Going for broke

Prevailing market conditions might offer your school the opportunity to expand its roll at the expense of a competitor. But what are the benchmarks to confirm the wisdom of this strategy? Simon Shneerson reports

For many years, one of the hallmarks of the independent education sector was that its schools had better premises, facilities and resources than the maintained sector. Last year’s ISC Census showed that in 2006 its member schools invested more than £700 million in capital expenditure, about half of which went on new buildings. Some of these buildings will have replaced older ones, but ISC also reports that £164 million was spent on improving existing buildings.

In all, capital expenditure amounted to £1,400 per pupil, a staggering 13.6 per cent of fee revenue. In the wider business world this level of investment would usually be associated with growth markets promising high future returns.

Squaring the circle
So why do schools spend so much on physical expansion and development at a time when their market is broadly static and when most of them achieve margins of under 10 per cent on their revenue?

One reason is that since most independent schools are charities, they are happy to generate modest rather than high profits and then to re-invest their surpluses in new buildings and resources. This fits the natural desire of teachers to provide the best possible education for their pupils. The argument goes that larger schools can employ more specialist staff and offer more educational options, so bigger is better. Or, if a school does not want to expand, additional facilities support the quality of learning and encourage the best teachers to want to work in the school.

Mind the gap
In the IAPS “Quo vadis?” survey, conducted last year, we identified a clear split between larger and smaller schools. For example, in the M25 belt, 60 per cent of larger schools had seen pupil numbers increase and were now full, while only 30 per cent of smaller schools were full and 39 per cent reported falling numbers. As well as being fuller, larger prep schools reported greater confidence about their long-term future, greater success at recruiting pupils, higher profitability, more management resource and, of course, more facilities.

But where should expansion stop? What is often overlooked is that more buildings and more facilities mean higher running costs, and often the emotion and enthusiasm behind improving the educational product means that the business case for investment becomes secondary.
Some schools invariably invest in what they believe to be “good ideas”, but which provide no tangible difference other than to costs and operational complexity.

Reasons for confidence
There are many schools that are immensely successful and are permanently over-subscribed. These schools can confidently assume that expansion will be sustainable and so can invest in further growth at the expense of, or alongside, their competitors. But many others are investing in buildings when they might be better off investing in better teaching, more marketing, or in keeping – or making – fees lower.

Parental commitments
Many schools report a growing trend for parents to dip in and out of the independent system for a few years at a time, where they would previously have bought a start-to-finish independent education. Prep schools are booming where they feed into state grammar schools, and boarding schools report parents trading down to cheaper flexi-boarding. In the “Quo vadis?” survey, 86 per cent of prep school head respondents felt affordability was a key concern, and 49 per cent said that fee levels were already impacting on pupil numbers. I suspect there would be a similar response from heads of senior schools as well.

What will schools do about this, and is now the time to be more cautious about further expansion? Most bursars have already optimised their infrastructure costs and, without cutting teaching staff, there is little scope for savings. Only the building development budget remains for consideration. If parents want the best education for their children but not enough of them can actually afford it, more facilities won’t help, and the extra classrooms that will be built in 2009 will simply add to the emptiness and despair of the hapless head and governors. Cutting building development plans and freezing (or even reducing) fees might well be a sensible option for many.

A dose of realism
Of course, this is a pessimistic view, but it may also contain a hint of realism. However you see things in your school, in today’s economic climate every school should consider all the business and marketing options that are available. Price, positioning and promotion are every bit as important as the product is or could be. Schools should consider expansion not as an end in itself, but as a strategy to strengthen the school as a long-term business.

Do plan for expansion if your school:
• is already – and consistently – over-subscribed, offers a recognisably distinctive education, and can genuinely improve either its quality or its balance sheet by expanding;
• has the chance to squeeze out a smaller, weaker competitor at some point in the foreseeable future;
• faces changing market conditions within the catchment area – such as major housing or employment developments that will boost the potential customer base;
• is too small to cover its costs at an affordable fee level, but has the potential to attract more pupils if it had greater classroom capacity; or
• has spare resources (staff or facilities) which could profitably be used with modest investment in removing one constraining factor (such as by adding a temporary building).

Do plan additional facilities if your school:
• has a strategic weakness that is costing you in quantifiable numbers of pupil registrations or admissions;
• has a strategic opportunity to compete more effectively with a major rival;
• can charge higher fees once they are integrated into the educational product; or
• has a major donor who might finance the initial investment – but make sure your ongoing extra costs will be met by being able to recruit additional numbers of pupils or by generating additional revenues.

Finally, do:
• consider the school’s overall purpose, goals and strategies periodically, with challenge, fresh thinking and an eye on external factors;
• carry out market research to find out what your current, prospective and rejector parents think of your school and what it offers;
• make use of price-volume models when setting fees, and look at wider ranges of options than you have done in the past; and
• focus parents’ minds on what you do and how well you do it, rather than on the buildings and facilities and the “arms race” with the school down the road.

Simon Shneerson provides strategic business consultancy for independent schools. Simon can be contacted on 01923 283574 or via www.simonshneerson.com

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