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The Letter From: Political Risk, Political Action (April 5, 2004)

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My editorializing is now confined to edbizbuzz and my weekly podcast SIIW Online, but on April 5, 2004 they were still part of School Improvement Industry Week. The examples may require a modest recollection of the industry's history and the last Presidential election, but I think the points made then remain relevant.

Investment, Political Risk, and Political Action

Political risk dominates the future of the school improvement industry. Any organization providing products, services and solutions to public schools could fail because of ineffective management, inappropriate products, low-quality services, poor customer selection, or bad cash management. But these factors are within the control of staff, management, the board and investors.

Every school improvement organization - however well run - operates in a market environment that lives or dies on politics. In most states, there are few legal restrictions on the purchase of school improvement services - up to and including school management. Political resistance at the local, state and national levels, is what makes it difficult. At each echelon, bureaucratic inertia combined with powerful interest groups and public concerns about commerce in the classroom, has slowed industry growth

Politics has also opened our market up, again, at the local, state and national levels. Beginning in the 1990s, state legislators, bolstered largely by local parent groups and nonprofit education policy advocates, grew increasingly unwilling to spend more money for mediocre outcomes from the insular public school system. They established standards of student and school performance, created the charter school option, and brought systemic change mainstream legitimacy.

NCLB built on this trend across the states and overlaid federal law. It linked performance against state standards to market options initiated by state charter laws to establish national markets over the broad array of school improvement services discussed in SII Week.

Politics led to the laws that created the market opportunities that investors and firms now exploit. Yet it is important to remember that the industry was not much of a factor in its own creation. We were and, to a great extent, still are a “free rider” benefiting from the political efforts and objectives of other groups.

The "upside" of this has been the ability of industry leaders to spend their time and capital on business development. Some of this certainly involved local politics. Whether one is starting a charter school, selling a comprehensive school reform model, or negotiating a school management contract, the process is inherently political. But the industry's energy was concentrated on building individual firms rather than a collective political presence at the state and national levels. And there is lot to show for this - hundreds of firms, in thousands of schools, earning billions annually.

The "downside" is that the industry has not developed the political instruments it now needs to influence federal and state education law. The stakes are very high for firms and investors alike. To give just one obvious example, the industry will look different under Kerry than Bush. Political risk still dominates our future.

The fate of the industry depends on keeping NCLB in place - but our industry lacks a Political Action Committee for even the Presidential election. The size and shape of our market are affected by appropriations and amendments discussed on Capitol Hill - but most of the school improvement industry lacks effective lobbying. Rules, regulations, and guidance issued by the Department of Education affect what products and services our customers can purchase, and how we can sell them - but we lack knowledge of its workings and staff to press our positions.

Today, we are not important to a debate that is important to our future. Federal k-12 education policy now follows from interaction between the education establishment, which resists change to varying degrees; evaluators and researchers, who spend too much time untarnished by practical realities; and ideological policy advocacy groups from left and right. Even our friends cannot understand of the interaction between federal policy and firm operations well enough to protect our interests.

Although Warburg Pincus chose the wrong strategy in 2004 - forming EMOs into a trade group associated with the Center for Education Reform, rather than folding them into a larger nonpartisan industry association like EIA - every investor in k-12 education should follow their lead. Successful investment in the school improvement industry depends on managing political risk, and every firm should be engaged with a trade group.

Marc Dean Millot is the editor of School Improvement Industry Week and K-12 Leads and Youth Service Markets Report. His firm provides independent information and advisory services to business, government and research organizations in public education.


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