Millot: Condem Bakke's Intention But Understand His Motivation

It is... our money and our risk, not theirs.

Denis Bakke, President, to Imagine Schools developers, directors and principals (Sep. 4, 2008)

We cannot condone theft, but we can sympathize with the laid-off father who intends to steal groceries, motivated by the need to feed his hungry children. Denis Bakke hardly became Imagine Schools' CEO in a fit of amnesia - he knew (or should have known) the laws governing charter schools before he entered the market. Nevertheless, while his memo to senior staff on charter school boards expressed wrongful intent with unambiguous clarity, his motivations for gaining control over schools in the Imagine network address show-stopping problems faced by every for- and nonprofit school management organization.

The reasons E/CMOs seek some measure of control over "their" charter school fall into two categories: academic and financial. Both are common to the success of every Management Organization's business model. 

The academic rationale for control is uncomplicated. MO sales appeal to chartering authorities, parents, and ultimately charter school boards is based on the image conveyed by their "brand" (i.e., Edison, Imagine, Green Dot). A good part of that image is superior student performance, based on a recognizable academic model. If they fail to produce either, the MOs will never achieve the scale required to become financially sustainable. If MOs fail to grow fast enough, they will run through the cash supplied by private investors or philanthropy for the period the CMO founders expected to achieve scale. The need to achieve high levels of performance and maintain a distinct approach to teaching and learning motivates MOs to control everything from each school's "look and feel," to the teaching force, to pedagogy. There are many ways to gain a measure of control or influence, but there's no control like controlling a charter school's board.

The financial motivations to control charter schools in the E/CMO's network may appear a bit more mercenary than the academic incentives - and they are far more subject to bad acts, but as a matter of CMO sustainability they are no less important.

Start with the fact that MOs cannot hold charters outright beyond their immediate environs and that, aside from Arizona. EMOs cannot hold charters at all. MOs must find charter school boards interested in partnering with them, work with them to develop a charter application, and negotiate the school management contract allocating control between the board and their firm. These "customer acquisition" costs are not trival for an MO with regional or national aspirations.

Once the charter has been granted to the board, the MO must invest additional funds to start the school, including most of the equipment, furniture and personnel costs - well in advance, and far in excess, of the first government per-pupil payments. There are also likely to be substantial up-front costs to acquire and/or renovate real estate suitable for a school building.

Once the school is operating the MO has a relationship with the parents of children attending the school, the community in which the school is located, and the board. The more "hands on" the board, the more time and money the MO will spend managing activities beyond teaching and learning.

These substantial investments can only be recovered over time. This period may be in excess of a new school's multi-year charter. In short, the MO may not begin to generate a surplus (CMO) or profit (EMO) from its work with a partner charter school board for five years.

Again there are ways for MOs to improve the prospects for cost recovery and unit profitability. High levels of academic performance is one - but the fact of the matter is that no CMO produces consistently high performance, as judged by comparison against similarly situated public school or withing its network.

One additional inconvenient fact works against long term relationships between charter schools and MOs. In most cases the MOs management capacity is not a significant competitive advantage over the charter board, and the gap narrows rapidly in an operational charter school. Frankly, once the MO has invested in start up, its bargaining power with the charter board disappears. In the past many charter school have decided within a few years of start up that they can do a better job of realizing their vision of what children should know and be able to do than the distant headquarters of any CMO. One man's "economy of scale" in quality control, is another's "one-size-fits all" cookie cutter.

Contractual methods are available, but independent charters by definition must have some kind of opt-out. In today's chaotic charter school environment, a board that wants out will find a way that is likely to leave an MO far short of cost recovery - let alone profit. And so again, the best guarantee is a captive board.

Next: Control Strategies at the Top of a Slippery Slope