Economies & Diseconomies of ScaleGrowing Your Charter or Charter Organization IntelligentlyGrowing Your Charter or Charter Organization Intelligently
CCSA Conference • February 28, 2012 • 3:45-5:00PM
Michael Bonino, EdTecGavin Kwong, Lighthouse Community Charter Schools
Gasper Martinez EdTecGasper Martinez, EdTec
T: 510.663.3500 F: 510.663.3503 • 1410-A 62nd Street, Emeryville, CA 94608 ©2012 EdTec Inc.
Growing your charter school intelligentlyB f t t t dBefore we get started…
• Presentation PurposeFraming the p• Target Audience• Intended Outcomes• Participation• Introductions
Framing the Conversation
3:45-3:55
Upfront Resources
4:10
Ongoing Finances
4:20
• What Does Growth Look Like?Developing Your Growth Strategy
Exploring G th I t lli t• Developing Your Growth Strategy
• Defining Economies & Diseconomies of Scale
• Key Considerations
Growth Considerations
3:55-4:45
Intelligent Growth
3:55 4:45
• Further Reading• Ongoing DialogueWrapping Up
Staffing Facilitiesg g g• Other Sessions of Interest• Q&A• Evaluations
Wrapping Up4:45-5:00
4:30 4:40
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Framing the Conversation
T: 510.663.3500 F: 510.663.3503 • 1410-A 62nd Street, Emeryville, CA 94608 ©2012 EdTec Inc.
Presentation PurposeWh t d i t lli t th l k lik ?What does intelligent growth look like?
Many reasons to grow your organization, ranging from the philosophical to the pedagogical to the financial
Financial motivations are often predicated on an “economies of scale” argument towards sustainability but in practice the term may be thrownargument towards sustainability, but in practice, the term may be thrown around too lightly
Limited tools and information readily available with respect to exploring li t iti ti l l f ll i tiscaling opportunities, particularly for smaller organizations
A limited perception of what charter school growth has to look like
Purpose of today’s presentation is to look at financial considerationsPurpose of today s presentation is to look at financial considerations more closely with respect to intelligent growth
Random Sampling: Why are you interested in growing your organization?
4g g y g
The Target AudienceAll tt d l b t t ti tAll attendees are welcome but presentation may resonate more
with a greener audienceTarget rolesTarget roles
Charter school staff and board members responsible for or involved with developing growth strategy
Charter school staff and board members responsible for or involved in financial matters and considerations
Target backgroundsg gNovice to intermediate familiarity with growth strategy and considerations
Target organizational profilesSingle charter schools contemplating grade level expansion, site expansion, site additions, and new charter additions
Multi-charter school operators and smaller, nascent charter managementMulti charter school operators and smaller, nascent charter management organizations (1-5 charter schools or sites, less than 2,000 students)
Audience Poll: Who do we have here today?5
Audience Poll: Who do we have here today?
Intended OutcomesWh t ld lik t lk ithWhat we would like you to walk away with
Starting framework for creating or refining your strategic plan towards expansion, growth, and scaling
Clear definition of economies and diseconomies of scale
O t it t h i f ti d b t ti ithOpportunity to share information and best practices with peers informally and formally
Where to find more information
A different lens to consider your organization’s growth
By no means exhaustive of all considerations to keep in mind when exploring growth, but some of the more important financial ones
R d S li Wh t ld lik t lkRandom Sampling: What would you like to walk away with?
