ONLINE EXTRA: Scardino: "It Is Not Enough to Be a Content Company"
Pearson's CEO talks about where the company has been, where it's going, and how she intends to get it there

Ever since Marjorie Scardino moved over from the Economist in 1997 to take the reins of Pearson PLC, which owns 50% of the weekly but doesn't control it, a stream of news has emerged from Pearson's London headquarters on Burlington Gardens. The 53-year-old Texan has turned into one of Europe's biggest dealmakers. She has inked more than 120 transactions, buying, selling, and merging assets worth more than $11 billion.

She has also built up the businesses she has kept. She poured money into the Financial Times newspaper, almost doubling its circulation. She also built Pearson's also-ran education business into the world leader. And she is spending heavily to adapt the company's content offerings to the Web.

Unlike some more cautious CEOs, Scardino doesn't hesitate to back what she thinks are good ideas. That arouses controversy. Some education industry observers, for instance, doubt that students and schools will adapt to online offerings as quickly as Scardino believes. But she's confident that she's doing the right thing.

Along with being a corporate mover and shaker, Scardino is also a warm and funny person whom colleagues say makes work fun. She has definitely improved morale at Pearson -- a company that was being touted as a breakup candidate before her arrival. She recently invited Business Week London Bureau Chief Stanley Reed to talk about the last four years and the future. Pearson Finance Director John Makinson also participated in the meeting. Scardino and Reed talked more in a later phone interview. Responses are Scardino's unless noted. Here are edited excerpts of these conversations:

On what she saw in Pearson:
What attracted me most about Pearson, besides that it was a nice company, was the wonderful brands. You could take all the assets and use them on different platforms.

On why she has built up education:
Before I joined, I got all these strategic plans, we went away for Christmas, and I read them. You would have come to the same conclusion when you read through all these various business. What was the best market, what was the best business, what had the best characteristics -- it was education. But it was a pretty crummy business that we had. We were No. 4 or 5 in the market, and we had management that wasn't up to doing all that much.

When you look at the world, you figure that the rise of democracy and economic determinism, and all that is fueled by the rise of education. It is certain that as the world gets more democratic, it's going to be an important ingredient. There is going to be more public expenditure on education, more merit systems. More cross-border investment means the rise of English. There are five or six [other trends] I could name. All of those say that if you are in the education business already, you have a start. We already had a start with some Pearson brands.

So that looked very enticing. The growth rate in the education business is pretty good. The emerging markets grew in double digits when their economies were able to handle it. As people got wealthier, they had more money to invest in children's future. All that looked very favorable.

If you think about education in the broadest sense, we are in the business of things that allow people to make good decisions or stimulate the imagination or bring intellectual joy. We are not in the business of doing things that appeal to anything but the intellect.

First thing we did was address the issue of top-quality education management. We looked at who was running the most successful education company. That was Peter [Jovanovich] at McGraw-Hill [publisher of Business Week]. We got Peter, and I remember sitting up on the seventh floor here, saying to him we are going to be the world's No. 1 education company.

So we did, and Peter is a wonderful, wonderful education guy. Because he is not only good at the business but because he cares about education. That really makes a difference because it is an industry that is not just a commercial proposition. It has the public trust aspect, and if you don't appreciate that, you will fail at it.

John Makinson: There aren't many industries of the size and potential of education where you could have taken a pretty poor business and pretty poor management and because of the structure of the industry with the appointment of a CEO and two acquisitions and created the world's leading company in the industry in a period of just over two years.

On fixing the company and culture:
We did not set out to grow this company by acquisitions or deals. We set out to clean it up and focus on a couple of good businesses that would work together so the whole would be greater than the parts.

The first thing we did was say this company does not know about performance. It needs a culture transfusion anyway, but first of all it needs to know that it has to perform growing revenues because all the elements are there. So the first thing we did was to focus on profits that would fund a little bit of time for us to consider how to achieve the strategy.

John [Finance Director Makinson] communicated to the organzation that we had to meet earnings targets. We said we were going to produce double-digit earnings growth because that was a simple idea and easy to communicate. It worked out well, and it sort of caught everybody's fancy. A lot of people thought it meant double-digit growth in revenue, which was not too bad an idea, either, but much harder.

There were two things that changed the culture. First of all, it was not an equity culture. The options did not go down very low. They now go down quite deeply. The regular option plan has gone from 300 [employees] in 1997 to 4,000. Then I think the communication we have done has changed the culture. After we announce our results, we go around the world talking to groups of employees talking abou thow we have done.

On expanding the Financial Times:
I had been running the Economist in America. I had been watching the FT for a long time. Periodically, I'd say to Frank Barlow [her predecessor] "why don't you let us run this for you? You are not doing anything with it, so it was an opportunity that was always there. So deciding to invest and growing that thing was a reasonably easy thing to do.

On whether it is going to be difficult to sell educators on the Web:
There is no question that the school business in America is complicated and somewhat bureaucratic. But if you spend time with local school administrators, these people are fundamentally concerned with teaching kids. They are earnest, sincere. They are trying to figure out what the best way to do it is. They aren't dazzled by technology but see it as a source of power. You couldn't know people in the education world without feeling how much they are striving to get this right. We have a chance to find solutions, and it will be a good business for our shareholders.

