Education Management Organizations: Managing Competition

NHA students
National Heritage Academy (NHA) students get instruction at a school terminal. NHA expects to operate 22 charter schools by the end of 1999.

Michigan is home to the nation's third-largest number of charter schools, many of which rely on private, for-profit companies for administration and management. The companies, commonly known as education management organizations (EMOs), manage approximately 70% of the state's 144 charters. But some EMOs are not content to simply manage charter schools for others in some cases, they are starting up their own schools, creating greater educational choice and competition for Michigan families.

One such company is National Heritage Academies (NHA), a Grand Rapids-based EMO. Founded by J. C. Huizenga in 1995, NHA is rapidly achieving its goal, which is to create and manage a strong network of K-8 charter school academies. Huizenga operated just one charter school in NHA's first year. Three years later, the company is managing 13 schools in western Michigan and plans to open nine more schools this fall.

Like other EMOs, NHA has sought private, outside investors. To date, it has raised $100 million in investor capital in addition to millions of dollars provided by Huizenga from his own personal finances. Yet, even with this level of funding, the risk is great, and there are no guarantees of success.

Charter schools cannot sell bonds for buildings and equipment like traditional public schools. First-year charters must be fully staffed and teaching students long before any money comes from Lansing. The high up-front costs for starting charter schools cause a negative cash flow for many months and also keep many "mom and pop" charter schools from entering the market.

On the plus side, the high up-front costs may also lead charters to use more cost-saving measures such as contracting out school support services. NHA, for example, contracts out 100% of its food and custodial services to other private firms.

Some charter school opponents, however, believe that profiteven if it improves serviceshas no place in the classroom. Mike Boulus, executive director of the Middle Cities Education Association in East Lansing, commenting on a report of charter school profits and deficits, noted that, "Any [school] in a deficit has shown good faith and spent everything they had on students."

But researchers are skeptical about whether Boulus's view represents a proper understanding of how profits ought to function in a competitive education market. "The absence of the profit motive in any business leads to stagnation," says Andrew J. Coulson, author of Market Education: The Unknown History. "The way to reach the educational goals most desired by the public is to cultivate a free market in education.

"Many of us have powerful computers on our desks, a situation that would have been unthinkable only 20 years ago," Coulson adds. "But computer manufacturers have not been regularly improving performance and cutting costs out of the goodness of their hearts: They have done it because they profit from doing it."

Similarly, the number of charter schools and EMOs is increasing across the land because they pay attention to profitsthat is, to using resources in the most cost-efficient way and providing optimum service at the same time. Even some public school districts have learned this lesson: For example, Lansing Public Schools provides contract food services for the Mid-Michigan Public School Academy, Michigan's largest charter school, and does so for a fee above the district's own costs. This might well qualify Lansing Public Schools as a kind of EMO in its own right.

Sustained profits are a sign that a company or school is doing things right and pleasing its customers. Profitable schools will be in a good position to have "rainy day" funds to make needed school repairs. Profits also reflect better management and planning, not a show of bad faith or lack of concern for students, as implied by detractors.

For teachers, profitability can also mean the opportunity to personally share in the success. The New York-based Edison Projectthe nation's largest private EMOnow offers its teachers stock options, an added benefit that traditional educational institutions and arrangements cannot provide.

Ultimately, charter schools and the private companies that manage them are held accountable by parents who are free to return their childrenand the state aid that goes with themto traditional government schools at any time. Consumer choice is the key. By searching out market niches, private companies such as NHA and the Edison Project are helping to provide families with greater educational options at a reasonable costwhile providing teachers, investors, and taxpayers with opportunities they would otherwise not enjoy.