NCLB Law Bestows Bounty on Test Industry

By Lynn Olson — November 30, 2004 10 min read
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The No Child Left Behind Act has spawned new opportunities—and challenges—for an increasingly diverse testing industry.

With all of the federal law’s testing requirements, the Government Accountability Office estimates that states will have to spend between $1.9 billion and $5.3 billion in the next six years, depending on the types of tests used.

That prospect has led to new openings both for traditional test publishers—like CTB/McGraw-Hill and Harcourt Assessment—and for a host of middle-market or niche players who are scrambling to keep pace with growing demand.

“Obviously, there are more players than there used to be,” said John H. Oswald, the senior vice president and general manager of elementary and secondary education for the Educational Testing Service, based in Princeton, N.J. “There are many more choices that states have than they used to have.”

Based on an Education Week Research Center survey of state education departments this summer and fall, CTB/McGraw-Hill, in Monterey, Calif., now is the primary contractor for the largest number of state tests, followed by the San Antonio-based Harcourt Assessment and Pearson Educational Measurement of Iowa City, Iowa.

Together, those companies account for about 75 percent of the market, according to Mr. Oswald. The Itasca, Ill.-based Riverside Publishing, a division of the Boston-based Houghton Mifflin Cos., also continues to hold a number of state contracts.

But other players, such as the Dover, N.H.-based Measured Progress, the Minneapolis-based Data Recognition Corp., and the ETS, a relative newcomer to the precollegiate testing field, have also grown rapidly in the past several years. States can also choose from a handful of smaller players.

‘Competitive Landscape’

“It’s a very competitive landscape right now, and I’d say it’s undergoing a fair amount of change,” said Jeff Galt, the president and chief executive officer of Harcourt.

“We’re really talking 10 or 12 companies that are vying for a lot of these contracts,” agreed Stuart R. Kahl, the president and CEO of the nonprofit Measured Progress. “The competition is truly much stiffer.”

Eduventures, a Boston-based independent research firm, estimates that the pre-K-12 assessment market—including revenues from state tests, formative assessments used to inform teaching and learning on an ongoing basis, college-entrance exams and preparation for those exams, and catalog or off-the-shelf tests— totaled $1.81 billion in 2003. But that figure could jump as high as $2.29 billion by 2006, with the highest growth in state assessment programs.

Of that $1.81 billion, Eduventures figures about $334 million was outsourced by the contract recipients to subcontractors for functions ranging from content development to psychometric analysis and scoring.

That submarket is also expected to grow rapidly, to some $473 million in 2006, in part as vendors that win and lose state contracts continually scale their capacity up and down. In addition to holding the primary contract in a number of states, many vendors hold subcontracts.

States also have multiple contracts with different testing companies. For example, Measured Progress generated the test items for Louisiana’s standards-based tests in grades 4, 8, 10, and 11, but Data Recognition Corp. administers them. Utah’s math and science tests are under contract to Measured Progress, while Pearson handles its English tests.

Some industry shifts predate the NCLB law, which requires that states annually test students in reading and mathematics in grades 3-8 and once in high school, beginning in 2005-06. States must add science tests at least once in grades 3-5, 6-9, and 10-12 by 2007-08.

In the 1990s, CTB/McGraw-Hill, Harcourt, and Riverside began to diversify and set up their own scoring centers, rather than subcontracting that work to other, more specialized companies, such as Pearson.

At the same time, niche players, like Pearson, Data Recognition, and Measurement Inc., which had started out focused on data processing and scoring, began to expand into full-service players, doing everything from test development and administration to the scoring and reporting of results. Nonprofit groups, like the ETS and the Washington-based American Institutes for Research, which had not traditionally gone after large-scale state testing contracts, also entered the game.

“We had decided that assessment, and state assessment, was someplace where we could actually have an impact,” said Jon Cohen, the vice president and director of assessment at the AIR. “It’s not that NCLB caused us to want to do the work,” he said, “but it certainly did put a lot of work out there for us to be able to do.”

New Demands

Along with a more welcoming business environment for testing vendors are sharper demands.

“Probably the number-one issue that we’re seeing, and people are asking of us, is how do they test later in the school year but get the results back faster?” said Douglas Kubach, the president and CEO of Pearson. In Texas, Pearson is now turning around score reports in some high-stakes grades in five to seven days.

“The timelines are just incredible,” said Mr. Kahl of Measured Progress. “We used to figure, years ago, a couple of months was a fast schedule between testing and putting results out, and that just isn’t allowable today. Statewide assessment programs—basically, you’re talking weeks.”

In response, companies have been putting money into technology that enables them to build more quality checks into the testing process; to automate the shipping, receiving, tracking, and handling of materials; to scan open-ended responses and score them using computers; and to generate printed reports faster.

“We’re investing a lot in technology—both the technology the customer would use to administer a test, as well as systems that support our internal business practices,” said Mr. Galt of Harcourt.

Those innovations, combined with the prospect of getting results back faster and more efficiently, also are generating renewed interest in online assessments. In November, Illinois awarded a four-year contract to Harcourt that will lay the foundation for moving its entire testing system to online delivery.

