Franchising for Charter School Scale
In theory there is no difference between theory and practice. In practice there is. Attributed to Yogi Berra.
Mike Petrilli asked me to comment on “Brand-Name Charters,” an essay by business writer Julie Bennett in the Summer 2008 issue of Education Next, noted on Flypaper. Bennett wrote Franchise Times Guide to Selecting, Buying, & Owning a Franchise (Sterling Publishing, 2007).
The strength of Bennett’s article is describing two broad strategies for corporate growth and applying them to charter schools.
In one the company opens units it owns outright. Bennett suggests Starbucks; I offer Nobel Learning Communities, the nation’s largest publicly traded elementary school system.
In the other, the company enters into franchise agreements with individuals or groups who buy into the business concept literally. Bennett draws on McDonald’s; Sylvan Learning Centers is an example from for-profit education.
Bennett places various Charter Management Organizations (CMO) in the vicinity of one approach or the other. KIPP is her example of the CMO growing by franchising; Lighthouse a CMO adopting the company owned approach. (I might have used Aspire.)
It’s a useful way to think about ways to scale the charter movement. The company model favors control over rapid growth. The second emphasizes growth over control.
In business, as well as charter schools, balancing the two objectives is no mean task. The success of either strategy depend quite heavily on legal structures. The further the actual relationship between headquarters and the unit deviates from either type, the more problematic the relationship becomes – undermining quality and slowing growth.
To a great extent, Bennett is a fan of the franchise model, and describes different features of different CMO-school relations that have franchise features. It’s a good piece, especially for a field that is not inclined to draw on other disciplines, a problem that extends to education’s social entrepreneurs no less than traditional agency administrators. Nevertheless, some understanding of the legal formalities of franchising and the nature of the charter market is essential to appreciating the possibilities suggested by Bennet and the challenges to realizing the vision she suggests.
As the Center on Reinventing Public Education’s report Quantity Counts (which Bennett notes and I helped to write) points out, readers should understand that what looks good in principle has generally fallen short in practice. In part, this is because CMO leaders lacked a clear picture of growth strategies at start up, the business and legal capacity and experience a company one would expect of a business preparing to scale up, or the tried and tested scalable model. To a greater or lesser extent this remains true. At least as important, however, is the nature of the charter school market – which favors would-be franchisees over franchisors.
Fundamental to the franchise model is a legally binding contract between the developer/owner of the model to be replicated (the franchisor) and the individual or group that will implement the model (the franchisee).
This agreement covers the responsibilities, rights and recourses of the two parties.
Franchisors are generally obligated to supply franchisees with the financing (loans), brand (trademark), materials, training and technologies necessary to replicate the model; to build brand awareness through outreach activities (e.g., advertising); and to maintain the quality of the brand by protecting the brand image from unauthorized use in court, and by assuring that other franchisees conform their operations to the model and produce the expected level of quality.
Franchisees are generally required to invest financial and human resources sufficient to demonstrate a real commitment to the model; to agree to implement the business model with fidelity; and to adhere to a set of objective standards related to the quality of model implementation and outcomes.
The agreement generally contains a description of the consequences following a party's breach of their duties and a process for resolving disagreements. If worse comes to worse, franchisors are often obligated to strip a franchisee of its rights to use the model's marks, materials, processes etc.
One final important point is that franchisors generally have more bargaining power in the negotiation of these agreements than franchisees. At least in its heyday, the number of people who sought a local McDonalds exceeded the number of locations McDonalds wanted to open. One important result of this disparity is that franchisors can make it virtually impossible for an ex-franchisee to conduct business in the relevant franchise territory - by stripping them of the support required to operate the franchise itself, and by enforcing non-compete clauses signed by franchisee. Disgruntled franchisees have a much harder time seeking recourse against franchisors.
In contrast, in the company-owned approach to growth there is no party with rights like those of a franchisee. If the company sets up a new place of business, it owns it lock, stock and barrel. It can close up shop at any time, for good reason or no reason. It can allow units of questionable quality to remain in operation. Legally the company doesn't even need formal a defensible trademark, materials, processes quality standards. About all it really needs is the common brand name to be scaled up - and that's a practical requirement, not a legal obligation.
Legally, no for-profit Education Management Organization operates as a franchise organization. Edison, National Heritage, Mosaica etc. enter into contractual relationships with school districts or charter school boards to provide all or part of the activities embodied in their educational models. Circa 1997, Center on Reinventing Public Education founder Paul Hill called this "school contracting." EMOs are vendors, not franchisors. In rare cases, like Arizona, where for profits can hold charters outright, their contract is the charter granted by the relevant chartering authority, which gives them a more advantageous set of rights.
