Megatrends andopportunities ineducation

OPPORTUNITYKNOCKS

Our starting point is a recap of the objectivesof educational reform. Cost containment andimprovement of educational outcomes havebeen key factors shaping education trends inthe developed world for a number of years,whilst in developing markets, policy makersare trying to determine how access toeducation services can be extended to agreater proportion of the population.

Against this background, despite currentpressures on public spending in developedmarkets, public and private spending oneducation is increasing, with growth driven bya number of powerful, long-term globalmegatrends.

1. DECENTRALISATION AND MARKETBASED REFORMS IN PRIMARYAND SECONDARY EDUCATION

2. GROWING PARTICIPATION RATESIN PRIMARY, SECONDARY ANDHIGHER EDUCATION

3. THE GROWING TECHNOLOGYINFRASTRUCTURE ANDASSOCIATED DIGITAL CONTENTAND RESOURCES IN EDUCATIONALINSTITUTIONS

4.A FOCUS ON EFFICIENCY ANDCHANGING FUNDING MODELS(IN DEVELOPED MARKETS)

5. INTERNATIONALISATION ANDSTANDARDISATION IN EDUCATION

These megatrends suggest that over the longterm, the education sector will continue tobenefit from robust growth, at a time whenmany economies in the developed world arestruggling to emerge from recession,creating opportunities for the private sector.

COSTWhat is

the most cost effective way to

organise the educational system?

QUALITY OFOUTCOMES

How can learning be maximised and standards

improved?

ACCESSHow can accessto services be

extended to covera greater share ofthe population?

OBJECTIVES OF EDUCATIONAL

REFORM

Areas of focus for educational reform in the

developed world

For many years, the education sector has beenpoorly understood, captured as a subset ofbusiness services or the media sector. Educationdoes however deserve more attention. Itcontinues to be a major area of investment forgovernments around the world, with increasingopportunities for private sector operators. Here, we focus on some of the key megatrendsimpacting the education sector globally andhighlight some of the resulting opportunities.

1 An OC&C Insight Opportunity Knocks

MEGATREND #1:DECENTRALISATION

Educational reform in primary andsecondary education in the developedworld, such as Voucher Schools in Sweden,Charter Schools in the US and Academiesand Free Schools in England, is emphasisingsupply side reforms to promote parent /student choice and competition in theschools market. Decentralisation is leadingto more decision making and budget controlbeing devolved to schools, whilst fundingpools are increasingly being opened to bothpublic and private providers.

As more budget responsibility is devolved toschools, suppliers to educational institutions,such as the publishers of text books, areincreasingly facing a more fragmentedbuying environment, with resultingimplications for how they manage their salesforce and other channels to market.

Whilst the implementation of market basedreforms promoting growth in privateeducation provision are creatingopportunities for the private sector, privateproviders have had to focus on developingnew models to deliver operational efficiency,as revenue growth is typically capped. Thisreflects the fact that in most cases of marketbased reforms, privately run (including for-profit) schools receive public funding foreach pupil educated on the same terms asLocal Authority or municipality schools. As aresult, revenue growth in the form of annualtuition fee increases has not been possible.Despite this constraint, a number of privateschool groups have emerged to explore

scale and experience benefits. For example,Kunskapsskolan now owns and operates 33schools in Sweden and is the sponsor andfounder of the Learning Schools Trust in theUK, which recently opened three newAcademy schools in south west London.

The chart on the right highlights the growthin the penetration of independent schoolsoperating under the voucher system inSweden, where about 10% of lowersecondary aged pupils now choose to attendindependent schools (for upper secondarystudents, the figure is over 20%). There isincreasing evidence that the increasedcompetition created by the emergence ofvoucher schools in Sweden has increasedlevels of educational achievement, ashighlighted in a recent study commissionedby The Institute of Economic Affairs. Thissuggests that these new schools are here tostay. Closer to home, 24 new Free Schoolsopened for business in England inSeptember 2011, with applications for anadditional 200+ Free Schools now beingconsidered by the Department forEducation. Whilst Free Schools currentlyrepresent only a fraction of the overallnumber of schools in England and willcontinue to face challenges in areas such asplanning and finding suitable premises, theycould become an increasingly importantfeature of the schools landscape in Englandover the coming years, provided that theycan demonstrate that they can deliver asustainable improvement in academicoutcomes.

