Can you be for-profit and for K-12 students?

How do for-profits factor into K-12 education?

Across industries such as health care, clean energy and even space exploration, private enterprise plays an accepted and critical role. Yet when it comes to education, many view for-profit providers with distrust. Although there is no shortage of negative opinions on for-profit education providers, there has been a lack of real conversation about the complex and complicated role they do, can and should play in improving American education.

These factors formed the impetus behind Private Enterprise and Public Education (Teachers College Press, Aug. 2013). Surveying the good and the bad of for-profits at all levels of education, including K-12, this book facilitates a thoughtful conversation around for-profits to bring balance to the discussions around their role in education. Ultimately it concludes that, given sensible policies and quality control mechanisms, policymakers can and should leverage the power of for-profit innovation and investment to better serve more students.

At a time when the educational status quo is defined by tight budgets, disappointing outcomes, high remediation rates and rising expectations, it would serve the American education system well to relax the reflexive criticism of for-profits and instead ask whether, when, and how for-profit providers can promote quality and cost-effectiveness to create a student-centered learning environment for children. The book excerpt below highlights three key conclusions drawn by comparing the corporate structures of nonprofits versus for-profits.

Excerpt: For-Profits vs. Nonprofits: Key Myths and Realities

The role of for-profit companies in public education—education financed by the government—has attracted increased scrutiny over the past few years. Several for-profit universities have attracted significant negative attention over the past few years for questionable marketing practices around recruiting students and for what some government officials and others perceive as low graduation rates.

(Next page: Three myths and realities)As this controversy heated up, it has prompted a wider debate about the role of for-profit companies in education, which has been fueled by the emergence of new for-profit K–12 education companies along with increased interest in education from private capital sources, including angel investors, venture capitalists, private equity firms and companies such as News Corporation.

Many in public education assume the worst when it comes to for-profit corporations, but it’s important to explore the reality of for-profits in education and move beyond the caricatures—both good and bad—of for-profit companies both generally and in public education specifically. In our work, examining the basic incentives and structures of for-profit and nonprofit companies by using the theories of disruptive innovation to deduce what drives them and what opportunities and dangers their corporate structures create yields three key conclusions.

First, for-profit companies are not inherently good or evil. Some corrupt for-profits flagrantly violate the law, but many others accomplish remarkable things. Likewise, some for-profit companies are wildly successful and others are wildly unsuccessful. Successful for-profits solve the problem or do “the job” that customers—the entity or person paying for the product or service—hire them to do.

When there is a viable, publicly financed market opportunity in front of them, these for-profit corporations respond by chasing the customer’s—in this case, the government’s—dollars by doing what it asks them to do, much of which is codified in policies and regulations. If there are “smart” regulations and policies in place that cause the government customer to make “smart” purchasing decisions, successful for-profit companies will do “good” things. If there are “stupid” ones in place, then they will do “bad” things. For-profits that receive plenty of investment up front but do not ultimately satisfy the customer and therefore do not gain traction in the marketplace will be unsuccessful.

Second, there are far fewer inherent and predetermined differences between for-profit companies and their nonprofit counterparts than many assume. Much of the debate over whether for-profits or nonprofits are more or less virtuous is a red herring to what the real questions should be. For the government paying, the question should be, “Is this given company, regardless of corporate structure, delivering on what society is paying it to do, as specified in the law?” And more important, the government should ask, “Is the law asking this entity to do the right thing?”

When the government is the customer, both for-profits and nonprofits may or may not be aligned with the needs of their targeted end user, as the end user is often not the one paying. That all depends on how well the government’s policies align to the end users’ actual needs, as opposed to their perceived ones. The notion that for-profits are inherently motivated to cut costs at the expense of doing their job—or that nonprofits inherently have less discipline in controlling costs and therefore are far less streamlined and efficient—has proved largely to be a smokescreen in public education to this point.Third, the biggest inherent differences between for-profits and nonprofits stem from their fundamental corporate structures, which determine what they are able to do with their profits—and thus affect their ability to attract capital and scale—as well as what opportunities look attractive.

For-profit corporations have owners or shareholders; nonprofit corporations do not. Having owners means that for-profits may not always reinvest all their profits into their core business as successful nonprofits will, but instead have the option to return some of those profits to their owners. This is not necessarily a bad thing, however: as for-profits provide returns to their owners, they attract even more capital to grow and scale operations and attract more top talent when there is a viable market. Successful for-profits tend to be crystal clear about their end objective: Make increasing profits by doing the job their best customers pay them to do.

Nonprofits lack this easy metric, which makes it relatively harder for many of them to stay focused on a particular job. They play a vital role, however, because without shareholders, they can remain invested in a sector even in the absence of a viable market—a circumstance from which successful for-profits retreat.

The government should employ both for-profits and nonprofits to serve the public good, as favoring one over the other may shortchange society’s interests. Critically, for-profits and nonprofits alike will only move the needle if the government customer demands continual improvement. Laws and regulations should therefore focus on and define the desired outcomes where possible without specifying the processes or inputs used to achieve them. They should also reward organizations that achieve the best outcomes for the best price relative to the competition and align those outcomes with what the end user actually needs.

Michael B. Horn is the co-founder and executive director of the education practice at the Clayton Christensen Institute for Disruptive Innovation, a non-profit think tank applying the theories of disruptive innovation to solve problems in the social sector. He is co-editor of the new book “Private Enterprise and Public Education” (Teachers College Press, Aug. 2013), from which this article was adapted. © 2012 Teachers College, Teachers College, Columbia University. For more information, visit www.tcpress.com.