On what attracted her to National Computer Systems, the Eden Pairie (Minn.) educational testing company that Pearson purchased for $2.5 billion in July. Critics have doubted that NCS systems can be adapted to deliver content as Scardino envisions:
If you think they are a data-management company, go and talk to them. They are fundamentally an education company. They started out as a testing company from the University of Iowa. They have systems all the way from the back office to the teacher's desktop. They are not EDS or IBM. They fundamentally understand how schools run. The signifigance of having their system is it generates data about students and their schedules and their teachers. With that data, you can learn a lot about how that kid is learning, why he or she isn't succeeding. You can take that and couple it with assessment because that is sort of the mantra of the American school system now and increasingly all over the world.

How can you tell if a person is learning or not? You can only tell if you give him a test and see if he answers the questions right. If you couple the data you have on a kid with how he has done on a test, you can figure out what he is learning and not learning.

Our interest in NCS has to do with two sides of the business. With our content, they make a perfect match. Peter has known them over the years because he knows their tests. They sat down with his group, and they tried to create some new products together, products in which you have a math course where assessment is embedded. So instead of a big test every two years, you have a test after every chapter. So if you apply this via computer, you can figure out if Johnny caught on to the last lesson, and you can catch him before he falls. That is the dream of education because then you can do away with this horrible one-size-fits-all education we have in America and help each child learn at his own pace.

On criticism that NCS was too expensive:
Makinson: We took the cash flows of NCS and the five years at rate-of-growth achieved historically, and you can see those numbers the first few years historically because of the nature of their contracts. We then hedged back in the later years just for risk, and we bashed the model around, road-tested it, stress-tested it, and it came out with a present value ahead of our cost of capital. It is a tidy earnings multiple we paid. But because of where our own stock was trading, there was no earnings dilution. It will be earnings-accretive the first year. So we were very comfortable with the deal math, recognizing that the absolute price was quite high.

On the Learning Network, Pearson Education's Web site aimed at consumers:
Parents desperately want to figure out how to help. They are going to be willing to buy other aids and get services. Our learning network has a tutorial service that can find a tutor within 10 miles of your house. Parents are hungry for that sort of thing.

Teachers spend a lot of their own money -- $600 to $800 per year -- for their classrooms. They will be able to buy online and get a discount. I am pretty excited about it. I do not think it will all happen tomorrow morning, but it will happen.

On how their businesses are changing:
We think it is not enough to be a content company. You have to be able to provide the applications and services to match the content, to help the customer use your content. There is very little content that is not a commodity right now. We have to find an application that is more alluring than what anyone else has.

Three years ago, everything would have been dominated by our content. As technology has become more functional, it has become very clear that what you really have to do is take technology and use it as an engine for the content. The content and applications idea is what we are more focused on -- providing customers not just content but a dynamic experience that fits their needs and has lots of different functionalities. They shape it.

I think technology is all about putting people in charge of what they use, whether it's online investing or education. Hence, the NCS acquisition allows us to take a lot of the learning content we've got and not only fashion it for many different kinds of uses in classroom but also connect teacher and parent and administrators. It could connect school rooms far apart and students with like interests and needs, and give a far richer, 3-D environment.

On why she bought Dorling Kindersley, the London-based illustrated book publisher last spring:
Dorling Kindersley was consistent with how we've looked at things. We look at the brands and content, not how the content is applied now but how you apply it in the future. DK has a unique way of taking content and applying it in all sorts of ways. It is great online, great in CD-ROM, great in books. It is a great resource for all the businesses.

Are you worried about a downturn?
We ask everybody in their budgets to have a profit-protection plan. We are in a good position at this company because our businesses are in different cycles. The FT based on advertising would be one of the first in. Education is not impervious to recession, but in a certain way it is more protected than advertising-driven businesses are, and in some ways that gives us protection from a downturn.

On how has it been being a woman in British business:
I hate that question because I don't think people ought to categorize people by things they can't help like gender or the size of their nose. I don't like thinking like that. Nobody has ever treated me very peculiarly. I think so far as it has had any effect, it is an advantage because I am from a different country and maybe a little different than a lot of people. So they don't quite know sometimes how to deal with it.

Would the British government block a takeover of Pearson?
I expect they wouldn't give a damn.
Makinson: It is a much easier business to take over than it used to be. It doesn't have a merchant bank or TV. There would be a referral on the FT, but banking and TV are no longer an issue.

On rumors that she might be leaving Pearson:
I am very happy in England. My children are here except for one of them. When I hear these rumors, I call my board and say "are you guys planning to dump me?"

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Chapter 2 at Pearson

COVER IMAGE: Pearson's Big Bet

TABLE: Pearson's Growing Empire

TABLE: Scardino the Dealmaker

RESUME: Marjorie Scardino

PHOTO: Marjorie Scardino

The Financial Times Takes On the World

ONLINE EXTRA: Scardino: "It Is Not Enough to Be a Content Company"

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