Saturday, May 21, 2011

59/100: How can 'Education as Enterprise' Turn A Profit?

I am looking for a name of my industry. I am in this industry which is called 'Private Sector Education' in Britain, and 'For Profit Education' in America: I like neither of these terms. For a start, 'Private Sector' is a term espoused with Britain's ubiquitous Public Sector in mind, but that distinction may soon go. More and more education businesses will now vie for public funds given out in terms of subsidized student loans, and more publicly funded universities and colleges would want fee paying students just like the Private sector. In fact, the Universities minister David Willetts just alluded to that possibility, only to be severely rebuked by Vice-Chancellors and the media; but, as with other things this Government is doing, this is exactly what is around the corner.

As Public/Private distinctions get blurred in Britain, Education For Profit is having its own existential crisis in America. Steve Eisman, the 'Big Short' guy, has already caused a stir by saying that For Profit education is the next Sub-prime mortgage: "Until recently, I thought there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the sub-prime mortgage industry. I was wrong. The For-Profit Education industry has proven equal to the task." And, indeed, Peter Thiel, the legendary Paypal investor, and Paul Krugman, the Nobel-laureate economist, and many others have started questioning the viability of the For Profit Education industry as it stands in America: The student debt is already too high (it is bigger than credit card debt in the US) and job prospects are already too uncertain to make room for more growth [See my earlier post on the subject]. And, though For Profit Education is on the march all across the developing world, the American stigma is likely to stick and may even cause a reversal of policy in the long run, unless the industry can rediscover itself.

Such rediscovery should start from finding a new purpose, beyond profits. It can be reasonably argued that private sector education can expand access, develop productive capacity and lead teaching innovation, in ways that less responsive public sector institutions can not. But, as long as all the activities are labelled For Profit, it is difficult both for participants and observers to see what value the industry may have for the rest of the society. The label has lived its useful lifetime and now needs changing. I have started using 'education as enterprise'; doubtlessly other terms will also be introduced. All the names will indicate a greater purpose beyond profits - creation of new capacity, converting non-users to users, leading teaching innovation etc. - and this is exactly how the companies in the sector will start seeing their business.

I am quite optimistic that this new trend may start from Britain, rather than America, as the British companies don't have to face off an industry entrenched in bad habits; rather, the British ones are facing the public sector, and given the British social attitudes, redefining the private institutions with its social purpose will mean better business. This may eventually serve as a model for the rest of the world, which is making its own way through this debate and struggling to offer its fast-growing middle classes with an worthwhile education.

However, whatever the model be, if it is funded with private investors' money, it must turn a profit. It is indeed difficult to see how the industry can be sustainably profitable. Higher Education is investment intensive, and indeed, the component parts, books and journals, great professors, real estate and facilities, all require significant investment and maintenance. In fact, Alan Ryan, a visiting fellow in Politics in Princeton University, believes: "If the UK government takes more care than either it or the US government has hitherto taken to avoid being ripped off - and if recruitment is properly regulated and high standards of provision are insisted upon - the For-Profits will quickly discover what other educational institutions already know: outside technical training in IT, law, finance and medicine, there's not a lot of money to be made out of higher education'.

In a way, then, we are at an interesting point in the debate: Already the investors and traders are seeing the current business model of education as an unsustainable proposition, and the academia is seeing no reason how For Profit can turn a profit. In fact, there is plain hostility to private sector education when Sally Hunt writes in Times Higher Education: "It is essential that the (higher education) sector come together to counter the for-profit threat, which represents an attempt to commodify education and leave standing only that which makes a profit. I urge our mission groups, think tanks and Vice Chancellors to put their differences aside and unite at last to fight this attempt to privatize knowledge."

Despite this hostility and widespread skepticism, I shall argue that Education as Enterprise has a role to play, particularly in Higher Education. I shall possibly agree with the commentators who are calling for greater regulation, but disagree with their observation that when proper standards are met, there is no money to be made at higher education. Here is my case.

First, we have to acknowledge that the role of national governments in a society are changing. There are many reasons for this, including the rise of global institutions and global trade. But, the biggest reason possibly is technology and the information revolution it has brought about. The citizens now have a contract with the state, the tax we give is taxpayers' money and the state has become a service organization. And, since higher education today is largely seen as a method to create private prosperity, it is unlikely that the state will open its purse and continue to support it. So, however desirable our previous state of affairs was, the state sponsorship of higher education is going to go. The argument is already lost: The burden of creating and sharpening knowledge has irreversibly been passed onto private entrepreneurs.

Second, private education, in the past, has made money from the sectors that Alan Ryan allude to, technical training in IT, Finance, Law and Medicine. But history is no template for things to come, and since many other professions are able to create prosperity for its practitioners, it would be possible to make a profit by teaching these subjects. In the end, the profit equation for education will be based on pay-off, how much money can the graduate earn for having this education, and once the right sectors have been identified and right courses have been developed, there will be money to be made in Higher education.

Third, it is wrong to conclude that education businesses are making money because the regulation is too lax. It isn't; most people in education business would think there is too much of it. Education businesses have so far made money (even with sub-par service offerings) because there was too much of regulation and open competition in the sector was restricted. What will happen now is that such protections will go and the 'rent' income for existing education companies will go. (This is why the investors can't see the money in education now) However, competition is the surest way to bring in innovation, and we shall see a number of education innovation in the coming years.

This is my final point: Education as Enterprise is at an inflection point too. The industry as it exists today benefit from high entry barriers, which are set to be going. What the industry seem to be entering is a phase of competition and innovation, which must invariably come. The good news is that this is also the time when the demand for higher education will peak, with continued prosperity, rise of the middle classes and acute talent shortage in China, India and elsewhere. So, the changes will be less painful than it would have been, though protective policies of national governments, like the recently announced immigration controls in Britain, will hurt local industries from time to time. I do think that the new generation of Education As Enterprise businesses will be more sustainably profitable, as they will be born competition ready and will face an intensely customer-centric marketplace. Their profits will come from innovation, primarily, by bringing out innovation in teaching, and making curricula far more responsive to industry requirements than it has been thus far. In fact, in this, one can see a triad - public universities excelling in research and leading the way, businesses applying the knowledge to create prosperity and education as enterprise focused on teaching and creating the workers and entrepreneurs of the future.

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