10%

8%

5%

3%

0%

2009-102006-072001-021997-981991-92

Introduction of the voucher

programmein Sweden

Sweden: Students in Compulsory Educationin Independent Schools% of Students Enrolled

Source: The Swedish National Agency for Education

DECENTRALISATION AND MARKET BASED REFORMSIN PRIMARY AND SECONDARY EDUCATION

An OC&C Insight Opportunity Knocks 2

Our work in the education sector around theworld has highlighted the strong correlationbetween GDP growth and participation ineducation. Using tertiary education as anexample, the top chart highlights tertiaryenrolment and GDP per capita in 2008 for anumber of OECD countries. Here, GDP percapita is shown on the basis of purchasepower parity. Understandably, enrolment ishigher in developed economies such as theUS, New Zealand and the Netherlands thanemerging economies such as Pakistan.

We have also highlighted the historicalchange in tertiary enrolment ratios for anumber of countries (bottom chart). Thishighlights the rapid growth in tertiaryenrolment in those markets with fastergrowing economies. For example, in Brazil,the growth in GDP per capita has beenaccompanied by an increase in tertiaryenrolment from 15% in 2000 to 35% in2008. Poland and to a lesser extent Spain,have experienced similarly rapid growth,whilst in contrast, the US has experiencedmuch more gradual growth in the proportionof the population attending tertiaryeducation institutions.

Quite simply, as average household incomerises, the number of households above theprivate education affordability thresholdrises more quickly. Later on, as countriesbecome wealthier, the growth in theirtertiary enrolment ratio decreases.

This trend is understandably contributing toa faster rate of growth in spend on educationin emerging economies, with regions such asAsia, Eastern Europe and South America,expected to experience growth in publicexpenditure on education increasing by up to12% per annum from 2010 to 2015,compared to 5% per annum in NorthAmerica and 4% per annum in WesternEurope over the same period (chart on p.4).

A number of private operators in theeducation sector are benefitting from thismegatrend. For example, Cognita ownsand operates 54 schools (nurseries, pre-prep, junior and senior schools) across theUK, Europe and South East Asia, includingThailand, Vietnam and Singapore (withnew schools added to the Cognita portfolioin these countries over the past fouryears). During this period, Cognita hasexperienced rapid growth in revenuesfrom £65 million in the financial yearending August 2007 to £151 million in the2010 financial year.

Of course, in many markets, the recentrecession has adversely impacted thedisposable income of aspiring middleclasses, with some parents switching theirchildren out of private schools and back intopublic education. During the recessiontherefore, a good understanding of priceelasticity was required to determine theprecise impact of the economic downturn onprivate school enrolments.

Another example of the opportunitiesassociated with growing participation ratescan be seen in the higher education sector.In markets such as Turkey, Romania,Bulgaria, the Czech Republic, Slovakia andCroatia, private providers account for about15% of students enrolled in higher education.However, these private higher educationinstitutions have contributeddisproportionately to enrolment growth inthese markets in terms of new universityplaces created (over the period 2000through to 2008). Laureate, theinternational operator of private universities,was able to benefit from these trends, byentering into a partnership with Istanbul BilgiUniversity in 2006, thereby tapping into thisgrowth. Bilgi University is one of the largestprivate universities in Turkey, with 11,000students enrolled.