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ParticipationY ti i ti i iti l b t t t i iti th dYour participation is critical, but we want to prioritize the needs
of the many and build consensus when possible
A modified Socratic approach
A lot to cover in a limited timeframe; concise questions or comments highly encouragedhighly encouraged
We’ll try to defer potentially longer or more involved questions or conversations to Q&A; please take advantage of the index cards circulating
If something isn’t clear or our pacing is off, let us know
If we can’t answer your questions or respond to your comments during the presentation or Q&A, we’re happycomments during the presentation or Q&A, we re happy
to stick around after this session or have follow up conversations throughout conference and after
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Introductions
About EdTec About LCCS
• Social venture founded in 2001 to develop, support, and advance quality charter schools
• High expectations charter school founded in 2002 with two separate charters for grades K-8quality charter schools
• Have worked with hundreds of charter developers and charter
h l i l t t
separate charters for grades K 8 and 9-12
• Most recently, school received a $7M 5 f d l t tschools in several states
• Michael Bonino and Gasper Martinez, Client Managers, both
$7M, 5 year federal grant to explore teacher evaluation, performance management &
it, g ,
have significant experience working with charter schools of various stages, size, and scale
merit pay
• Gavin Kwong, Business Manager, joined LCCS in 2010 g , ,
• Background exploring growth scenarios
g , jand has been involved in organization’s dialogue around expansion and replication
8p p
considerations
Exploring Growth Considerations
T: 510.663.3500 F: 510.663.3503 • 1410-A 62nd Street, Emeryville, CA 94608 ©2012 EdTec Inc.
What Does Growth Look Like?G i di h t h l d ’t ilGrowing or expanding your charter school doesn’t necessarily
mean moving towards a CMO modelCh t h l th t k fCharter school growth can take many forms
Enrollment and grade growth expansion within a single charter
Expansion to other sites under the same charterExpansion to other sites under the same charter
Additional charters and replication
Confederations or alliances between independent charter schools
Informal and formal creation of administrative or central office functions to manage multiple charter schools
Takeovers, turnarounds, absorptions, and mergers, , p , g
Growth can mean scaling up or out, both often used interchangeablyScaling up is a vertical build up of the profile
Scaling out is a horizontal build out of the profile
No one proven model for successful growth; each carries its own benefits and constraints
10benefits and constraints
What Does Growth Look Like?M f l th t i f i i ti ithMany successful growth stories of various organizations with
different objectives, competencies, scales, and pace
Aspire Public Schools
• Opened in 1998
Five Keys Charter School
• Opened in 2003
GreenDot Public Schools
• Opened in 2000
Language Academy of Sacramento
• Opened in 2003
RocketshipEducation
• Opened in 2007• 34 schools• 12,000+
students• Developed
central office
• 3 schools• 4,000 students*• Multiple locations
for serving students
• 18 schools• 10,000+
students• Developed
central office
• 1 school• 400 students• Current growth
trajectory of 540 by 2018
• 5 schools• 2,500+ students• Regional cluster
approachFacilitycentral office
• Intends to reach 50 schools by 2015, making it larger than 90%
f h l di t i t
students• WIA exemption
to serve students older than 19
• Has explored i
central office • Substantial focus
on turnaround opportunities
by 2018• Received a Prop
1D award of $8M to rehabilitate and develop
h l it
• Facility development arm
• Recently applied for 20 new hof school districts
in California• Largest private
bond issuance by California
options to serve other parts of California
school site charters• Intends serve
15,000 students by the year 2020
charter school
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Developing Your Growth StrategyIt t t ith d d hi h ill lti t l i f di tiIt starts with demand, which will ultimately inform your direction
A d tif th d d f dditi l d ti l ff iAssess and quantify the demand for additional educational offerings
Whether existing or speculative, organic or cultivated, substantiate it
Focus on a target range not a specific number that allows for flexibilityFocus on a target range, not a specific number, that allows for flexibility in decision making
If your existing school(s) or organization is already not at full capacity, focus on reaching scale there before “doubling down” and embarking on other growth endeavors
Adding schools to supplement existing school financial performance canAdding schools to supplement existing school financial performance can be dangerous
Random Sampling: Do you know what your organization’s capacity is today?
