The ABCs of Profit

The CEO of Nobel Learning Communities Inc., an operator of for-profit and charter schools, is convinced that he knows how to make money with schools -- without sacrificing quality.

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To hear the head of Nobel Learning Communities tell it, U.S. public education amounts to nothing more than the last unprofessionally managed industry in America. Does that spell opportunity?

Each year, billions of dollars are spent on public schools in the United States, yet no one thinks they work. So is this industry -- in essence a regulated monopoly -- ripe with entrepreneurial opportunity? Jack Clegg thinks so. Clegg is chairman of Nobel Learning Communities Inc., in Media, Pa., an operator of for-profit and charter schools. And he's convinced that with schools, he knows how to make money while not sacrificing quality, a skill he's demonstrated with a score of previous businesses. His method? Focus on hitting a few key numbers, and watch the rest take care of itself. Is education ready for this?

Gold mine?
The first thing you notice about Jack Clegg is his nose. Bent and flattened, it looks as if it has been worked over with a hammer and tongs. It's the nose of a man used to banging his way ahead through life, no matter what the odds are. Clegg lost his father when he was 12 and later took eight years to finish college, which he attended at night. Over the past 43 years he has worked in the trenches at such corporate leviathans as IBM and Xerox, and in between he has found the time to be an entrepreneur, running 21 companies in 17 industries at one time or another.

Clegg has run businesses that manufacture trash compactors, clothes hangers, space vehicles, and automotive parts. He has managed shoe, cutlery, and cookie stores. And he has peddled computers, copiers, and electronic switches. But his biggest success is his latest -- and least likely -- venture, for-profit education.

In 1991 the board at Rocking Horse Childcare Centers, a chain of day-care centers based in Media, Pa., brought in Clegg to advise the company. Rocking Horse was dying right under its owners, having had just one profitable year since its founding in 1984. "The company had a negative net worth, was involved with the workout departments of two banks, and had recently been delisted from Nasdaq," Clegg recalls. "Other than that, things were fine."

Clegg bulled his way onto the board and stayed on as chairman, even after the management invited him to step away. In his first year with Rocking Horse, Clegg produced a seven-figure profit. The company, since repositioned and rechristened as Nobel Learning Communities Inc., has gone on to average 30% annual growth. In its latest fiscal year, ending July 1, Nobel made nearly $2.5 million on sales of $127 million, which reflected a 56% increase over the prior year's net earnings. The company now operates 162 schools in 15 states. It employs 4,500 people, of which 1,848 are teachers, and has the capacity to educate more than 26,000 students.

Education, you'd think, would be a gold mine for entrepreneurs like Jack Clegg -- easy pickings. The bulk of the $618 billion the country spent on education in 1998 went to public schools. And as student performance in those schools declines -- even as spending keeps rising -- those who would reform education keep venturing forth with their dollars and their ideas.

Silicon Valley venture capitalist Tim Draper is spending $20 million supporting a ballot measure this November that would give every California public-school student a $4,000 voucher to use at the school of his or her choice. Ambitious as that might seem, Draper's proposal is modest compared with the $350-million campaign that the Bill and Melinda Gates Foundation has undertaken to improve primary and secondary schools.

But education is a complex and gnarly business, involving the management of not just money and real estate but an array of contentious and entrenched constituencies, including students, teachers, parents, and regulators. Just ask Denis Doyle, who wrote Reinventing Education with IBM's Lou Gerstner. Doyle has worked in the education industry for 30 years as a consultant. "Most public schools are bureaucratic, hierarchical institutions that are unimaginative and cautious," he says. "They're where the auto industry was in 1965."

Nobel's chief operating officer, Daryl Dixon, calls public education "the last natural monopoly." That makes it an inviting target, but when you go after a monopoly you also must contend with inertia and those who try to protect the status quo.

Many entrepreneurs who have gone into the education business have encountered their share of roadblocks. The most visible venture in for-profit education, Edison Schools, started by the notably flamboyant Chris Whittle, has invested $100 million over the past six years in the management of charter schools -- and has yet to break even.

"You definitely have to pick your spots," says Keith Gay, a partner at the San Francisco investment-banking firm Thomas Weisel Partners LLC. "Developing a successful for-profit company takes a lot of time because the customer is not always rational." He likens education to health care, an industry in which buyers want the best -- at a bargain price. As a result, says Gay, "what could be explosive growth becomes controlled growth because you can't afford a mishap."

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