This issue of PILOTed features the first interview of and unfettered Iwan Strechenberger.
Iwan was president of Edusoft and a corporate vice president of Houghton Mifflin. Iwan joined Houghton Mifflin in 2001 as vice president of corporate development and technology initiatives. He has also served as corporate vice president of strategy and business development and as president of Houghton Mifflin Learning Technology. Prior to joining Houghton Mifflin, Iwan was COO at Flipside Europe, a division of Vivendi Universal Publishing, where he was responsible for the company’s operations in the United Kingdom, France, Germany and Hungary.
We debated splitting this interview into two newsletters, because it covers so many topics. But, on the other hand, they are all related. So instead of breaking it up, we decided to list the questions, and, if you have a particular interest, you can just click on the question to view Iwan’s answers.
Or, you can read the entire interview and get some great insights from someone who is a leader in educational publishing.
Don't you think publishers share the blame for failures in the educational system?
Are there any parts of K12 education that should be attractive to investors?
Is being acquired the only viable strategy for a small education company?
Is $20 million in sales the ceiling for independent publishers?
How are Open Source and Open Content likely to shake out?
One thing before starting the interview. If you are in the Education Technology Industry, I'd encourage you to attend the SIIA's Ed Tech Industry Summit in San Francisco, April 15 to 17. We are very active in the SIIA, and have found the ETIS a great opportunity to network and find out what is happening in the industry.
What do you think were the biggest challenges in education and in education publishing over the last 5 years? How did we meet the challenges? What should we learn from that?
The first challenge to me was the incredible inertia the prevailed in the education sector. When I came to the US 6 years ago, I saw a lot of great opportunities connecting instruction, assessment, and intervention. It was difficult to see how slow things move in education. Obviously, it was not something new but it was new to me :-)
The second challenge came from technology. While technology offers a great opportunity, it presents the challenge of having to create products and services that use it to its full potential as well as getting those products used. I have learnt that in education, simplicity matters more than the richness of the features.
The third challenge was the NCLB movement. Seeing the education world embrace accountability was very encouraging. Applying business standards to this world sounded great to me. Unfortunately, the implementation of NCLB has made educators focus only on emergencies; it has sometimes diverted them from their broader mission of teaching better by using technology. Instead, they have focused on meeting NCLB requirements and hitting numbers. I am worried that this could end up being a missed opportunity to change education deeply through the combination of accountability and technology tools
A larger question is whether we teach the right things to kids in schools. There is only so much time that kids spend in class. There is a general agreement that school is the place to teach basic skills. But, kids may never actually use a lot of the things that we teach; for example, some of the information we teach in science will not by used by the vast majority of students in the real world. But, there is also general agreement that it is important general culture for them to learn these things. Should we be teaching 21 st century skills? How important is test prep?
Is there a middle road? These challenges make the education industry so interesting and also so complex.
Nader Darehshori asked a great question at this year's Ednet, and I'd like to paraphrase it. There is a lot of evidence pointing to failures of the US educational system. The publishers are making a lot of money providing goods and services into that system. Don't you think the publishers share blame for the failures? How? What should they do about it?
I worked for Nader; and that was indeed a very interesting question he asked. The one thing I don’t agree with is that there is a not so hidden bias that there is something wrong with making money. In the commercial sector, to attract investors and the best talents and have them work hard, your company has to make money.
For me, the question should be: are we delivering the value that schools should expect when they spend this money?
There is no doubt that education vendors could be more innovative. However, education is a very tight ecosystem with the typical “chicken and egg situation”. Everyone is dependent on each other; no one wants to be the first one to change.
Publishers are not sure that they will be able to convince schools that they should adopt innovative solutions. It is safer to go with the solutions that the educators have always purchased. When you talk to clients, they complain that publishers do not innovate, and make their life tougher.
Publishers can be more valuable to the districts, but will they be rewarded if they lead the way? I’ve seen a lot of innovation that didn’t get rewarded. Sometimes the money just was not available for that type of intervention. Sometimes the money was earmarked for those innovative applications, but was actually spent on others. The funding structure makes things very complex.
