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Innovation in the Independent School Business Model – How many levers are there?

by on March 29, 2017

This post is written in support and response of an article in the Spring 2017 edition of Independent School Magazine

Article: The Search for True Innovation: Examining Tuition, Compensation, and Class Size
By John Gulla, Executive Director, EE Ford Foundation

I read with great interest this article by John Gulla in the most recent edition of NAIS’s Independent School Magazine. Last summer, as MISBO was in the early stages of development and planning for the MISBO + IDEO Project, I spoke with John at some length about the proposed project along with my thoughts on the future of independent schools. He shared with me his thinking as well, much of which is expressed in this article which he was in the process of writing at the time.

John tells the story of his long-ago conversation with Pat Bassett (former president, NAIS) where Pat outlined his views of the limitations of nearly every independent school. Please note that this was about 20 years ago. The basis for the development of the current MISBO + IDEO Project is a direct result of the fact that our schools, school leaders, association, etc. have been talking about this known challenge for decades, yet little action has been taken to make real innovative changes. Pat indicated that there were three factors at the heart of the financial model (I prefer to use the term “business model” since the term “financial model” can be confused with a spreadsheet): what they charge (tuition), what they pay (compensation), and average class size. John provides some compelling reasons to take a close look at all three. I might argue that average class size actually drives compensation, but it is an important factor and I agree with their assessment that it can be viewed as a significant lever for a school to explore.

Tuition is the only significant driver of revenue for an independent school. However, from a business point of view there is little strategic design behind tuition setting. Most schools benchmark tuition against an appropriate group of peer schools and set their tuition at a similar level. Some choose to be at the median, while others may vary slightly higher or lower for a variety of reasons. The real question of tuition actually refers to net tuition – published tuition less financial aid. This may have a greater variance than the full-pay tuition amount, but schools still have essentially one product at one price. John suggests some alternative thinking about tuition and product offerings. How many of our schools actually look at this and consider that schools are selling a product? He uses the airplane example (very appropriate as I am writing this on an airplane) to suggest that our schools can look at other businesses for examples of different forms of pricing.

The second lever is on the expense side and that is of course compensation. I actually believe that this is a place where our schools have much more opportunity to be innovative. It is not just about salary levels, but also the full picture of staffing (all faculty, staff, and administration). Class size is certainly a factor, but John presents some models that may disrupt the long-held beliefs about class size. Michael Horn, in his recent book, Blended, discusses various modalities of blended learning and new ways to think about teaching and learning which may challenge our long-held beliefs. Michael also presents scenarios where blended learning can significantly reduce both compensation and facilities costs. This is happening now at many schools. Equally important is John’s challenge to us to consider the viability of a compensation system that essentially only rewards longevity without a similar correlation to performance. I agree with John and I am a strong advocate of transparency, but most of our schools have salary and compensation systems that reward longevity in many ways.

We all know that the number of employees has grown at our schools over the past 20 years. In an effort to provide a great array of programming and services we have added a large number of non-faculty positions. Another factor has been the dramatic increase in the compensation for our heads and subsequently all senior administrators. Add to the higher costs the fact that nearly all of our schools are top heavy with administration and this just adds to the challenge of keeping our largest expense in control and therefore controlling the increases in tuition.

I end with this quote from John: “I encourage schools to think more boldly, more courageously, about these “fixed” elements of our financial models – about our pricing, our compensation, and our classroom quantization.”

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