Private enterprise and public education: Strange bedfellows or natural allies?

By Frederick M. Hess, Michael B. Horn, KC Deane | American Enterprise Institute

Many parents, educators, and observers argue that for-profit businesses should stay out of education, often stemming from fear that their focus on maximizing profits will bring impure motives to the crucial processes of teaching and learning. These concerns are sometimes founded but often spring from misunderstandings of the factors at play. Although some providers are more concerned with profit margins than student success, others have proven that their resources and experience allow them to offer innovative, nimble, cost-effective solutions to pressing current problems in education. More ­balanced consideration of all sides of this issue, such as in the recently published essay compilation ­Private Enterprise and Public Education, is needed to clearly assess the role for-profit providers can and should play in 21st century education.

Key points in this Outlook:

  • For-profits attempting to enter the education market are largely met with hostility, but the role they can play in K–12 and higher education deserves further consideration.
  • For-profits are sometimes less transparent than nonprofits and overly concerned with pleasing customers, but they are more able to innovate, maximize efficiency, and attract key talent and resources.
  • When considering the role of for-profits in education, we should stop fixating on tax status, recognize for-profits’ unique strengths, and conduct more focused research on their effectiveness.

As we note in the just-published book Private Enterprise and Public Education (Teachers College Press, August 2013), education is—whether we like it or not—big business. Last fall, McGraw-Hill sold its education publishing division to Apollo Global Management for $2.5 billion.[1] Such deals are a reminder that, in the United States, the K–12 and higher ­education sector amounts to more than $1 trillion a year. After health care, it is the largest sector of the American economy. In 2009 (the most recent year for which data are available), schools and systems spent almost $22 billion on transportation, $19.8 billion on food services, and $2.6 billion on textbooks.[2]

Yet, although most instances of for-profits ­providing public schools with routine services are not remarked upon, the for-profit providers in K–12 that offer tutoring or charter school options to kids trapped in lousy schools are frequently ­subjected to vitriolic attacks. For-profit colleges, after decades of being formulaically paid with ­federal aid dollars for enrolling new students, have suddenly been subjected to withering criticism for enrolling students without educating them well. Senator Tom Harkin (D-IA), chairman of the Senate Health, Education, Labor, and Pensions (HELP) Committee, thundered in August 2010:

It[’s] disturbingly clear that abuses in for-profit recruiting are not limited to a few rogue recruiters or even a few schools with lax oversight. To the contrary, the evidence points to a problem that is systemic to the for-profit industry: a recruitment process specifically designed to do whatever it takes to drive up enrollment numbers, more often than not to the disadvantage of students.[3]

Hostility to for-profit ventures has also been evident in federal and state legislation. One prominent example was the prohibition on for-profit entrants in the US Department of Education’s Investing in Innovation (i3) Fund. Similarly, when New York legislators lifted the state’s charter school cap in 2010, they placated unions by banning for-profit charters. Most recently, the reform-minded group Parent Revolution has pushed for legislation prohibiting for-profit charter school operators from getting involved in taking over schools where parents have invoked the “parent trigger” turnaround option.[4]

What’s going on? Doesn’t the United States have a proud tradition of embracing free enterprise? Didn’t President Obama declare in his most recent State of the Union, “Let’s prove that there’s no better place to do business than here in the United States of America”?[5] Yet that principle does not apply in education. And this state of affairs draws little notice or public discussion.

What is sorely needed is some reflection, sophistication, and perspective on the questions in play. We have sought to provide just that in Private Enterprise and Public Education. In the volume, contributors try to push past the current rhetoric to think more deeply about what role for-profits do, can, and should play in improving American education.

Our Unusual Hostility to For-Profitsin Education

John Bailey, executive director of Digital Learning Now!, notes in the volume that the discomfort with ­for-profits in education is highly unusual in other areas of public policy.[6] In fields such as health care, clean energy, and space exploration, he observes, ­“policymakers do not ask whether they should engage for-profit companies, but how they should.” He recounts that NASA set aside $6 billion to support the private development of spacecraft. SpaceX built its “Dragon” capsule, capable of transporting humans and cargo into space, for $800 million—less than 10 percent of the
$10 billion NASA had spent trying to build a model.

“Simply put, for-profits have both real strengths and real drawbacks when it comes to education. We have not done an especially good job of understanding either.”Andrew P. Kelly, a resident scholar at AEI, observes that polling finds Americans mixed on the role that for-profits ought to play.[7] He cites Gallup surveys that show that more than 75 percent of Americans are comfortable with for-profits providing school transportation and ­facilities, but barely one-third are fine with for-profits running schools. This is consistent across time.

In 2002, 2006, and 2007, a Phi Delta Kappan survey asked the same question about respondents’ comfort level with “private profit-making corporations” running “the entire operations of the public schools in [their] community”—and each year, less than one-third of respondents approved.