MEGATREND #2:PARTICIPATION

Tertiary Enrolment Ratio andGDP per Capita, 2008

0

10

20

30

40

50

60

70

80

90

Enro

lmen

t R

atio

%

30,000

GDP per Capita $ PPP

50,00040,00010,000 20,0000

EthiopiaPakistan

Bhutan

ColombiaTurkey CyprusCroatia

UKCzech RepublicIrelandPortugal

Israel NetherlandsHungary

ItalySweden

IcelandNew Zealand

USA

Brazil

Source: UNESCO, IMF

Tertiary Enrolment Ratio andGDP per Capita, 1995-2009

0

10

20

30

40

50

60

70

80

90

0

19952008

2005

2009

2000

GDP per Capita $ PPP

2009

2005

2000

2005

2000

1995

2009

20051995

Enro

lmen

t R

atio

%

USA

SPAINPOLAND

BRAZIL

30,000 50,00040,00010,000 20,000

Source: UNESCO, IMF

GROWING PARTICIPATION RATES IN PRIMARY,SECONDARY AND TERTIARY EDUCATION

3 An OC&C Insight Opportunity Knocks

It is worth highlighting that even indeveloped markets, where growth inenrolment will be limited, robust growth inpublic expenditure on education is expected,despite the prevailing challenging fiscalenvironment. This reflects a continued andgrowing focus on educational outcomes,with a corresponding increasing emphasison assessment. For example, in 2000, theProgramme for International StudentAssessment (PISA) at the OECD begantracking the academic attainment ofchildren by the age of 15 in 32 countries,with an emphasis on Maths, Science andEnglish. The most recent PISA assessmentcompleted in 2009, highlights the poorperformance of the US (ranked 14) and theUK (ranked 20) in 2009 relative to otherOECD countries.

In the UK, despite a gradual improvement,over half of secondary school pupils inEngland continue to leave school without 5Grade A*-C GCSEs including Maths and English(the government’s target for school leaversaged 16). As a result of these poor academicstandards, the UK government continues tocommit in excess of £3 billion per annum tothe Skills Funding Agency, to fund adultliteracy, numeracy and vocational skillstraining, with much of this funding directed torecent school leavers.

863

1,037

217

261

374

506

162

236

169

62

47

95

60

18

84

64

43

20

52

37

29

30

26

22

24

13

2000

1,369

615

409

Western Europe +7.8% +3.8%

966

Asia +5.6% +6.2%

2005

1,980

South America +13.1% +7.9%

777

Eastern Europe & CIS +18.2% +12.3%

North America1 +6.6% +4.9%

Middle East +2.3% +6.8%

2015F

Africa +5.8% +2.7%

725

1,178

Oceania +12.3% +5.4%

2010

2,583

3,288

CAGR2000-10

CAGR2010-15F

Global +6.6% +4.9%

Public Education Spend Over TimeUS$bn

Source: IMF, EIU, UNESCO

An OC&C Insight Opportunity Knocks 4

MEGATREND #3:TECHNOLOGY

The adoption of Information CommunicationTechnology (“ICT”) is changing the educationlandscape, enabling new methods of deliveryand improved learning outcomes. e-Learningis becoming increasingly prevalent as onlineplatforms and access continue to improve,whilst learning aids like interactive whiteboards, mobile devices and educationalsoftware create a better learningenvironment, often leading to improvedacademic outcomes. In many cases,deployment can occur very rapidly.

Key growth drivers include the increasingsophistication and penetration of ICT globally,coupled with innovation in the sector. In manycases, governments have set aside ring fencedfunding to support adoption of both hardwareand digital content. For example, during the2000s, there was a significant increase in thepenetration of PCs and other ICT infrastructurein schools in England, with a resulting increasein the adoption of digital content, due to theprovision of funding in the form of e-LearningCredits by the government. Classroompenetration of interactive whiteboards (IWBs)in the UK increased from 15% in 2001 to 85%in 2009, with investment fuelled by theadditional funds provided by government.New private ventures such as EspressoEducation (established in 1997) were able tobenefit from these investments – EspressoEducation is now one of the leading providersof digital curriculum in the UK, with itsproducts used in over 10,000 schools.

Looking forward and as outlined in the chartopposite, whilst the market for IWBs in the UKis expected to experience little if any growththrough 2014 due to the high level ofpenetration, other regions will see more rapidgrowth. At the same time, continued

innovation is resulting in greater adoption ofdigital content and resources, as peopleincreasingly believe that the internet can makea difference to educating children. Hence thesuccess of the Khan Academy, in the US, whichuses video lectures to enable lecturing ofchildren outside traditional class time, withclass time focused on tutoring. Whilst only ahandful of public schools adopted the KhanAcademy methodology in the last school year,many other public and private schools arenow expressing an interest.

