The Education Business: A Road Map for Disruption

My first post of every school year is about my upcoming classes, in specific, and about the future of education, at least as I see it, in general, and this year will be no exception. As I get ready to teach the first session of the 52nd iteration of my valuation class (more about that latter), I am reminded again of both how lucky I am to be a teacher and how dysfunctional education is, as a business. 

The Education Business

Nothing raises hackles among the education establishment (which includes most university administrators, many academics and some teachers) than to call education a business. Their response is that it is not a business and cannot be run like one, and that the encroachment of for-profit entities into their hallowed space is sacrilege that will spoil their knowledge-seeking paradise. I am sorry, but I think that this is nonsense and an excuse for the complete lack of accountability that characterizes education today. At the risk of killing a few sacred cows, here is what I think:

1. Education is a business: The essence of a business to me is simple. If you have a mission to accomplish (and it does not have to be profit maximization), a product or service that you offer in pursuit of this mission and consumers that buy that product or service from you, you are a business. If the sales pitch of universities is to be believed, their primary mission is to educate, the product they offer is a university degree and they not only charge a hefty price for the education, but get the federal government to provide backing for that cost. Thus, it seems to me incontestable that education is a business and students are the customers. It follows then that like all businesses, universities and schools should be held accountable for the quality of the products that they provide. Listening to some defenders of the education establishment fulminate against business practices being used in education, I am inclined to believe that what they fear is being held accountable for their failures.
2. Education is not not-profit: Even those educators who accept that education is a business and needs to be judged like one are wary of the for-profit model, arguing that this leads to the dilution of the education mission. That argument, though, is based on the delusion that the existing education system is a non-profit model, when it is clearly not. Using the language that I learned in my Economics 101 class, and defining profits as the surplus claimed by the owners of a business, I would argue that “non profit” education, as practiced today, generates plenty of surpluses, but that these surpluses are repackaged and claimed by the stakeholders in the existing system. At the university level, administrators take some of the surplus to expand their fiefdoms, professors claim another chunk to reduce teaching loads, fund research and guarantee their jobs (tenure) and some graduate students use the surplus to extend their education well into middle age. I prefer the unvarnished focus on profits of the for-profit university/school to the double talk that I hear at non-profit educational institutions. 

The Disruption Model

If you accept the premise that education is a business and that the key difference between for-profit and non-profit education is the who gets to keep the surplus, the discussion then can be opened up to the question of whether this is a business that is ripe for disruption, the moats that defend the existing structure and the weakest links in this defensive system.

The Castle: The Education Status Quo

Disruption is the hottest concept in strategy today and while I think it is used more casually than it should be, there can be no denying that many businesses have been disrupted and changed over the last two decades. Thus, Amazon’s inexorable expansion in retailing has not only put dozens of department stores and conventional storeowners out of business but has changed the business models for the remaining retailers in the business. Google’s surge in online advertising has sapped the profitability of newspapers and magazines, putting some of them out of business and changing the way the others operate. A few months ago, I valued Uber on this blog and argued that its value would come from the disruption of the taxi and car service business. But what is it that makes a business ripe for disruption? I am not a strategist, but these seem to be some common features:

1. Market Size: Clearly, the bigger the business is, in terms of dollars spent on it, the more attention disruptors will pay to that business. Retailing collectively generates trillions of dollar in revenues and global advertising in all its forms reported aggregated revenues of $600 billion last year. I estimated that just the taxicab business, summed up across the globe, was worth more than $100 billion last year. The education business, defined to include not only the tuition collected at educational institutions but also the subsidies that some of them receive from governments, is huge. In fact, student loans alone in the United States amounted to more than a trillion dollars last year.
2. Inefficient: If you are a disruptor, you are not only looking for a large business but one that is inefficiently run, in terms of the costs incurred in delivering the product or service. That inefficiency may come from a lack of accountability (cost plus pricing) or from inertia (where the world has changed but the business has not). Anyone who has had dealings with the education business, whether it be as a business that is negotiating with a university or public school system or as a parent/student trying to fix a tuition payment mistake or to graduate early, will attest to the fact that they system is layered with inefficiencies.
3. Protection from competition: Another common feature that disrupted businesses seem to share is that they are protected from competition, either implicitly or explicitly, thus allowing them to continue to be inefficient, with impunity. With taxicabs, that protection comes from a state-sanctioned system that prevents competitors from providing cab service without a license; the price of a yellow cab medallion in New York city hit $1 million last year. It is true that neither retailing nor advertising had explicit barriers to entry but the large costs of entering these businesses (real estate in retailing, the cost of buying a newspaper/magazine in print media) made it possible for inefficient practices to continue in both businesses. The education business has been protected from competition both explicitly (accreditation boards, state laws) and implicitly (professional degree requirements).
4. Lack of customer focus: Most businesses that get disrupted make it easy for disruptors by losing their customer focus, either by accident or by design. Thus, some retailers made Amazon’s job easier by having poor inventory, a sullen and unresponsive sales staff and terrible customer service, just as print media paved the pathways for its own destruction by exalting its noble mission (news makers, societal watchdogs) often at the expense of their advertising clients. If you have a child who is a student in high school or an under graduate at a college, is he or she being treated like a customer? If you are the one paying for the education, do you get the respect that any paying customer should get? And if you don’t like a class, do you get to ask for your money back? Suffice to say that universities have not treated students as their customers for a long time and thus deserve what is coming to them.

The Moat

If education is ripe for the take down, you may wonder why it has not happened yet, and I would suggest that it is a combination of factors, some psychological, some economic and some structural.  At the start of this year, I posted on the specific barriers to entry that have insulated universities from competition for decades (and perhaps centuries).  I would consolidate those barriers into four broad ones:

1. Bundled Product: As I noted in the above-linked post, you get more than a collection of classes for the tuition that you pay at a university or college. You (arguably) get a structure for your classes, a social network, entertainment (college football, anyone?) and career placement. Until competitors can come up with their own bundled product to compete, universities are going to be at an advantage.
2. Inertia: It is difficult to get people to change the way they think, even if the rationale for that thinking has long since dissipated. As long as people (parents and their children) assume that an education requires four years in an (ivy-covered) campus, it will be difficult for alter that system. The sheer cost of a university degree is forcing some people to reexamine this assumption but it will take time and perhaps a generation to pass on for change to truly occur.
3. Laziness: For decades, employers, would be spouses and other outsiders have taken the lazy way out, when judging the intelligence, training and aptitude of a person. Rather than devise good ways of measuring potential value as employees or observing work output, they have looked at resumes and made judgments based on where you went to college and the degree or degrees you collected along the way. Thus, the fact that you got an undergraduate degree at Yale and a Harvard MBA predisposes potential employers to think of you as top-pedigree employee.  
4. The System: There are also structural constraints, some of which are imposed by the state (accreditation committees), some by trade groups and unions (example: you have to get an degree in education to be a teacher) and some that are completely arbitrary, which protect the system from assault.

The Barbarians

The education business has been lucky so far. Most of the entrepreneurs who have tried to disrupt the system have either been technology people, who don't quite understand what the education business. At the risk of offering advice that may put my comfortable existence at risk, here are some suggestions:

1. It's not just about the classes: The buzz about massive open online classes (MOOCs) has been replaced with disillusionment with their poor completion rates, since 90-95% of those who start these classes don't seem to complete them.  The problem, in my view, is that while MOOCs may deliver class room content (sometimes very effectively), they fail at providing the rest of the bundle that makes for education. If you truly want to disrupt education, you have to consider things you can add on (either technologically or with hybrid classes) to replicate the social networking, career counseling and other benefits you get in a university education.
2. Screening does matter: The other mistake that MOOCs made was in their attempt to reach large numbers, they ignored screening as a tool. I think that the most effective challenge to the university system will come from an online education venture that is selective about who it allows into the system and then proceeds to measure how much and how well a student has learned, relative to others in the class.
3. Exploit the weakest links: Education disruptors should use the weakest links in the university system to breach the walls. In particular, universities want to keep costs under control but don't like to or are unable to cut costs that hurt their strongest constituencies (administrators, tenured faculty) and have no compunction about cutting costs related to their weakest groups. It is not surprising to me that the biggest inroads  made by online players in the university system have been in core classes, that are taught by graduate students, adjunct faculty or reluctant tenured faculty.  
4. Good teachers and content: If you do want to provide education in a disruptive way, you have to get the content to deliver. That requires that you find good teachers who are comfortable in an online environment and the technological support to make the online classes stand out. As a teacher, my one advice to education entrepreneurs is to recognize that what motivates a good teacher is not the money but the impact that he or she can have with an online class.

My Benedict Arnold Moment!

If you are a disruptor looking at education as your business to disrupt, I should view you as the enemy, right? Not really, and for two reasons. The first is that I am also a consumer, with one child who has finished his college education, two others in the midst of theirs and one working his way towards college, and I share in the economic pain. The second is that I am a teacher first, and I am truly appalled at how little education truly matters in the current educational system. So, as I have done for the last few years, I will do my small part to undermine the status quo and put my valuation class online, this fall, for anyone who is interested to partake in one of three venues:

1. Online (on my website): This is the entry point on my website to the class, with webcasts for the class and material for it.
2. Lore: This is an online site as well, with the webcasts for the class and material. You will need a code to enroll as an auditor of the class and it is PK9N3T.  
3. iTunes U: This is an easy and relatively painless way to take the class, if you have an Apple device (iPad is great and an iPhone will suffice). If you have an Android device, you will need an app that lets you work with iTunes U and I have been told that TuneSpace works sell.

The first session will be tomorrow (September 3, 2014) and the webcasts will be posted on these sites by the end of the day, and I will continue with that practice every Monday and Wednesday until December 12, 2014, the date of the final exam.

I also know that watching 80-minute lectures online is painful, the equivalent of poking needles in your eyes, and that very few of you will have the time and the inclination to do this. If you prefer your classes in bite-size pieces, I have an entirely online version of this class (with twenty five, 15-minute lectures replacing the 80-minute ones), which you can also get in one of three places:

1. Online (on my website): My online entry point for the class, with links to webcasts and material.
2. iTunes U: The iTunes U version of the class.
3. YouTube:A playlist of all 25 webcasts. The advantage of YouTube is that it is supremely flexible, you can watch it from any computer or device and it adjusts to your bandwidth.

These sessions are all ready to go. So, you can start this class and be done with all 25 sessions by tonight.

In terms of sequencing, though, the valuation class is the second in a sequence that I teach in the MBA program, with the first being a corporate finance class. I describe corporate finance as the ultimate big picture class, where everything you talk about in any business discipline has a place.  This summer, I invested some time and resources in creating an online corporate finance class, composed of thirty six sessions of roughly 15 minutes length each, which you can access in the same three places: 

1. Online (on my website): My online page, where I have gathered together the resources for the class, including webcasts, slides and post-class tests.
2. iTunes U: The iTunes U version of the class
3. YouTube: A playlist of all 36 webcasts, with short descriptions of each.

These classes are also are all accessible and ready to go now.

To complete the sequence, you can also try my class on investment philosophies, where I provide my perspective on growth investing, value investing, charting and market timing. The videos in this class are not as polished, but they deliver the message:

1. Online (on my website):  My online starting point for the class.
2. iTunes U: The iTunes U version of the class.
3. YouTube: A playlist of all 38 webcasts (and I apologize for the lack of polish in these videos, which I recorded in front of my computer).

In the larger scheme of things, I am sure that my actions will not change the status quo by much, but every revolution needs to start somewhere. There has to be a point where we say enough is enough, pick up our pitchforks and go after the establishment. I wish you the best!