Coming to a cinema near you, The Private School Business

In spite of the Harry Potter effect only 7% of children in England attend private schools a rather modest number compared to almost 40% of their antipodean counterparts.

I have been thinking upon private schools a lot since an interesting meeting with the senior management team at a high profile Australian private school to discuss an edtech incubator idea. These were experienced senior educationalists and administrators running a large multi-campus establishment, where senior fees are $28k p.a. Rather than edtech, our conversation soon focused on the significant challenges this school faces if it’s to remain at the forefront of the Australian education market. To their credit the first major issue they highlighted was that the school couldn’t keep increasing fees by 6% p.a. because it was getting beyond what parents could or would pay.

The cinema business model

I think the basic business model of private schools is very similar to that of a cinema and within ten years many of the pressures that transformed the entertainment business will start changing private schools.

30 years ago every small town in Australia had a local cinema. As a kid growing up in Wangaratta, I spent almost every Saturday night at the Orana cinema. The Orana like hundreds of similar venues, no longer exists, killed off by wave after wave of technology starting with VHS videos and more recently content streamed over the web from companies like LoveFilm, Sky, Foxtel, Telstra and Netflix.

Today most cinemas are large multiplex chains, operating from leased sites with highly leveraged, often private-equity backed, business models. The ushers and staff who controlled the rowdy kids and ran the Orana are long gone, replaced by a lean staffing model (their major variable cost) of one person checking the tickets for several cinemas and another one or two managing the sound and projection for multiple screens.

Private schools by comparison tend to be medium-sized businesses, who are overcapitalised (with land, buildings and other assets) and who have not been able to reduce their major variable cost; teacher salaries and pensions. Instead of being able to cut costs, just last week the Victorian government agreed an increase in government school teacher salaries by 16% over three years (plus a guaranteed $1k ‘bonus’) for no extra work or performance gains.

Options

Australian schools could follow the lead of their UK counterparts (who are mostly charities) in establishing external for-profit subsidiaries. This keeps commercial risks ring-fenced and more importantly allows any profits to be directed back to the core school business.

Schools could free up huge amounts of capital by selling their assets, like land and buildings and leasing them back. It’s not a new idea, Eddie Groves tried it with ABC Learning and it’s also been popular with private equity companies who have built portfolios in areas like special education needs, private hospitals and sports clubs. However, even if a school could convince their multiple stakeholders like religious organisations, alumni and parents that’s a viable strategy, the residual stink from the demise of ABC Learning makes it a remote possibility.

What’s left?

• Raising fees – unpopular and to what strategic purpose would the funds be put?
• Pressuring government to allow for-profit schools – long game with little current political support
• Flipping from being a private to a government school – really only an option for low cost non-elite schools
• Use edtech to ‘remodel the classroom experience’ i.e. cut teacher numbers. It’s worked in US charter school chains like Rocketship, but it’s only a partial solution and seems anathema to the small class ethos of elite private education

Synopsis

I think the senior management teams and those charged with steering the fortunes of elite private schools face a huge challenge. The same external forces that transformed the entertainment industry (globalisation and rapid technological change) will likely also radically reshape private education. But rather than waiting passively for this to happen, smart schools will drive change from inside to reshape not just their existing schools but the whole notion of the role they play in the education market.

If the boarding school I attended thirty years ago was a cinema, then the main feature was more Lord of the Flies than Hogwarts. Extreme bullying was endemic/systemic and the greatest institutional focus was on things like sport and cadets rather than anything educational. I survived by becoming as awful as the worst of my peers; it shaped the man I am today and I sometimes wonder if some sort of penitence for my former deeds is what has kept me in the education business for so long?

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