ICT has the potential to deliver significantbuy-side efficiencies including: (1) Scale andoperational efficiencies both within andacross regions through resource sharing ande-Learning; (2) Improved delivery, flexibilityand quality of education services (forexample, through adaptive learningsoftware), particularly in areas with lowaccess; and (3) the delivery of corporatetraining more cost effectively. Providers ofICT services, ICT outsourcing providers ande-Learning platform providers will all benefit

from this trend. For example, SMARTTechnologies, the leading provider of IWBshas experienced annual revenue growth of30% from 2009 to 2011, with revenuesincreasing from $468 million to $790 million.During this period, unit volumes of IWBsshipped by SMART increased from 306,000to 406,000. Meanwhile, for potentialinvestors, a buy-and-build strategy ispotentially interesting as scale is likely tobecome increasingly important as ICT ineducation becomes widespread.

Whilst we do not believe that the adoption ofdigital content and resources by educationinstitutions is yet at a tipping point andrecognise that digital penetration variesenormously by market, the increasingadoption of ICT is creating challenges forsome operators. For example, publishers oftraditional print-based textbooks need toinvest in digital propositions for the mediumto long term, to offset the threat presentedby start-ups and other market entrants, suchas Espresso Education in the UK.

Interactive White Boards Sub-Market by Region, 2004-12FUS$m

624911 918

345

511

1,020

1,731

323209

138172

167

2004

546

170

2008E

1,307

2006

838

170

+23%

US +20%

UK 0%

ROW +34%

2012F

2,819

170

2010F

2,069

CAGR 2004-12

IVB ClassroomPenetration 0.8% 2.3% 4.4% 7.4% 11.1%

Source: Datamonitor, DTC, Cairneagle Associates, IDC, ICON

THE GROWING TECHNOLOGY INFRASTRUCTUREIN EDUCATIONAL INSTITUTIONS

5 An OC&C Insight Opportunity Knocks

An OC&C Insight Opportunity Knocks 6

MEGATREND #4:EFFICIENCY

As already highlighted, public (and private)sector budgets are currently under pressure indeveloped markets, forcing educationinstitutions to find operational savings and/orcut services. Given the current size of deficitsand levels of public debt, budgets areexpected to remain tight for the foreseeablefuture in developed countries. For example, in2010, the UK government announced a 25%cut in the further education budget (throughto 2014/15), with further education collegesand other institutions focused on the deliveryof adult education now faced with a muchharsher funding environment.

Budget cuts present a number of challengesfor education organisations and institutions,who are under pressure to cut costs whilstretaining high quality delivery of education.

Local authorities, municipalities andequivalent local government organisations arefaced with difficult decisions on fundingpriorities – for example, what services are coreand which ones could be provided privately?The more challenging funding environmenthas also resulted in policy makers consideringa potential shift to new funding models – i.e.,user-payer, performance-based funding, andcorporate partnerships.

The pressure to find efficiencies will benefit anumber of players, including ICT andoutsourcing providers to the education sector;such as SunGard Higher Education andEmbanet Compass Group in the US. Th ere willalso be greater interest from educationinstitutions in the use of collaboration andopen resource sharing networks to accesscost efficiencies.