You could argue that there is a lack of vision and ambitious thinking on the part of the largest (textbook) publishers. There is so much at stake in the textbook business, and they have so much to lose in the short term with change.
It is interesting to look at the music industry and see what happened there: the traditional players tried to slow down the emergence of digital music, MP3, Napster… Who ended up winning: a new entrant, Apple! Can we learn something from this?
Even though I decided to leave Houghton Mifflin a couple of weeks ago to explore new challenges, I will keep an intrigued eye on its merger with Riverdeep. This is an exciting time and a courageous decision: this merger will force an established textbook publisher to rethink the value it delivers to its clients.
Structurally, the education market does not encourage innovation and value creation. The adoption model is a one time decision based on a lot of factors including many political ones… What is there to reward those that deliver value? What penalizes those that don’t? I strongly believe that the adoption business model hurts both the vendors and the districts.
Edusoft successfully used the subscription model. Is there anything healthier than allowing districts to stop paying if they don’t get value? Not after 9 years but every year! As a vendor, not only does it keep you on your toes but the financial benefit is very significant as long as you never stop increasing the value you deliver.
The subscription model is likely to be the future… I hope it will be! But it will be critical to train districts on this new model, help them realize the power they have in their hands and how best to use it. Districts’ administrators are under tremendous pressure and extremely busy. They don’t always have the time, nor the skills to analyze what is a good product. Now, they are buying more than a book: they are buying a solution with content, platform, and services. This is a lot to evaluate!
Are there any parts of K12 that should be attractive to investors?
My take on this, having done so much M&A, is that K12 education is an attractive segment for investors.
There is a general sense and societal consensus that education is doing the right thing. People have kids, and education is helping kids. No question here!
However, investors are struggling to understand education. It is not transparent and too often irrational. Education is the only place where 1+1 is 1.9999, not 2 like everywhere else: more art than science! Investors do not understand the adoptions or the decision making process. And to make things worse, they are sometimes nervous about investing in the govermental sector.
Adoption makes education very seasonal: another bad thing for Wall Street which loves steady growth and no surprises.
On the positive side, there is a lot of money out there to be made and to invest in innovative education activities. Companies can make money and individuals can make a difference, but you have to be aware that this is not a typical industry.
If the subscription model becomes more widespread, I am convinced that it will be great for the industry and will help attract investors. The subscription model is more transparent: You can track new subscribers; you can track churn.
One reason that Edusoft grew so fast is that we could measure and focus on retaining our users. Between 2004 and 2006 we had over 90% renewal rate. Frederic Reichheld, a Bain and Company partner, wrote a book in 1996 called The Loyalty Effect where he analyzed that it costs approximately 10 times less to retain a client than to attract a new one. And this was true across a wide variety of industries, including credit cards, cable television, and telephone… and now education!!! In his more recent book, "Loyalty Rules", he even claims that "a 5% improvement in customer retention rates will yield between a 25 to 100% increase in profits across a wide range of industries." Quite impressive and a great opportunity!
There are currently a lot of investors looking for opportunities in K12. They want to know where to invest, where to find both explosive growth and predictable revenue streams.
For those investors, my bet is that the next couple of years will be the ideal years for strong growth in intervention programs, both for students and for teachers. For the first time, we have data that shows how students are performing, and that analyzes precisely where they are doing well or poorly. This is already generating a huge demand for intervention platforms. This should be a very exciting time for intervention companies and Professional Development providers.
In the past, trying to help a child learn faster was as if a doctor tried to treat you without doing a diagnostic first. Like shooting in the dark. It sounds obvious now but the healthcare industry exploded because of the huge progress made in diagnostic tools. The same is happening in education.