When parents are asked explicitly about their ­inclinations for their own children’s education, the ­findings are even more telling. In a 2009 CBS News poll, 49 percent of respondents reported that they would not even consider sending their children to a school operated by “private companies that specialize in education” whose goal is to “provide quality education and make a profit.”

Two big forces appear to drive this popular ambivalence. First, Americans have a sensible and laudable attachment to the work of schooling and show themselves to be protective of the core purposes of teaching and learning. Second, little effort has been made to understand how or when for-profits can actually help, when they hurt, and what policymakers and educators can do to tip the scales.

Simply put, for-profits have both real strengths and real drawbacks when it comes to education. We have not done an especially good job of understanding either. This makes it tough to take the next step, which is to craft policies that can leverage the good, minimize the bad, and help provide families and educators with the information and tools that can safeguard them and promote good decisions.

Two Sides of the Same Coin

For-profits have incentives that public entities and ­nonprofits lack. At the most basic level, unlike publicly operated entities, for-profits that do not provide customers with something they are willing to buy will go out of business. Indeed, a focus on the bottom line means for-profits are inclined to move nimbly and ­reallocate resources when circumstances warrant—all through an incentive to serve the customer, innovate, and boost productivity. As they aim to deliver goods and services, for-profits operate under the self-interested, watchful eyes of investors or owners, which can lend a healthy discipline around performance and productivity. It also means that for-profits often have cause to tackle stubborn cost structures in ways public or nonprofit providers do not.

Of course, these same characteristics also yield important weaknesses. Because for-profits seek to—no great secret here—make money, their desire to cut costs can cause dubious actors to cut corners. Similarly, the incentive to grow can cause for-profits to be less rooted in community institutions, less stable, and more willing to cut services or personnel. The incentive to add customers can also cause for-profits to market themselves in deceptive ways or compromise quality in the rush to add clients. As any connoisseur of mass-produced fast food or of late-night infomercials can attest, these negative business practices can run rampant.

Public debate about for-profit education is confusing largely because it tends to ignore any benefits while focusing solely on the potential negatives. There are various reasons for this state of affairs. For one, almost all education scholars who write or speak about for-profits are ideologically predisposed to regard them as an unsightly blemish. For another, for-profit providers and their paid spokespeople have generally found it easier and more appealing to lobby for access in the hallways of legislatures and bureaucracies than to publicly make the case for the potential value of free enterprise in education. Even education advocates supposedly enamored of school choice and educational competition, at places like the Heritage Foundation or the National Alliance of Public Charter Schools, have generally ignored the thorny task of making the case for for-profit providers in favor of generally celebrating school choice. To make a compelling case for the thoughtful and purposeful embrace of for-profit options, we must survey both the bad and the good.

“The underlying assumption of moral superiority in nonprofit and public education is lost on those who have spent time in the for-profit education industry.”The Bad. For-profits are inclined to be exceedingly responsive to customer desires. This can cause problems, as with for-profit higher education programs that eagerly throw their doors open to students who are not equipped to be there and unlikely to complete a degree. In addition, customers may value qualities or practices of schools that do not actually reflect whether they are serving students well. In the volume, Todd Grindal notes that many pre-K child-care programs focus on easily observable characteristics that parents want, such as cleanliness, safety, and low child-to-staff ratios.[8] These measures, however, have only a vague relation-ship to education quality. Such information asymmetry leads for-profits to invest in these elements that attract customers, not necessarily what delivers great teaching and learning.

Similarly, as they seek to grow, firms that have ­established a strong brand sometimes opt to focus on mass marketing and cut-rate provision. This can occur in markets where customers find it challenging to gauge the quality of the good or service. On a related note, in a variety of sectors, including banking, mortgage lending, and agriculture, for-profits spend ­enormous time and money lobbying for rules that serve their interests but may oppose the public interest.

Michael B. Horn explores this lobbying incentive in his chapter on disruptive innovation.[9] Leading ­organizations will design their business model with an eye to existing policies and regulations. Take for-profit universities, which have long been funded strictly on the basis of bodies enrolled. When policymakers sought to change the rules to instead provide funding based on whether students were benefiting, for-profits geared to the old incentives quite naturally pushed back.

In a similar vein, as contributor Matt Riggan notes, for-profits may hesitate to commit to independent evaluation (although nonprofits and public entities also do not have a terrific record on this count).[10] Research carries risks: it can show that a provider is ineffective or cast doubts on a popular service or product.

For obvious reasons, for-profits have cause to be ­especially leery on this score. Changes in perceived ­quality or reputation can impact a for-profit firm’s ­market position. (For publicly traded companies, the resulting loss of market value can get executives into hot water.) Meanwhile, broader skepticism of for-profits and the critical tone of much reporting can leave providers gun-shy. Inaccurate or unfair interpretation of outcomes could hurt both their reputation and their financial stability. So, for good reasons and bad, there are legitimate questions about for-profits
and transparency.