“One of the solutions that many people are beginning to look at is online testing,” said David M. Taggart, the president of CTB/McGraw-Hill. “There are some issues, especially for statewide summative tests, where you want to test all children in the same window,” he added, “but I think everybody is working to try to resolve those.”

With Pearson’s help, Virginia administered more than half its high school tests online this year. The company is working with other states—such as Florida, Georgia, Mississippi, South Carolina, and Texas—to conduct smaller pilot programs or comparability studies, “so they can really understand what it means, and how they can move forward,” Mr. Kubach said.

Although most vendors administer only a small share—typically fewer than 10 percent of their state exams—online, according to “Testing in Flux,” a report by Eduventures, the company predicts that by 2014, more than 90 percent of states will administer their statewide tests electronically.

States also are looking for companies that can help them design tests for special populations of students, such as those with disabilities or limited English, who must be included in state testing programs under the federal law. And states increasingly are interested in tying their high school exit tests to college-admissions exams.

‘Growing Like Crazy’

But probably the biggest demands are for better data-analysis and reporting tools, and for formative, or interim, assessments that can keep track of students’ progress toward state standards over the course of a school year.

The No Child Left Behind Act requires that state tests produce “individual student interpretive, descriptive, and diagnostic reports . . . that allow parents, teachers, and principals to understand and address the specific academic needs of students.”

Most testing vendors say it’s not realistic to expect state tests, given once a year, to provide substantial diagnostic information about individual youngsters.

“What a lot of states are interpreting that to mean, and a lot of testing companies too, is doing something that allows you to have some prescription for action,” said Mr. Oswald of the ETS. “You can still have a prescription for action at the group level.”

But the demand for diagnostic results also has produced a huge “aftermarket” of formative and interim assessments for classroom use to help teachers teach better and students learn better, he said. “The formative-assessment market is a big one, and it’s growing like crazy, and it’s accompanied by a lot of professional development to help teachers use those.”

As a result, a number of the bigger companies have acquired smaller firms that specialize in interim assessments or data-driven decisionmaking and reporting. CTB/McGraw-Hill acquired the GrowNetwork, for example; the ETS bought the Pulliam Group; and Houghton Mifflin bought EduSoft. They’re also inventing new products and services on their own.

In addition, vendors say, they’re seeing growing state interest in “value added” measures, or in tracking students longitudinally over time. (“‘Value Added’ Models Gain in Popularity,” Nov. 17, 2004.)

“Lots of folks, when they’re putting it in their requests for proposals, aren’t really specifying an approach,” Mr. Kahl of Measured Progress said. “They’re saying they want something to look at the progress of individual students from year to year, but they’re kind of vague sometimes.”

Edge for Big Players

Despite such a dynamic market, the large traditional players in the testing industry still hold advantages, said Eric W. Bassett, the director of research practice for Eduventures. For one, much of the content they’ve developed over the past decades for off-the-shelf or catalog exams can be recycled for customized state tests.

“They have deep pockets; they have well-established relationships; they’re great brand names in the industry,” Mr. Bassett said. “What small players can provide is innovation and flexibility and a new way of looking at the way things run.”

The stiff legal risks associated with high-stakes assessments also make it harder for new entrants to compete.

Since January, CTB/McGraw-Hill has received new contracts totaling about $180 million. The company now has about 1,000 full-time employees and five scoring centers, up from three centers five years ago. It has also added a research facility in Centennial, Colo. Harcourt, which now has about 1,400 workers in the United States, says its head count has grown almost 30 percent in the past 14 months.

But some of the newcomers have also grown significantly. The nonprofit ETS estimates revenues of about $90 million from state test contracts this year, with the bulk of that, about $55 million annually, coming from California. It hopes to add one or two state contracts a year.

Measured Progress had 22 contracts, totaling just over $26 million, in fiscal 2000. This fiscal year, it anticipates about 38 contracts, totaling some $62 million. “So, needless to say, the biggest jump by far is this current year,” Mr. Kahl said.

Data Recognition, a privately held company with about $100 million a year in revenues, not all of it from K-12 testing, also has seen its primary growth in the past few years, said Susan S. Engeleiter, the president and chief operating officer. “We re-secured business that we had been performing, and then we added some business,” she said.

Picking and Choosing

Other vendors say they’re picking their targets carefully. “We’re not interested in becoming a CTB or a Harcourt or one of the really big test companies,” said Mr. Cohen of the AIR.

His division now bills about $40 million a year, including item development for the federal government’s National Assessment of Educational Progress, along with state contracts in Ohio and South Carolina. “We want to work very intensely with a few places where we’re going to wind up helping them make significant and, hopefully, good changes in their educational systems,” Mr. Cohen said.

Eduventures predicts that small and midsize providers will continue to experience a “rapidly expanding market” as states move to customize their tests and add grades and subjects.

But they’ll also face the prospect of mergers, if they want to compete.

Several vendors also observed that while large states often find many companies vying for their business, that’s not true in smaller states, which may have few.

“There is still that tiering of players,” said Mr. Taggart of CTB. But, he added: “I think more players have entered the market as it’s become more attractive. And I think that keeps all of us moving ahead and being competitive—which is great.”

A version of this article appeared in the December 01, 2004 edition of Education Week as NCLB Law Bestows Bounty on Test Industry


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