"Treatments" become much more sophisticated: districts need solutions, not just tools… Companies providing basic tools will be penalized and won’t last. They will create more problems for the districts than they will resolve. The buyers know their problems: they now want the vendors to fix them, not to create new ones. This is the end of the era of the CD-Rom that you drop or the pallets of books you ship: you are expected to walk in, diagnose problems, propose solutions, implement them, support them for a while and be ready to be penalized if they don’t work.
As a result, investors will be much more aggressive in their due diligences: they will check the scalability of the platforms, the quality of the content, the performance and commitment of the support staff…
My guess is that Professional Development and intervention companies who score well on these dimensions will attract a lot of investors, whether they are financial investors or strategic ones.
Finally, the recent M&A activity (Houghton Mifflin – Riverdeep, Thomson Learning, and a lot of other rumors…) could be the perfect opportunity for new entrants to start playing a role. Are we finally going to see Microsoft, Google, Apple or Yahoo be active in this segment? It will be interesting and could bring some much needed fresh blood into the education market.
Is the only viable strategy for a small company to grow to a point where it is attractive to be acquired by a big publisher?
Maybe. Will these new (potential) entrants change things deeply? That’s a difficult question, and it probably depends on the time horizon. Is that the only viable exit strategy? The answer is probably yes in the short term. There are not many recent success stories of large IPOs in K12. It is very tough to get big enough to have an IPO.
If so, the underlying issue becomes how do you get big enough to attract large investments, go public, or get acquired?
For some reason, education companies struggle with the “20-40” bar ($20 million to $40 million of revenue). A lot of companies are very successful regional players with leading (local) positions in intervention, PD, or assessment. Few of them are or become national leaders.
Maybe I am more sensitive to this, coming from Europe, but, while the US is a big country, a lot of companies forget that you can’t sell the same way in Texas as you do in California. If you are trying to sell to a district in Texas, and you point out that you do “X” in California, they are not going to like this. When you move to a new region, it is starting from scratch and you need local representation; not easy to do in this industry.
When a company tries to become a national player, this is a make or break time for that company. A lot of them do not succeed with this step because they try to move too fast. They do not realize that they need to approach this new step as if they were building a new business in each state.
When I worked for Vivendi, we had all these great ideas for synergies between Europe and US, France, Spain, Italy and California… It was very interesting conceptually but much tougher in practice than we expected. We very quickly concluded that the education market is very much local.
A second barrier to fast growth is that companies think that if they can just partner with a big publisher, they have it made. Big publishers really like to do things internally. They feel that if they are putting their brand on a product, they need to be responsible for everything. Sometimes they probably push that too far.
Other industries believe in partnerships. They focus on what they do well and partner for the other things. The education industry has not completely embraced this concept.
Small companies looking for partnerships face a tough time with the discussions, terms, and integration, because they are not talking the same language as large publishers. For large publishers, the name of the game is to secure textbook adoption. If they have to give away everything else for free, they will. Quality is often less important than immediately perceived value: it is a checklist mentality with little premium for quality.
This model does not work for the smaller innovative companies who believe in their product and don’t want to discount its value by giving it for free.
This sales model has received negative response in the most progressive districts. Some of them have started to complain that there are too many products that they don’t need or use; there is so much stuff that doesn’t “talk” to one another other. If you give too many free products to districts without thinking of how they work together, it can become counterproductive for the districts.
A better solution would be switching from how much you can provide to:
- How can you make my life easier?
- How do you save time for educators?
- How do you help districts become more efficient?
The focus of the big publishers on adoptions and give-away products makes it difficult for them to partner with smaller companies. In my business development roles, I have often been the person brokering both sides. It is difficult to get the parties to agree on both the financial and the non-financial terms.
Large publishers want to pay a low price and then be allowed to do whatever they want with the technology. Technology companies want to maximize their dollars and continue to develop their product with their vision. It’s hard to find a common ground between different these business models.
The success of a deal comes down to communications, respect, and knowledge. You have to understand the mindset of the people on other side of the table and what they are looking for. Unfortunately, the education industry is not very good at this, maybe because it is vastly dominated by a handful of large textbook publishers. Lack of knowledge of the culture and thoughts of the other side kills far more deals than it should.
