In a recent conversation with an investor in the EDU industry, I asked him what do you think of Career Education Corp’s stock price taking a 40% nosedive?
His response was standard – something had to change and the industry is still looking for a company to go down. It sounds like a lynching party in some regards. The community and investors need a sacrificial lamb to satisfy the masses.
The more important sentiment here is that, most people looking from the outside or inside is that the for-profit schools are still very good businesses providing a good product. So why, aren’t these schools performing as they should?
One answer – They have E.D.
They are expected to keep growth rates up for a long period of time to justify their valuations. Most companies in most industries can not support 20% YOY growth for more than 3-5 years. Too many other factors change to keep that rate.
EDU has developed E.D. because they have become so stressed out about hitting their numbers, potential regulation, potential investigations, and potential lawsuits. This has slowed their supply of Title IV funding (the blood that fuels the system). Without this steady flow of money the system has deflated.
The schools have become so distracted, one might think that they have stopped paying attention to just providing high quality education. The basics of courting the Title IV funding.
Like most, the EDU system has tried to "enhance" their money flow to pump up the system again. They have done this by cutting costs, bringing on students that pay more out of pocket and screening students on the front end with orientation courses.
The effect of these "lifestyle" changes has had little or no effect on the system at large. The reason being that the EDU system has created so many barriers to being part of the system, schools are not testing media sources as aggressively as they once were.
Media is essentially the stimulation for the system. Expose the system to as many "scenarios" and see what provides the best result. This is essentially the same thing as dating a lot of different people. It is somewhat necessary to really figure out what works best for you.
EDU’s current harem of media sources is not doing the trick anymore.
So how does one get rid of a bad case of E.D.?
Humans would take a blue pill.
Corporations have a few options:
1) Change expectations. Perhaps EDU doesn’t need a trophy wife. Perhaps it needs a wife that is steady and true. The stock markets may just need to get a different growth estimate saying we may only see marginal growth for the long term but it will be highly consistent. Valuations will drop but it doesn’t matter, cash flow will improve, margins will improve and schools can get back to focusing on providing education rather than impressing the investors.
2) Divorce and go bankrupt. Sometimes the only way to change is to just get rid of the whole situation and rebuild from scratch. The schools are obviously scared of what their vendors might do, the trust is gone from the system. The vendors have high switching costs. Going into another vertical is tough. They want to get the most of out of this marriage before it breaks.
3) Focus on providing quality. This has nothing to do with media nor investors at the end of the day. It is education. The schools must at all costs provide a high standard of education which builds a brand. Keeping students in school is the most important thing to making sure they can repay loans. When I start hearing statements from employers like "I want to hire more online students, they are really prepared well," then we know EDU is on the right track.
4) Create a job site for students graduating from for-profit schools. Profile each one – give them a 2012 resume which is a video, highlighting their education, and get employers to watch. If you are providing a truly advanced education position your students and their career credentials as such. Being in the industry, there is still no centralized resource to find students from these schools. Their career services are weak at best.
If a for-profit school subsidized an employee, I am sure they would hire the person. This sounds a bit crazy but why not kick some money into creating jobs? I think a lot of companies would even hire the person if they got a $500 subsidy. Anything helps at this point.
It is time for EDU to simplify and renew. Focus on education, get rid of the performance stress and get back to the original mission. Helping the non-traditional student. More than ever this student needs your help and love.
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