The Good. But it is an enormous mistake to think the story is all doom and gloom. Because for-profits have a clear incentive to boost sales and grow profits, they have reasons to try a new model if doing so promises better success. If customers are focused on quality of learning, then the need to please the customer can drive for-profits to channel self-interested energies toward finding better ways to support and promote learning.

Second, seeking to grow profits means that for-profits have incentives to focus on efficiency and cost cutting, whereas many nonprofit and government providers are much more loath to make unpopular or politically sensitive cuts. In an era of budget cuts and a rising tide of red ink, the ability to use existing resources to support productivity can be particularly valuable.

“Rather than focusing on tax status, we should create policies that emphasize the primacy of student learning and that deal with all providers accordingly.”For-profits also have cause to grow more rapidly than nonprofit providers because they face pressure to pro-duce returns for investors. As Michael B. Horn notes in his chapter on online learning, we can see for-profits’ inherent scalability in their dominance of the online learning market to this point.[11] Although policy has sometimes discriminated against for-profits in other ­sectors of education, this has not been the case in online learning. This attitude has allowed for-profits to take advantage of the growing number of students enrolling in online courses. These companies can use a portion of this revenue to invest in research and ­development that can further innovation, create better products and services, and build new technology platforms, all in service of attracting and better serving more students. This ability to scale can thus be a ­powerful force if harnessed correctly.

Prospective returns also mean that promising ­profit-seeking ventures can enjoy advantages in attracting ­talent and capital. For-profits can offer employees ­lucrative opportunities and tap the private-equity ­markets for the resources needed to develop or improve their products and services or to scale aggressively.

In the volume, contributor Chris Whittle argues that the notion that for-profits suck money out of ­education is a myth; instead, he suggests the opposite is true.[12] For-profits naturally attract capital from investors seeking to make a profit, while nonprofits—unable to promise a return on investment—more often struggle to raise funds. For-profits benefit from their clarity of mission focus, whereas public entities and nonprofits have no such check-and-balance system in responding to unions or political constituencies.

The Complex Reality

Perhaps more interesting, given all of the heat and vitriol around the discussion of for-profits in education, is that the underlying assumption of moral superiority in nonprofit and public education is lost on those who have spent time in the for-profit education industry. As contributor Ben Wildavsky points out in his ­comparison of traditional and for-profit higher ­education, many of the educators he interviewed chose jobs with for-profit universities because they saw an opportunity to approach the learning problem in a new way.[13] Michael Offerman, president emeritus of for-profit Capella University and former dean of continuing education at the public University of Wisconsin-Extension, explained to Wildavsky that the distinctive mission of for-profits “allows us to innovate and experiment in ways that I didn’t see happening as much as when I was in public institutions.”

Contributor Mickey Muldoon interviewed the most prominent players in US K–12 education in an effort to understand how they viewed for-profits in relation to their public and nonprofit counterparts.[14] The results were unambiguous: “Interviewees shared the perspective that nonprofits and for-profits should be considered moral equals; neither is fundamentally more virtuous, socially valuable, or ‘mission-driven.’”

But the complications that stem from establishing a new for-profit organization are enough to push away even the most tireless educators. Richard Barth, CEO of the nonprofit KIPP Foundation, told Muldoon,“You have to focus on what you want your battles to be, and this issue isn’t my top priority.” Discouraging well-intentioned players from seeking new solutions to stubborn problems limits our capacity to rethink the way we deliver education.

Three Key Takeaways

Parents, educators, and policymakers have every right to be leery of for-profits in education because of the ­sensitive societal and cultural norms at stake in these discussions. Indeed, plenty of the concerns are warranted. Corruption and malfeasance do exist at some ­for-profits (but also at various nonprofit and public providers). It would be good for American education, for schools and colleges, and most of all, for students, if we ceased the reflexive vilification of for-profits and took more time to ask whether, when, and how they can help support great teaching and learning. With that in mind, we offer three quick recommendations.

First, we would do well to cease fixating on tax status as the key signifier of quality or merit. In truth, tax status says next to nothing about a company’s ­motivations. Every venture has multiple motivations, and it seems to us unexceptional that one might be to turn a profit. That hardly seems out of place in American life, and it can lend a healthy discipline and accountability. Rather than focusing on tax status, we should create policies that emphasize the ­primacy of student learning and that deal with all providers accordingly.

Second, for-profits pose unique concerns, but they also offer unique strengths. Their sensitivity to market demand encourages greater attention to quality and ­outcomes. Seeking to respond to client needs, for-profit colleges have collected and employed data more ­aggressively than most of their nonprofit or government counterparts. Similarly, these tendencies encourage innovative practices, as for-profit companies hunt for new ways to attract new customers and remain competitive.

