from making some decisions that make good business sense.

The company probably will have to conduct a large volume of business, managing at least 10 and perhaps more than a hundred schools, to make even "a modest profit,'' Mr. Doyle predicted.

Mr. Moe of Dain Bosworth Inc. speculated that the company will experience snowballing growth once it lands a contract to manage an entire district and is able to demonstrate how well it can implement districtwide reforms and trim central-office waste.

"Other districts wishing to be viewed as progressive will follow quickly,'' Mr. Moe predicted.

Baltimore Key Test

So far, the company's most ambitious undertaking is its five-year, $140 million contract to manage eight elementary schools and one middle school in Baltimore.

Michael E. Hickey, who has closely watched Education Alternatives' Baltimore undertaking as the superintendent of the nearby Howard County, Md., public schools, asserted that the company has put its reputation for delivering a high-quality education on the line by pledging to improve the nine Baltimore schools for about $5,550 per student per year--the amount the district currently spends per pupil.

The company, which previously has worked with single schools, is likely to encounter far more difficulty in showing improvement in nine schools with a total of 4,800 students, Mr. Hickey said.

Moreover, several of the facilities that it is operating are "maintenance nightmares,'' Mr. Hickey added, echoing the views of others who have visited the district.

Indeed, the firm's Baltimore effort got off to a rocky start in September, though it appeared to be faring better last week.

The company has had the support of Walter G. Amprey, the city's superintendent of schools, but has been beset by conflict with the Baltimore Teachers Union. The union has boycotted the firm's training sessions and staged protests against it. (See Education Week, Sept. 16, 1992.)

"They have not been successful in winning the minds and hearts of teachers by any means,'' said Irene B. Dandridge, the president of the union, whose members have objected to the company's decisions to change school schedules, mainstream special-education students, and replace veteran paraprofessionals with instructional interns.

Also last month, about 80 parents of children at Harlem Park Elementary, one of the privately managed schools, held a sometimes-tense meeting with Mr. Golle to complain that the company was moving too quickly in implementing changes there.

But David A. Bennett, the firm's president, noted in a recent interview that his company has received a much better reception from parents in the other eight schools.

And last week, union officials said they were near agreement on a proposal calling for paraprofessionals with a certain number of college credits to be hired as interns in schools the company manages.

Mr. Bennett said he was confident that his firm will be able to work with the Baltimore union, and cited as a precedent its ability to address the concerns of the United Teachers of Dade in assuming part of the management of the public South Pointe Elementary School in Miami Beach.

But Pat L. Tornillo Jr., the executive vice president of the Dade union, last month said that it would not have agreed to work with E.A.I. on the terms the company has proposed in Baltimore.

In Dade County, Mr. Tornillo noted, Education Alternatives did not attempt to show it could run a school more efficiently than public providers, but instead pledged to raise an additional $2.5 million from private sources over five years to fund the additional costs of its educational methods and to cover its fee.

'To Be the Public Schools'

Education Alternatives' basic pitch to districts is that can significantly improve schools at the same average cost per pupil that the district would spend.

"Our mission is not to replace or compete with the public schools, but to be the public schools--and to fundamentally change the dynamics of the learning environment,'' a company brochure proclaims.

Education Alternatives takes an approach different from that of the nation's most widely publicized new venture in for-profit schooling, Whittle Communications' Edison Project. Whittle is seeking to build and operate up to 1,000 private schools that would charge modest tuitions and let public schools copy their innovations. (See Education Week, June 3, 1992.)

Education Alternatives seeks to operate in existing public school buildings, rather than building new private facilities, and contracts with school boards to purchase its services with tax dollars, rather than relying on the parents of students to pay tuition or use publicly funded vouchers.

"Our approach brings none of the elitism or selectivity of private schools,'' a company brochure asserts.

Contracts with private vendors are common in other parts of the public sector; many school districts already contract with private vendors for services regarded as peripheral to their mission, such as food services or student transportation.

But Education Alternatives is unusual in that it is asking a public entity, the school system, to contract out its main line of work, observed Alan K. Campbell, a former chairman of the U.S. Civil Service Commission and an expert on privatization in the public sector.

