economies diseconomies of scale final · defining economies & diseconomies of scale k t id tif...

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

2

Framing the Conversation


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?

6

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

7

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


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

11

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?

13

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

15

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

16

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

17

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

18

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

19

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

20

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

21

Wrapping Up


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]

23

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

24

Thank you to our contributors and toThank you to our contributors and to our attendees this afternoon.

Q ti & AQuestions & Answers


economies diseconomies of scale final · defining economies & diseconomies of scale k t id tif...

Documents