“Today’s policies do not provide incentives for the right things in K–12 or higher education.”Third, the research community would do well to take for-profits more seriously than has often been the case. We have only minimal research into the dynamics of the for-profit sector or the performance of for-profit endeavors. This is due in part to for-profits’ reluctance to be studied, but also to the disinclination of many university-based researchers to study the for-profit sector. Indeed, we can testify from personal experience that a number of education researchers evince personal distaste for for-profits and thus do not want to wade into the intricacies of these questions.

How Can For-Profits Play a Constructive Role?

Today’s policies do not provide incentives for the right things in K–12 or higher education. For-profits consistently are unable to make a coherent case for their ­existence. Instead, they revert to vague claims that their venture does good and valuable work—only to fail to proffer any evidence to back such claims. Others just insist that for-profits are not really any ­different from nonprofits, despite what policymakers and the public think, and complain that they should be treated just like everyone else. We find ourselves underwhelmed by such claims.

For-profits have a productive and valuable role to play in American education. But it is a role that needs to be earned. Given public skepticism, for-profits need to make the case that what they offer is useful and important and that the nation, our schools, and our students will be better if we welcome them in from the cold.

We hope our book can support just that kind of conversation. Ultimately, though, only for-profits can make the case for themselves, by embracing quality-sensitive policies, policing their own ranks for shysters and charlatans, supporting research that documents the value they deliver, and engaging in the public square.

The difference in whether for-profit dynamism plays a constructive role or a less productive one lies less with for-profits than with the policy landscape they inhabit and the way that educators and other officials choose to utilize and scrutinize them. On that score, we need a better understanding of for-profits, including their strengths, their flaws, and what kinds of conditions bring out their best results. Our hope is that Private Enterprise and Public Education can help bring clarity
to those issues.

1. James Marshall Crotty, “McGraw-Hill Sells Education Unit to Apollo: Bellwether for Educational Publishing?” Forbes, November 28, 2012, crotty/2012/11/28/mcgraw-hill-sells-education-unit-to-apollo-bellwether-for-education-publishing/.
2. Thomas D. Snyder and Sally A. Dillow, Digest of Education Statistics 2011, NCES 2012-001 (Washington, DC: US Department of Education, National Center for Education ­Statistics, 2012), tables 186 and 188, /pubs2012/2012001.pdf.
3. Tom Harkin, “Statement of Chairman Tom Harkin (D-IA) at the HELP Committee Hearing ‘For-Profit Schools: The Student Recruitment Experience,’” news release, August 4, 2010,
4. Unless otherwise noted, all quotations are drawn from Frederick M. Hess and Michael B. Horn, ed., Private Enterprise and Public Education (New York: Teachers College Press, 2013).
5. Barack Obama, “Remarks by the President in the State of the Union Address” (US Capitol, Washington, DC, February 12, 2013), /12/remarks-president-state-union-address.
6. John Bailey, “Odd Man Out: How Government Supports Private-Sector Innovation, Except in Education,” in Private Enterprise and Public Education, ed. Hess and Horn, 121.
7. Andrew P. Kelly, “More Than Meets the Eye: The Politics of For-Profits in Education,” in Private Enterprise and Public Education, ed. Hess and Horn, 11.
8. Todd Grindal, “Unequal Access: Hidden Barriers to Achieving Both Quality and Profit in Early Care and ­Education,” in Private Enterprise and Public Education, ed. Hess and Horn, 80.
9. Michael B. Horn, “Beyond Good and Evil: Understanding the Role of For-Profits in Education through the Theories of Disruptive Innovation,” in Private Enterprise and Public Education, ed. Hess and Horn, 100.
10. Matthew Riggan, “Between Efficiency and Effectiveness: Evaluation in For-Profit Education Organizations,” in Private Enterprise and Public Education, ed. Hess and Horn, 173.
11. Michael B. Horn, “The Role of For-Profits in K–12 Online Learning,” in Private Enterprise and Public Education, ed. Hess and Horn, 140.
12. Chris Whittle, “Would Steve Jobs Be a Hero If He Had Built an Education Company Every Bit as Good as Apple?” in Private Enterprise and Public Education, ed. Hess and Horn, 192.
13. Ben Wildavsky, “Crossing to the Dark Side? An Interview-Based Comparison of Traditional and For-Profit Higher Education,” in Private Enterprise and Public Education, ed. Hess and Horn, 57.
14. Mickey Muldoon, “The Costs and Benefits of Nonprofit and For-Profit Status: Perspectives from Executives and Entrepreneurs,” in Private Enterprise and Public Education, ed. Hess and Horn, 33.

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