But in all cases, the bargaining power lies with the district, charter school, or chartering agency, who can choose among many EMOs and who cannot be contractually blocked from running their school or schools. EMOs need schools to run, far more than schools need what any given EMO has on offer. Edison will tell you that in many cases, long before the firm can recoup their customer acquisition costs and initial investment in a given location, their partner district or charter school will decides to end the contractual relationship - often to build on what they've learned from Edison and do roughly the same things themselves. The first case was Boston Renaissance, the most recent Friendship in the District of Columbia.
CMOs: Franchisors or Vendors?
Nonprofits can hold charters outright. Some have chosen to grow by establishing a central management function not unlike that of a school district, obtaining charters in their own name, and operating the schools directly. This kind of nonprofit charter management organization (CMO) has adopted the classic company-owned growth model.
What about the rest? Most CMOs have sought partnerships that have some of the features of a franchise relationship, but legally and structurally they are closer to the school contracting relationship of the EMOs.
The starting point is relative bargaining power. Most CMOs need new schools to satisfy their mission and financial requirements far more than any potential charter holder needs a particular CMO. Most CMOs still lack the basic capacity to provide what potential school operators really need - facilities, financing and technical support for start up, ongoing cash flow financing, and basic administrative systems, let alone well specified programs of curriculum and instruction that might facilitate the training of new school staff. Absent what business franchisors typically bring to the bargaining table, these CMOs are just not all that attractive to school leaders who might conceivable consider a traditional franchise relationship.
At least as important is that thus far most charter holders are not all that interested in replacing one "cookie cutter" school model - let alone the core curriculum and instructional model - owned by the school district they have escaped with one offered by some other central office. They may want assistance in certain areas, but they are unwilling to cede control over local responses to local needs.
CMO’s have had a very hard time finding the kind of people business franchisors' find in abundance – those who want to own their own business but are relatively agnostic about the business model or the philosophical principles underlying its design, development and implementation. The people interested in forming charter schools are less like the people attracted to franchise retail and fast food restaurants and more like those who have their own small business vision or offer professional services.
As a consequence, the legal relationship between the CMO and the school finds expression in contracts that cast the CMO more as a vendor than a franchisor. There is generally no master agreement obligating the CMO to provide its partner school with financing; the use of trademarks or other intellectual property; specific materials, training and technologies required to replicate the CMO’s model; back-office support services and the like. Similarly, there is no general contract covering the school’s investment obligations, any agreement to implement the business model with fidelity; and to adhere to a set of objective standards related to the quality of model implementation and outcomes.
Most CMOs lack the resources to offer schools the promises of franchisee support contained in a legally binding agreement - they are not entirely reliable partners. And most CMOs lacks documentation that describes or measures the quality of franchisee implementation with sufficient specificity or objectivity to be enforced by contract, in no small part because they could not create such documentation. No CMO manager knows how their model creates its educational outcomes in the way McDonalds knows how its proprietary fryolators produce its trademark fries.
Instead, any documentation memorializing the agreement between the two parties is likely to take the form of: grant proposals funded by some foundation in support of the partnership, letters between officers of the CMO and the school, perhaps a memorandum of understanding, invoices for services rendered by the CMO and the like. This is not the stuff of a franchise relationship. This is the stuff typical of arms length deals between buyers and sellers.
Franchising is a useful concept, but it’s a little like being pregnant – it’s an all or nothing status. Moreover the success of the franchise strategy depends on market conditions where would-be franchisees outnumber franchisors. Neither is true of charter schools today.
Could a franchise strategy of CMO growth work? Possibly, but only given specific conditions.
First, independent schools have to want what the CMOs have on offer badly enough to accept the obligations of a franchisee. If NCLB I was replicated in NCLB II, the vast number of schools in improvement status just might create such demand. Unambiguous demonstrations of materially better results wouldn’t hurt,
Second, the implementation of CMO’s proprietary curriculum and instruction programs must be amenable to objective review. This is at least some ways off.
As I’ve written elsewhere, the fundamental problem of CMOs, whether they adopt a company or a franchise growth model, appears to be their duplication of government’s role of assuring the educational efficacy of charter schools - by specifying its curriculum and instructional plan. First, controlling quality by monitoring the fidelity of implementation at each school adds substantial operating costs, making “break even” more remote. Second, every CMO makes that happy day even more remote because its model discourages more education entrepreneurs than it attracts.
We would be much better off with a charter school scale strategy that leaves the policing of quality outcomes to chartering agencies, where central management organizations offer what potential school operators really want and need - facilities, financing and technical support for start up, ongoing cash flow financing and basic administrative systems.