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Management How for-profit education made class clowns of four businesspeople

Class Clowns

By Jonathan A. Knee

Columbia Business School, 274 pages, $29.95

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The public offering of stock in Edison Schools in the United States in 1999 signalled the hope that, by using business principles, a private company could deliver better public schools for less money, leaving taxpayers and children (and investors) better off.

The founder, serial entrepreneur Chris Whittle, declared that "10 years from now, when you think about who does the best schools, we want there to be only one word that comes to mind."

If 18 years later you can't recall ever hearing about the scheme, don't fret. If you didn't invest in the seemingly glorious opportunity, count yourself lucky.

It flopped, as did a series of ventures around the turn of the century where big-name businesspeople with noble intentions such as media mogul Rupert Murdoch, hedge fund titan John Paulson and financier Michael Milken tried to bring market discipline and technology to the allegedly backward, blinkered world of education.

"Some of the most respected minds of our generation have invested many billions of dollars in for-profit education enterprises. And, with surprising regularity, they have lost their shirt," Jonathan Knee, a professor at Columbia Business School and former investment banker, writes in Class Clowns.

The book is timely as Donald Trump prepares to be sworn in as president of the United States with a cabinet dominated by businesspeople who want to transform education and much more along business principles. The book is filled with stories of hubris and myopia, of a failure to understand the field of education and, indeed, in some respects even the basis of success in business outside the celebrated investors' traditional field of dominance.

The title is drawn from spinoffs when the code words used for a company's two new parts often are "Spinco" and "RemainCo." When Rupert Murdoch was forced to spin off his money-losing (but beloved) education assets by others in his company who hated them, the code name was "ClownCo."

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The enterprises covered all spheres of education, from day care to university and beyond – educational publishing, testing, and technology support, among them. And it included more than the illustrious businesspeople, as they reached out for assistance from luminaries such as former Yale University president Benno Schmidt Jr., who left that prestigious post to helm Edison Schools, and New York's reforming chancellor of public schools Joel Klein, who teamed up with Mr. Murdoch.

The book revolves around case studies of four specific investors – Mr. Whittle, Mr. Murdoch, Mr. Paulson and Mr. Milken. Interestingly, a key factor for failure, Prof. Knee feels, was not understanding the concepts of competitive advantage and scale. "Although often mistakenly assigned to any number of attractive business characteristics, competitive advantage refers to something very specific: A structural barrier that prevents competitors from simply replicating the results of a successful business," he writes.

Often they made that mistake and when the competitive advantage wasn't there – just some interesting business characteristics – they struggled, getting into even more hot water. In education, scale can be critical. As well, too often these investors reached to build something big that in fact lacked scale advantages. "Size doesn't matter but scale does," he says.

For example, buying private schools all over the United States – or, indeed, globally – can give an operator size but not much opportunity to take advantage of scale. A competitor with not nearly as many schools, but concentrated in one state – geographically close, same curriculum and regulatory system – can be the one building on scale because of those characteristics. These investors seemed to miss the importance of scale being advantageous in fields where fixed costs are high, so size made it easier to finance that burden. Too often they were in ventures dominated by variable costs – getting bigger just meant, say, more salaries to pay, and no advantage from scale.

On the Internet, Prof. Knee says scale comes with network effects. Some of these ventures simply hope to use technology and the Internet to reach out wider, which won't necessarily succeed. He points to eBay's network advantage: The more people who use it, the more attractive it is for others to use. The same is true of Turnitin, which helps universities to weed out student plagiarism. Since those plagiarists usually use a friend rather than a public source like Wikipedia, the more term papers universities supply to Turnitin to check – indeed, the more universities that contract to it – the better its service as it compares them to each other.

Turnitin is an example of a successful educational money-maker. There are others cited in the book. It's not as if businesspeople can't make a buck (or a lot of bucks) in education. But it's not a sure thing, as the class clowns showed.

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The book is thorough and incisive, rigorously presented. The market for reading it may be thin – most people don't want as much information on educational ventures as he provides – but its message is important.

POSTSCRIPT

The idea of framing your career around one simple idea, captured in a single word, is the subject of two just-published books: Your One Word (Tarcher Perigee, 249 pages, $35) by entrepreneurial coach Evan Carmichael and Life Word (Wiley, 98 pages, $24) by keynote speakers Jon Gordon, Dan Britton, and Jimmy Page.

Consultants Alex Pattakos and Elaine Dundon, back in Canada after a period in the United States, offer a third edition, revised and expanded, of Prisoners of Our Thoughts (Berrett-Koehler, 255 pages, $27.95), which uses the principles from concentration camp survivor Viktor Frankl to help you discover meaning in life and work.

In Spark: How to Lead Yourself and Others to Greatness (Houghton Mifflin Harcourt, 210 pages, $35.50) by Angie Morgan, Courtney Lynch,and Sean Lynch, three military veterans turned leadership experts argue leaders can be found – and be effective – at any level of an organization.

Harvey Schachter is a Kingston, Ont.-based writer specializing in management issues. He writes Monday Morning Manager and management book reviews for the print edition of Report on Business and an online column, Power Points. E-mail Harvey Schachter

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