12p y y
Developing Your Growth StrategyB f i i ti k hBefore growing your organization, make sure you have your
plan and approach in writing
Growth strategy should be codified in writing with flexibility to evolve
Easily aligned but not constrained with other strategic documents
Should incorporate business plan elements
Clear decision points
It h ld k t t tiIt should speak to cost, time, resources necessary
Most of the organizations referenced earlier have extensive growth plans that reflected mapped out processes, timelines, financial p pp p , ,assumptions and considerations, and beyond
Audience Poll: Do you have an existing growth strategy?
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Developing Your Growth StrategyS h t f l th d i t t iSnapshots from several growth and expansion strategies
Rocketship EducationYES P Alliance College ReadyRocketship EducationYES Prep Alliance College Ready
While very different from each other in approach, most of these strategies incorporate very similar elements of
14detail
Defining Economies & Diseconomies of ScaleK t id tif i i d di i i d t di th i DNAKey to identifying economies and diseconomies is understanding their DNA
Economies of scale, in the context of this conversation, is the phenomena of costs per pupil coming down as a school grows or expands
The idea here is that the cost associated with serving additional pupils isThe idea here is that the cost associated with serving additional pupils is marginal, relative to the costs associated with serving the initial or base case of pupils
Thi d i il t i d t b f thThis decrease in per pupil cost is advantageous because of the potential resources it frees up for new spending
The inference, however, is the school initially wasn’t fully scaled, , y y
Economies of scale can sometimes being confused with costs growing proportional to base case, which doesn’t necessarily yield a benefit
Diseconomies of scale, in this context, are triggered when charter school growth may create demands and tip costs beyond a point, where the per pupil cost is increasing because of growth
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Defining Economies & Diseconomies of ScaleR dl f fil ll i ti id i th d tRegardless of profile, all organizations considering growth need to worry
about diseconomies of scale
Unexpected costs may trigger diseconomies more easily in singleUnexpected costs may trigger diseconomies more easily in single charter or newer charter organizations when enrollment is smaller
More mid-size charter organizations or groups can see difficulties as they navigate transition from smaller to larger organizations
Larger charter organizations have also been observed to have and self-reported their own challenges with scale, particularly as they increasereported their own challenges with scale, particularly as they increase geographic footprint, centralize, and approach district size
Lake et al., National Study of CMO Effectiveness, 2010
Lake et al., Paying for Scale: Results of a Symposium on CMO Finance, 2011
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Select Diseconomies of ScaleA h t h l l t f th b d t ill t llAs charter schools grow, several parts of the budget will naturally see
diseconomies without intervention
Th t diti l i l d ti h t t d tThe traditional special education encroachment arrangement does not scale as a charter school gets bigger
Health insurance costs escalate both as organizations grow and get g g golder, requiring a hybrid of strategies to slow cost growth
Teacher expenses represent escalating % of the operating budget as a school grows in size and ageschool grows in size and age
School leadership often feels the indirect impact of diseconomies of scale, so that while % of budget spending may decrease with charter size, leadership gets spread thin
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Key Considerations: Upfront ResourcesD d t d h t dditi l d t b i th ff t ?Do you understand what additional resources you need to begin growth efforts?
Determining the true cost of initial expansion efforts can be difficultg pHow do you quantify in-kind benefits from the existing organization
Startup resources like PCSGP and Revolving Loan are not a guarantee
Leveraging fund balances and cash reserves of an existing charter school for a new school can jeopardize ongoing finances down the line
Costs of capital and borrowing can be really the debt associated withCosts of capital and borrowing can be really the debt associated with specific growth activities but artificially shouldered across a portfolio
Most CMOs set substantial targets for additional private resources E.g., Rocketship Education targets $3.75M in startup funding for 8 schools, 4,000 students to support activities prior to scaling; KIPP LA recently was targeting over $4M to support growth expansiong g pp g p
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Key Considerations: Ongoing FinancesLi it d dditi l b d bli d ll h l l iLimited additional resources beyond public dollars means schools exploring
growth will need to focus on the cost side
Most philanthropic support of larger organizations isn’t going to schoolMost philanthropic support of larger organizations isn t going to school specific costs but rather to subsidize home offices as they reach scale
Being able to benchmark your spending relative to your peer organizations is important, but the context is equally important
Some element of outsourcing is critical to any growth scenario initiallyHowever many tradeoffs/pros/cons so strategic implementation is criticalHowever, many tradeoffs/pros/cons, so strategic implementation is critical
Technology is the go-to for driving costs down for larger organizationsE.g., Rocketship Education, Aspire Public Schoolsg , p , p
Consultant expenses, when comparing standalones and CMOs, is a pretty comparable at around 11-12% of total spending, so opportunity for turning that dial down as you grow is pretty minimalfor turning that dial down as you grow is pretty minimal
Group purchasing can offer benefits of scale
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Key Consideration: StaffingWh t h ld b i t h thi ki b t t ffi ?What should you be mapping out when thinking about staffing?
