Time for education businesses to stop blindly following the rules

5 May, 2014

Education is a one-way bet. It simply has to be. There is no economy in the world that does not need a better educated, more highly-skilled population.

You’d have to spend a long time looking to find a company that does not want better trained, more technically capable staff.  And I have not yet met a parent that does not aspire to give their children a better education than their own. Don’t worry too much about digital disruption, emerging versus developed markets, or the economic cycle. It’s all just detail. Education is an unstoppable one-way train.

And then, of course, reality hits. A quick glance at the share prices of leading US and UK education businesses over the past couple of years seems to tell the opposite story. Investors into the sector have had their fingers burnt. Not in every case, but often enough to force us all to pause for thought. Some observers take comfort in the argument that there are reasons, very specific and very narrow reasons, that explain the poor performance of specific companies, or more broadly the US for-profit sector.  But we would argue that the problem goes deeper and that there is a structural malaise at work.
The problem is a fundamental disconnect between the priorities of learners and targets that education businesses focus on. These are targets that have evolved out of outdated structures which have been heavily influenced by historical and political factors that have little to do with the underlying value for the learners. Managers of education businesses have no choice but to play the system as it exists and so are forced to focus on outcomes that are mandated by government, regulators or even corporate clients. The problem is that these are quite often the wrong outcomes. Education businesses focus on what their clients or funders say that they want, the gap between perceived and actual value of the education and training grows, eventually the rules are rewritten and the operators have to take a major financial hit as they have to adjust to a new set of measures, possibly no better than the original ones. And so it goes on.  Managers of education businesses throw up their hands complaining that the goalposts have been moved yet again and shareholders are left to lick their wounds.

Other than wait (potentially decades) for these outdated underlying structures to modernise, what can education businesses do to sustain value creation for the long term and protect themselves from the whims of regulators?  This is a call for education and training businesses to stop simply following the rules and to begin setting their own standards. Passing exams and reducing drop-out rates is important, but so too is measuring value-add and perceptions of learner ROI. Pearson has announced that it is developing its own outcomes measurement and that these will be reported in a transparent manner. That is to be applauded and we must hope that it succeeds. It is time for the rest of the industry to follow. In no other industry is the gap between the true needs of the ultimate customers (the students) and the targets businesses are managed to permitted to grow so wide. Education businesses must strive to close that gap themselves, not wait for government, regulators and clients to do it for them.