Monday, February 03, 2014

Educating for Profit: Anatomy of a Broken Model

For-Profit Education stands, more often than not, for poor education. At a time when big claims are being made for the potential of For-Profit Education to change entire economies and alleviate poverty (See Parag Khanna and Karan Khemka in HBR), one must seek to understand why For-Profit education under-delivers. 

Because, it is impossible to turn a decent profit in education, claim some. Alan Ryan claims that minus the public subsidies going into For-Profit education, "outside technical training in IT, law, finance and medicine, there’s not a lot of money to be made out of higher education" (Alan Ryan in Times Higher Education, see here) This observation may empirically bear out as most For-Profit activities happen in areas with immediate employability, and where cost of delivery is low (For-Profits in medicine have often come up short, and For-Profit Engineering Education has usually been a disaster).

There is more. The history of For-Profits has so far been the history of malpractices and scandals (See my earlier attempt to chronicle this here). The problem of asymmetric information remains rife in Education, particularly as first generation students come to Higher Education every year: As George Akerlof and others have shown, it is hard for honest operators to survive in such markets. 

Further, the For-Profits is that investors usually prioritise on growth over good behaviour. Kevin Kinser contends that the fact that Apollo Education shares have grown despite their history of regulatory troubles (it has fallen since, after its abilities to draw financial aid came under scrutiny), while DeVry Inc shares have remained stagnant though the company had a much better record of compliance, goes on to show where the priorities of the stock market lie.

The regulators' solution was to push For-Profit sector up in terms of size and investment, driving out proprietor-run For-Profit institutions out of business and consolidating the sector into corporate entities instead. They have usually done it, Britain being a particular example, by pushing up the regulatory costs as well as changing the dynamic of the sector by making available student loans/ aids to larger For-Profit entities. The implicit assumption here is that a publicly owned For-Profit institution (or one owned by Private Equity) is likely to behave better than small ones owned by private individuals.

But this approach is based on an assumption that financial markets will auto-correct, something we already know does not happen. The fancy offices of Private Equity and army of analysts from elite institutions do not guarantee that they would care for the first generation college students seeking a foothold in the professional labour force: Further, the corporate Head Quarters of these massive For-Profit networks are just too distant, and the operations are just too top-down, to be responsive in a business which is so difficult to scale because it is so centred on details and human interactions. A fair share of misbehaviour in For-Profits come from larger companies. Besides, the reliance on the market forces lead to a light touch approach to regulation. Despite the various suggestions that we need to look at regulations as well as incentives (such as tax breaks) to encourage long term thinking in the sectors that need long term thinking, such as education but also most forms of public services now privatised, nothing has really happened so far. So, the story of For-Profits continue to be a cat and mouse game, a history of cutting corners till regulators catch up.

The other problem is that these corporate institutions are process-driven industrial entities, doing a good job in Professional Education but utterly averse to change. These are like any large corporation under intense pressures of stock market (or their Private Equity masters), which are unable to change even when they are fully aware an avalanche may be well on its way. At a time when automation is making most of today's jobs obsolete, For-Profits are precisely the kind of solutions we don't want. Imagine a For-Profit institution turning around to its investors and say that they think serving the immediate requirements of the market of training accountants is misplaced, because these people will be obsolete in 5 years: The discipline of the For-Profits, which we celebrate over and above the academic excesses of the Public institutions, does not have any allowance for such innovation. The entrepreneurial life-blood has usually been sucked out of the sector with the demise of proprietor-owned For-Profits.

Hence, what we have is a broken sector: Utterly dependent on public subsidies, focused on narrow disciplines, unable to innovate in a changing labour market, afflicted by the problems of abuse and consequently low public esteem. It is a business in search of a sector, trying on business models borrowed from other sectors which hardly fits, and left to the care of regulators who have long run out of ideas. The Googles and Facebooks (not the Google and the Facebook, which may still try to model the sector after themselves) of For-Profit Education Sector are yet to appear, and quite unlikely to appear: For all the glitz and billion-dollar valuation, we are yet to figure out how to educate for a profit.

   

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