Waste Not, Want Not

Education Alternatives' strategy is to free up money to improve education by trimming about 25 percent of school expenditures, especially in such waste-prone areas as maintenance, secretarial services, food preparation, purchasing, and administration.

The company contracts with Johnson Controls, a firm long involved in school maintenance, to find ways to bring long-term efficiency to the operation of school facilities.

It also contracts with KPMG Peat Marwick, an accounting and consulting firm that has worked extensively with state and local educational agencies, to scrutinize records of school spending and determine ways to use school employees more efficiently.

Paul B. Ballard, a Dain Bosworth investment executive who sits on the Kansas City, Mo., school board, ventured that Education Alternatives' status as a publicly held company means that stockholders watch its books and give it additional incentive to operate schools more efficiently.

The company then takes the money it frees up and directs an additional 20 percent of school expenditures toward implementing the Tesseract system.

Education Alternatives asks school boards to route tax funds to its schools and then assume an oversight role, leaving the firm to carry out a site-based approach to management that holds teachers and principals directly accountable to the "customers'': parents, students, and board members. The superintendent serves as an on-site project manager and works under the terms of a performance-based contract with the firm.

'Doing Well by Doing Good'

After cutting costs and implementing its Tesseract approach at a school, Education Alternatives will be left, its officials hope, with 5 percent of the school's budget to keep as profit.

"There is a word for all of this. It is called capitalism,'' said Mr. Golle, who has been candid about his desire to reap profits.

He insisted, however, that his goal over all is "doing well by doing good,'' and he said he will not seek to make money at the expense of students.

But some educators who have dealt with the company, charge that profits, rather than students, appear to be its bottom line.

Ms. Dandridge at the Baltimore Teachers Union asserted in a recent interview that Education Alternatives appears to have rushed too quickly into her district out of a desire to improve its cash flow.

School board members in Duluth, Minn., and other districts where the company has done business also have accused the firm of operating secretively and failing to communicate its intentions.

The Duluth school board, which in March contracted with Education Alternatives to provide it with an interim superintendent for four months, dropped any discussion of giving the company a long-term contract after it became entangled in an ongoing local dispute over school construction and seemed unlikely to quickly bring about dramatic school improvements.

But company officials maintain that the educational interests of children in Baltimore and elsewhere have been safeguarded by a performance-based contract requiring the company to improve school outputs and demonstrate quantifiable improvements in student performance before it takes its profits.

"As long as we fulfill our mission,'' Mr. Golle asked, "who then can object?''

In the schools the company has managed to date, students have advanced about 1.5 grade levels every school year, Mr. Bennett said.

Events Drive Stock

The nation's education enterprise, of course, has long been the source of revenues for publishers, computer manufacturers, and other publicly held companies. But Education Alternatives may be the first company to attempt to derive all of its revenue from running schools and selling related educational products.

The company has an unusual advantage, several stock analysts and investors said, in that it can take on new contracts worth millions of dollars without needing to hire new employees or invest in new facilities.

"The Baltimore contract added $27 million in annual revenues, and most likely there will be one additional person at the company to handle that,'' Ms. Clark of John G. Kinnard & Company said.

"It is rare that you can find a company whose business can go up in size so dramatically overnight,'' added Richard W. Perkins, the president of Perkins Capital Management, an investment group in Wayzata, Minn., that has acquired 15 percent of the company's stock.

Because Education Alternatives is a pioneer in its field, its stock behaves much like "concept'' stocks in such fields as biotechnology, fluctuating wildly on the basis of events and news of decisions by government agencies, analysts observe.

Mr. Moe said the firm's stock climbed from about $10 a share to $14 a share last March, largely in anticipation of the company's landing a contract to manage the Green Brook, N.J., school district. It then plunged to $6 a share by early May after Green Brook voters ousted board members who had advocated contracting with the firm.

More recently, the stock rose again, to almost $14 a share, after the Baltimore contract was signed, but then dipped slightly after the beginning of school and the company's labor troubles with teachers.

In mid-September, Mr. Golle sold about $1.2 million worth of the stock he owned to a member of the company's board of directors. He said last week that he had sold the 100,000 shares at $12 each to help retire some of the personal debt he was carrying in connection with the private Tesseract school in Phoenix.

Vol. 12, Issue 06

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