UK Public Sector Education Expenditure, 2005-11E£bn; % of GDP

12.9 13.1

10.5 11.3 11.9 12.6 14.3 15.6 17.9 12.8 12.4 12.7

11.311.511.712.011.511.410.09.88.9

9.9 1.1

0.70.80.80.80.80.8

0.70.70.61.1

2.53.33.43.75.4

5.0

4.13.23.2

3.1

4.5

4.9%5.3%

5.8%6.1%6.0%

5.4%5.2%5.3%5.2% 5.1%

5.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

90.683.1

53.3

2009

55.1

73.0

2007

49.7

78.2

2011E

59.1

93.3

2012F

60.9

30

60

70

80

9090.5

63.3

2013F

89.5100

2014F

64.9

92.7

2015F

0

10

20

57.4

2010B

88.6

2008

47.0

2006

69.7

45.1

2005

65.1

42.1

110

120

130

Tertiary

Secondary

Pre-Primaryand Primary

LA Spend

Other

Source: HM Treasury, www.ukpublicspending.co.uk

A FOCUS ON EFFICIENCY AND CHANGINGFUNDING MODELS

MEGATREND #5:INTERNATIONALISATION

INTERNATIONALISATION ANDSTANDARDISATION IN EDUCATIONThe growing emerging middle class in manydeveloping markets, increasing globalisationand the dominance of the English language ininternational business continue to contributeto the growth in international studentsstudying in the UK, the US and other English-speaking markets. In higher education inparticular, students continue to be highlymobile, particularly for western and Englishlanguage education, with the UK and the USpreferred destinations. Despite capacityconstraints at some universities, theseinternational students have generally beenwelcomed by higher education institutions, asforeign students generate higher fees thandomestic students and may require additionalsupport. For example, in the UK, universitiescan currently command tuition fees forinternational students that are up to 4xgreater than the tuition fees currentlyreceived from domestic and EU students(although this dynamic will change with theintroduction of higher tuition fees, effectiveSeptember 2012).

In some markets, namely the UK, the US,Australia and New Zealand, this trend hasresulted in the emergence of a new type ofeducation services provider, offering pathwayprogrammes and English language training.Companies like Study Group, INTO Universityand Cambridge Education Group that partnerwith universities to offer internationalstudents help with getting into universities,have experienced strong growth in revenues.These pathway programme providers alsooffer other education services such assourcing suitable accommodation andproviding ELT courses to ensure internationalstudents attain the required proficiency inEnglish. Larger education groups like Kaplanand Navitas have also benefitted (althoughthe outlook in the UK is now more challengingfollowing the recent overhaul of the studentvisa system, including tougher entrancecriteria, limits on work entitlements and theclosure of the post-study work route). Inprimary and secondary education, privateinternational school groups such as NordAnglia and Cognita, who offer an English

language based private education, havecontinued to see rapid growth in enrolmentsat their international schools in China andSouth East Asia respectively.

Elsewhere, there continues to be strongdemand for English language training incountries such as China. The potential forinternational expansion into fast growingAsian and South American markets creates astrong investment thesis for many educationcompanies. For example, in 2010, Pearson(the largest education company globally byrevenues) acquired Wall Street Institute (WSI),which provides premium spoken Englishlanguage training for adults. WSI operatesover 400 learning centres in 26 territories inAsia, Europe, the Middle East and Africa.Separately, Pearson reported a 27% growthin student enrolments at its Wall StreetEnglish schools in 2010 and announced plansto open 50 English language centres in China,adding to the 66 centres and schools alreadyoperating under the Wall Street English andLongman English brands.

Non Citizen Enrolment in Tertiary Education – Selected OECD Countries, 2004-07Thousand Students

1,553

460

6560

Other +9.6%

2007

Spain +12.7%280

2004

1,310

364

340

2006

1,457

418

261

217

6851

130

259

4269

311

2005

260

395

1,387

244

126

UK +8.1%

Germany -0.2%

Australia +7.0%

Japan +2.2%

New Zealand -2.0%

+5.8%

258

260

199

118126

6946

211

CAGR2004-07

Source: OECD, UNESCO

7 An OC&C Insight Opportunity Knocks

An OC&C Insight Opportunity Knocks 8

OPPORTUNITIESAND THREATS

Opportunities Threats

DECENTRALISATIONAND MARKET-BASEDREFORMS

l New operators of independentschools can explore scale andexperience benefits in primary andsecondary education

l For-profit private school groups cantarget new growth opportunities (eg,operating Academies) if restrictionson generating an economic return arelifted (in the UK)

l Suppliers to educational institutionssuch as the publishers of text booksface a more fragmented buyingenvironment, with implications forhow they manage their sales forceand other channels to market

