Education Supply: Will It Create Demand?

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As recently as 25 years ago, public schools rarely contracted with private vendors for services. School districts--or, less often, states--ran their own transportation systems and food services, among the biggest budget items after teacher salaries. And while schools bought textbooks privately, California--then as now, the nation's largest textbook market--printed most of its textbooks in the state printing plant (at the time, the largest printing operation west of the Mississippi).

How times have changed. School leaders, eager to unburden themselves, are "outsourcing," contracting out services as fast as they can. Marriott, Pizza Hut, and ARA Services are now commonly seen in school "food courts," and fewer and fewer school districts still own, service, and operate their own bus fleets. And these changes are just the beginning: Since California got out of the printing business 15 years ago, textbooks and workbooks are privately produced for all of the nation's schools. In the newer realm of high technology, schools have never been their own producers. Today, educators must make sane choices among vendors selling a baffling, ever-changing variety of computers, software, CD-ROMs, networks, and telecommunications products.

Schools also use private providers for construction projects; design and construction are the province of private architectural, engineering, and contracting firms. From carpets to paper towels, schools are outfitted by private businesses and distributors. And the drumbeat of privatization goes on: warehousing and inventory control; payroll and accounting; data collection and data management; maintenance, janitorial, and groundskeeping; printing and duplicating; legal and consulting services; energy conservation and management; and training of teachers, administrators, staff, and school board members. In short, almost every administrative and management function in education is or soon will be "privatized."

The reasons are obvious and sensible. Besides the possibility of reducing costs, administrators favor contracting out to diminish the administrative burden, increase accountability, and improve performance. Experts can often do it better, faster, more reliably, and even more cheaply. But most important, administrators are freed to focus on academics.

Modern school systems are simply doing what is already de rigueur in business and industry. To use management guru Peter Drucker's formulation, companies "outsource" to optimize, rather than to maximize. Optimizing means doing a few key things well; maximizing means doing many things, but few if any of them well. Even the most famous vertically integrated producer in history, the Ford Motor Company, outsourced such basics as tires. Today, half an automobile may be outsourced; tires were just the beginning. Why is this important? Because the next round of school outsourcing has begun: delivering instruction, in part or in total.

The evidence? The First Annual Education Industry Conference was held in New York City in mid-February. Sponsored by the investment bank Lehman Brothers, this meeting may well be remembered by historians as the day that "for profit" education came of age. Several hundred potential investors and education industry leaders showed up to trade war stories, sniff out the competition, and pick up hints on investment possibilities in the future of education. (See Education Week, Feb. 21, 1996.)

And here is what the participants saw: Education expenditures from all sources for all purposes are over $620 billion, approaching 10 percent of the gross national product. That's a lot of money, even by Washington standards. Elementary and secondary education alone spends $285 billion per year. And the education sector is diverse, and growing rapidly. As Christopher Whittle told his rapt audience, one market "point" is $2.8 billion. By business and education standards, that is a lot of money. If it were a company's annual billing, it would be enough to get the firm into the Fortune 500.

This market is so big, so diverse, and so unexplored that even investment bankers sit up and take notice. Parallels with other human-capital enterprises, such as health care, are compelling. Privatization and profits have exploded already in the medical field, as the United States seeks to control costs and improve performance. So, too, in education. In his now-famous Wired magazine interview, Apple Computer's founder, Steven Jobs, observed that technology will not save education; the only thing that can is the force of markets, introducing new ideas and practices.

It's already happening. Entrepreneurs are not just waiting patiently for access to markets, they are literally prying the door open themselves. But it's not easy-revolutions rarely are. The recent cancellation of contracts held by Education Alternatives Inc. to manage schools in Baltimore and the system in Hartford, Conn., reveal the difficulty of moving from a public monopoly to a private service. While newsworthy and sobering to investors in private provision, these are momentary setbacks, straws in the wind, not to be confused with long-term trends. The more relevant development is the quiet, steady, and dramatic growth of a company like Sylvan Learning Systems Inc., an education provider that tutors students and gives numerous tests, including a range of Educational Testing Service tests. Sylvan's profits went from $15 million to $65 million in only four short years.

Among the pioneers are Christopher Whittle of the Edison Project and John Golle of EAI, both chastened by their disappointments. But like true entrepreneurs, they are learning, changing, and coming back for more. Mr. Whittle's new message, delivered at the Lehman conference, was precisely what businesses should adopt: "We are here to serve our clients, the public sector is our client, and your success is our success." While this is new rhetoric in the education sector, it is language that many superintendents and school boards understand.

What we see today is a great groundswell of "supply," as the participants at the Lehman Brothers conference show. Dozens of companies, some private and some publicly traded, are just the tip of the iceberg. Indeed, so robust is the "supply" response already that one wonders why the "demand" is so weak. To the uninformed observer, it looks like "restraint of trade." The great education question as this century ends is how quickly will the supply side of the equation capture the interest of educators? And, once the demand is organized and made manifest--as school boards begin to request bids for instructional management and new pedagogical technology and techniques--supply will grow explosively.

Vendors already in the market will forge ahead. And new suppliers will appear in abundance. Just who these new vendors will be depends on what school boards do, and how they forecast their needs and shape the bidding process. Put most simply, in a healthy market, particularly one with the resources of public education, boards can write their own ticket. The whole world of providers is at school districts' command--choice and resources undreamed of just 10 years ago. How boards play their hands will determine the contour of this emerging market.

This does not call for rash or radical action. In fact, school boards tend rightly to be cautious where children are concerned. As boards enter unfamiliar terrain, they are likely to open the bidding process incrementally, inviting vendors to bid on parts of the academic process. No doubt, Berlitz would be delighted to bid for language programs. Sylvan Learning already has centers in 60 public schools in five cities and is poised to grow rapidly. Originally offering suburban tutoring for middle-class kids, the company confounded critics by opening school-based learning centers for low-income students served by Title I.

With experience, school boards and superintendents could become more venturesome. Indeed, they can selectively stimulate the supply-side response and shape services to the needs of their schools and students. Besides soliciting bids for new schools from existing for-profit providers, boards can encourage proposals from teacher collaboratives or cooperatives.

They can encourage nonprofit groups such as Theodore Sizer's Coalition of Essential Schools, James P. Comer's School Development Program, or Henry Levin's Accelerated Schools to bid on schools or programs within schools. And boards of education could work with community-based organizations such as Girls Inc., the Urban League, the National Association for the Advancement of Colored People, Boy and Girl Scouts, colleges and universities, or local museums to create exciting, unique schools for children.

What we are witnessing is the fulfillment of an old axiom in economics: "Supply creates its own demand." It is true entrepreneurship in action: stimulating something so new that no one knows that they need it until they see it. The Xerox machine, fax transmission, personal computers, laptop computers, cellular phones, and CD-ROMs are modern examples. But supply can create its own demand only when buyers are willing, thoughtful, and creative. It certainly worked for PCs and cellular phones, color television, and jet planes. Only time will tell when the schools of the future will join this extraordinary list.

Vol. 15, Issue 26, Pages 37, 48

Published in Print: March 20, 1996, as Education Supply: Will It Create Demand?
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