Potential of For-Profit Schools for Educational Reform

Abstract

The rise of a for-profit industry in elementary and secondary schools is a relatively recent phenomenon in American education. In the past, a small number of independent schools - probably 2 percent or less - were for-profit endeavors, usually owned by a family or a small group of educators. However, over the last decade a group of for-profit firms has emerged with the goal of managing public schools on a contract basis. These firms have established contracts with both charter schools and public school districts. In exchange for a per-student fee (often the average per-student expenditure in a district or the amount of charter school reimbursement from the state), they will manage both the logistical and instructional aspects of the school. These firms can be analyzed according to their ability: (1) to be adequately profitable to attract capital; and (2) to improve education and initiate reforms in their schools, and stimulate reform in other schools that face competition from them or wish to emulate them. This paper suggests that the ability of EMOs (Educational Management Organizations) to be profitable is, at best, problematic. Although spokespersons for almost all EMOs suggest that it is only a matter of gaining more schools to reach economies of scale, the evidence on scale economies in education is at odds with this claim. A combination of high cost structures at central headquarters and the need for major marketing activities are also major challenges. In addition, education is a much tougher business than many of the EMOs anticipated because of the many-layers of political scrutiny and the ability of charter school sponsors and school districts to cancel term contracts after relative short periods. On the basis of existing evidence we have not yet seen substantial innovation in instruction by for-profit EMOs, although we have seen some logistical advantages in school organization. Evidence on educational outcomes is also mixed. This paper concludes with the view that for-profit EMOs are less promising than potential other forms of for-profit endeavors in education.