GROWINGPARTICIPATION

l Private operators of schools anduniversities can target new growthopportunities in emerging markets

l In developed markets, where thedisposable income of middle classconsumers has been adverselyimpacted by the recession, privateschools may experience lowerenrolments

GROWING TECHNOLOGYINFRASTRUCTURE

l Providers of ICT products andservices, such as interactive whiteboards, mobile devices andeducational software can leveragegrowth opportunities in marketsinvesting further in ICT

l Innovators in digital content andresources can similarly benefit

l Publishers of traditional print-basedtextbooks need to invest in digitalpropositions to offset the threat ofstart-ups and other market entrants

A FOCUS ON EFFICIENCYAND CHANGINGFUNDING MODELS (INDEVELOPED MARKETS)

l ICT and outsourced services providerscan benefit from increased demandfor their services

l Providers of collaboration and openresource sharing networks cansimilarly benefit

l Universities in the UK not offering‘value for money’ to studentsfollowing the advent of higher tuitionfees, may experience a fall inenrolments

INTERNATIONALISATIONAND STANDARDISATION

l Pathway programme providers willsee increased demand fromuniversities in the UK, given therecent overhaul of student visas

l Providers of ELT courses can benefitfrom the continuing demand forEnglish language training

l Private international school groupscan leverage increased demand inoverseas markets

l Universities and other highereducation institutions in the UK willexperience a decline in enrolmentsfrom international students given thetougher student visa regulations

The megatrends outlined here present a number of opportunities and also some threats for educationcompanies and potential investors in the education sector, some of which are outlined below.

SO WHAT?The megatrends identified pose some tough questions for anycompany in the education sector, including education institutions,technology and digital companies, providers of support services,traditional textbook publishers and other suppliers.

Each megatrend poses some pertinent questions, which OC&C hasworked with clients to address:

1. DECENTRALISATION AND MARKET BASED REFORMSl To what extent will schools independent from Local Authority or equivalent local

government control deliver improved academic outcomes?

l Will new, scale operators of independent schools emerge and if so, whatopportunities will these groups present for investors, given the currentrestrictions on profit making in England?

l As more power is devolved to schools, how should suppliers such as text bookpublishers, reorganise their sales approaches and infrastructure to deal with themore fragmented buying environment?

2. GROWING PARTICIPATIONl Which international markets offer the most attractive growth opportunities for

international operators, based on any imbalance in local demand and supply foreducation?

l To what extent will growing levels of enrolment in tertiary education in emergingmarkets increase the flow of international students to western markets?

l What scope is there for further growth in the international private schoolsmarket? Which cities (and countries) represent the most attractive local marketsfor new schools?

9 An OC&C Insight Opportunity Knocks

3. GROWING TECHNOLOGY INFRASTRUCTUREl Given the increases in tuition fees in higher education in the UK, will universities

need to offer lower cost delivery models, such as online or hybrid degrees?

l Which international markets offer the most attractive opportunities for providersof Learning Platforms and other education technology infrastructure?

l How can technology be used to improve access to numeracy, literacy and otheradult skills training for the growing number of young adults in the UK not inemployment, education or training?

4. A FOCUS ON EFFICIENCY AND CHANGING FUNDING MODELS(IN DEVELOPED MARKETS)l To what extent are there opportunities for higher education institutions to explore

further opportunities in shared services, particularly in the middle and back office?

l Will the UK see the emergence of new outsourced services providers such asSunGard Higher Education and Embanet Compass Group in the US?

l To what extent will UK universities need to adopt more sophisticated consumer(student) segmentation and pricing, given the advent of higher tuition fees inSeptember 2012?

5. INTERNATIONALISATION AND STANDARDISATIONl Does the ELT sector offer opportunities for consolidation?

l Which international cities and markets offer the most attractive growthopportunities for operators of international private schools?

l What is the expected growth in international curricula such as the InternationalBaccalaureate and what opportunities will this growth present for suppliers toschools?

It is an exciting time to be involved in the education sector, with opportunitiesto gain competitive advantage. We would love to hear about the challengesyour company is facing and share views on the future. Please get in touch onEducation@occstrategy.com

An OC&C Insight Opportunity Knocks 10

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