BUSINESSWEEK ONLINE : FEBRUARY 7, 2000 ISSUE
COVER STORY

Edison's Chris Whittle: "Winners of This Race Are Children"
For-profits schools foster healthy competitition with other institutions, says the industry pioneer

As founder and CEO of the nation's largest for-profit operator of public schools, Christopher Whittle is easily the industry's best-known executive and its leading spokesman. In a recent interview at Edison's headquarters in New York City with Business Week Boston Bureau Chief William C. Symonds, Whittle discussed the outlook for both the industry and Edison. Here are edited excerpts of their conversation:

Q: What makes you believe that for-profit companies can do a better job of teaching kids than the public schools?
A:
The average school district in the U.S. is a cottage industry. [The average district] has just 6 schools, 3,200 students, and a budget of $22 million. And it is run locally. In contrast, we are national and have big advantages of scale. For instance, the typical school district can't support research and development, and doesn't have the scale to do serious design work. We do. [Edison hired former Yale President Benno Schmidt Jr. to lead a three-year effort to develop a world-class curriculum.] There is just no comparison.

Q: But can this industry really improve the performance of our schools nationally?
A:
I am quite optimistic. Twenty years from now, we will have the best public schools on the globe. We already have plenty of anecdotal information. And guess what? It shows that when you have a [for-profit school] trying real hard down the street, that makes schools up the street try harder, too. That is positive, and the winners of this race are children.

Q: Right now, government-run schools control about 90% of the market for educating kindergarten through 12th-grade students, with private schools accounting for most of the balance. How do you see this mix changing?
A:
In 20 years, I think Edison-like entities will have 20% to 30% of the market. In turn, school districts could be like O'Hare Airport. O'Hare is a local-government monopoly that is operating in partnership with national for-profit providers. And school districts can evolve in this way. A school district could recruit [education] providers and let citizens choose what school [their children] would go to.

Q: Edison was one of the first for-profit providers. How did you come up with the idea?
A:
I go way back [in the education business]. In 1969, I ran a campaign for president of the student government at the University of Tennessee, and my bumper sticker read, "for a better education." That resonated. We had the largest turnout for a student-body election ever. Then, for the next 20 years, I was around schools -- in the publishing business [and running Channel One, an advertiser-supported television program for schools]. Over this time, I attended thousands of school-board meetings.

Then in the late '80s, the Business Roundtable asked me to make a speech on what I would do to improve public schools. And after I gave the speech, I kind of listened to myself and said, "Why don't I do it?"

Q: But how did you come up with the idea of running public schools?
A:
At first, I thought the only way was to build a national system of private schools. But then in 1993, I spoke to the governors, and some of them came to me and said, "We will find some public schools that will let you [run them]. I felt maybe there was a way to do this in the public sector. And then the charter-school movement began to emerge.

Q: Edison is about the only major for-profit company that contracts directly with school districts to run public schools. In contrast, the other companies are focusing on running charter schools -- which are free from many of the rules that restrict district public schools. Why are you doing both contract schools and charter schools?
A:
We view this in geographic terms: Contract schools work in some states, and charters in other places. As a general rule, in a state that has a very low level [of education spending per pupil], it is really tough to do a charter school. So we seek contracts in states with moderate and lower levels of spending, and consider charters in higher-spending areas. Right now, about 65% of our schools are contract schools, and 35% are charters. One of the advantages of this strategy is that more markets are open to us.

Q: One problem faced by charter schools is that they must pay for their own school buildings. How are you going to solve that?
A:
The No. 1 constraint on the charter-school movement in the U.S. is real estate. An O.K. building -- just O.K., not great -- can cost you $1,000 per child per year. Let's say you are receiving $5,000 a year [per-child to educate the child]. You just got 20% of your funds diverted to your facility cost and out of your academic program.

One answer might be something called lease-aid, where the government would give charters additional money [to help them pay for their buildings]. If they do this, it will make charter schools possible everywhere.

Q: Do you see governments providing such aid to charter schools?
A:
I think it is coming, but it may be five years before we see it in a pervasive way. Right now, the facility cost is the Achilles' heel of this movement.

Q: Coming back to one of the bottom lines for your business: How can you do a better job of teaching?
A:
I'll give you two words: Design and urgency. When you infuse [an excellent design like ours] with urgency, it does make a difference. If we don't perform, we can lose our contract [to operate a public school]. So, if student achievement doesn't go up, we don't have a business.

Q: How are you doing so far?
A:
Quite good. Any objective person who sits down and looks at our 79 schools, and looks [at what we've done since our first school opened five years ago], has to come away with the conclusion that the children in those schools are better served than they would have been in a typical [public school] down the street. That is not open to serious question. But are we perfect? Absolutely not.

Q: The other bottom line for your business, of course, is whether you can make money. So far, you haven't. In fact, last year, Edison lost $49 million on revenues of $133 million. How are you going to turn that around?
A:
Our business strategy is to use the advantages of scale to drive down our headquarters cost.... We think the estimate that 50% [of the education dollar] is wasted on administration is hyperbole. Our estimate is that about 70 cents [of each dollar spent by the average public school] makes it to the classroom; 3 cents goes to capital goods like textbooks; and 27 cents goes to administrative costs. At scale, we plan to spend just 8 cents on central spending.

Q: Are you making progress?
A:
Our central costs as a percentage of our revenues is dropping like a rock. In 1996, it was 78%. By 1999, it was 25%. And this year, it should fall to 21%.

Q: What will happen to the money you save by spending less on headquarters?
A:
At scale, we plan to spend 79 cents of every dollar in the classroom [vs. 70 cents spent by the average district], and 6 cents on capital spending, twice as much as the typical school. After headquarters costs of 8 cents, that will leave a profit of 7 cents.

Q: How do you respond to those who say for-profit schools are bad for education?
A:
Under our plan, we will drive more dollars to the classroom, and more dollars to capital spending. The only people who don't support that are those people who work [in the current education] bureaucracies.

Q: How much competition do you expect in this industry?
A
: I think you're going to see another wave of players: The big buys. When this category is accepted, you'll see some companies that can naturally segue into education -- like Walt Disney, Apollo Group, or maybe a big textbook publisher.



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