The largest opportunity for achieving economies of scale benefits but i krequires workBased on 2009-10 financial data, CMO staffing and benefits costs, not including central office staff, averaged around 56% of total spending vs. 64% at standalone schools
% of spending on teachers does tend to increase over time
Instructional staff particularly elective teachers and supplemental rolesInstructional staff, particularly elective teachers and supplemental roles, and classified staff may be the greatest subset opportunities for scaling
Develop clear decision points for adding or subtracting staff
Developing a staffing pipeline vs. managing other recruitment costs can be difficult
St ff t t d t ti d t d ti ti dStaff to student ratios need to come down over time, so as mentioned earlier, systems investments need to be in place to create higher efficiencies but not burn people out
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Key Considerations: FacilitiesF iliti b i i t f h t h l b tFacilities can be a pain point for any charter school, but organizational growth can add another layer of complexity
Many different facility options and resources - growing charter organizations rely on a number of options that compliment each other
Prop 39 facilities seem to be a preferred option cost-wise as well as aProp 39 facilities seem to be a preferred option cost wise, as well as a way of addressing needs as the organization grow to its full scale
Leases can offer attractive initial terms but can escalate over time, hi il t t t i bilit ti l l ithi l ti lpushing per pupil costs past sustainability, particularly within a relatively
flat funding environment needs to be looked at on a multiyear basis
New construction or renovation can be the priority but it comes with its p ypotential diseconomies of scale with construction costs and tenant improvements not always getting figured in to the cost analysis
Many of the larger charter organizations have recommended bringing inMany of the larger charter organizations have recommended bringing in full-time facilities staff early on to help mitigate costs down the line, but full-time staff may not be within the means of the school
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Wrapping Up
T: 510.663.3500 F: 510.663.3503 • 1410-A 62nd Street, Emeryville, CA 94608 ©2012 EdTec Inc.
Further Resources & Ongoing Dialogue F th i t t d i l i d di i f thFor those interested in learning more and discussing further
strategies and considerations for intelligent growth
Presentation and Additional ReadingAvailable at: www.edtec.com
Sign up for more informationConnect with your peers considering charter school growth and share insights, questions, and comments
Connect with us and we’ll direct you to more informationMichael Bonino: [email protected]
Gavin Kwong: [email protected]
Gasper Martinez: [email protected]
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Other Session of InterestI f i th t t ith i ti h l d tInforming your growth strategy with existing school data can
help you accurately model financial considerations
Measuring Up: Using and Understanding g p g gBenchmarks for Budgeting
March 1, 2012 at 9:00 a.m.
Comparative analysis of averages ranges and patterns in charterComparative analysis of averages, ranges, and patterns in charter schools expenses adds valuable perspective to the budgeting process
Discussions will focus on how to interpret and analyze data and on how h l b h ki t k b tt i f d b d tschools can use benchmarking to make better informed budget
decisions
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Thank you to our contributors and toThank you to our contributors and to our attendees this afternoon.
Q ti & AQuestions & Answers
T: 510.663.3500 F: 510.663.3503 • 1410-A 62nd Street, Emeryville, CA 94608 ©2012 EdTec Inc.