This leads to a lot of missed opportunities to do great things that would add real value to the education industry.
So, in the short term, yes, the most likely viable exit strategy for a small company is to be acquired by a large one. But, this may change; and as subscription models become more prevalent, the industry will become more attractive to investors.
One other point. I think that there could be a slowdown in acquisitions. The big education publishers have bought a lot of companies in the last year or so. In addition, some of them are for sale or going through significant restructuring and valuations have increased in these last few years. It will be harder to get their attention for the next couple of years. That doesn’t mean that if a publisher sees something exciting, that fits in their portfolio, they won’t pull the trigger. However, they will be more picky.
You have mentioned the $20 million barrier a few times. How would a small company grow beyond $20 million dollars?
Content remains king. Even if you have a great platform, if you don’t have content, you won’t sell. You need content to solve problems and bring value to clients; technology is not an answer in itself. This is one way that the big publishers control the market; they own a lot of content. This has been the largest barrier to entry that has stopped, until now, large software publishers that have successfully entered a lot of other industries.
Edusoft founders anticipated the emergence of testing, and realized that classrooms would not have a computer for every kid. They came up with the idea of generating paper tests, and then scanning them, and relying on technology to analyze the results. The company did extremely well because its product solved a big problem with a simple solution.
In order to succeed like this, a company needs to solve a real problem with a solution that is simple for schools to implement. Plus, they must position it in a way that the school or district can fund it. Plus, they need to solve the localized national distribution dilemma. Finally, they need the financial resources to carry out these strategies over the timeframes required.
How are open source and open content likely to shake out?
Open source has penetrated the K-12 market more slowly than the Post- Secondary. Things are changing faster in Higher-Education because professors have the skills to create content and put it together. Also, there is a lot of excitement from Post-Secondary professors for open source and open content, and more interest in peer-to-peer innovations.
K-12 is more difficult. Teachers are really busy, they are more closely monitored, and they are less sophisticated with technology.
Over the years, every time we have sold a tech product, and tried to add more flexibility and local control to it, we found that the teachers didn’t use the added features. If teachers have to choose between simplicity or spending time to assemble content, they will go with something simple and prepackaged. Teachers do not have the time, the skills, or the appetite to create things themselves. They want the program to give them their tests, provide them with reports and the right content so they can spend more time with the students.
Perhaps open source is a more visionary term, while in K12, a more interesting trend is open systems; the goal being to let users combine and connect multiple systems together seamlessly.
Is it reasonable to expect districts to use one system for PD, another for assessments, another for their social studies curriculum, and yet another for math? The challenge for publishers is to accept systems that allow content from different sources. Systems will need APIs that allow them to string together content and features from different sources.
One of the values of Salesforce.com is that it leverages off of other companies that have come up with solutions for specific segments. In education, we are starting to see more focus on open flexible platforms that talk to each other. SIF is one initiative that helps meet this need. There is an opportunity for innovative companies to help to make the process of using content from different sources easier. Maybe, a company could do for education what Apple did with the Ipod and Itunes. Apple made it elegant and simple. You put your content in a technology that makes it easy to find and easy to use.
Open source is very attractive, and it is cheaper. But education customers, more than ever, need support. They still need to be held by the hand. One of the reasons Edusoft was successful, with high usage and low churn rates, is that a lot of money was spent on training and supporting users. That was more important than pricing. Open source providers could still provide this support but this is costly.
Moving forward, people are less likely to buy content or services. They will want solutions to their problems. They will be less concerned if it is a PD solution, or a technology solution, or a content solution. Of course, in education, the solution still has to find a way to match up with a funding source.
Education customers are increasingly more interested in solutions. They want a consultative approach to diagnose where the problem is. They want the flexibility to use things differently, and to use different things. This is true for high performing districts and low performing ones, it is true for wealthy districts and for poorer ones. But, you can’t approach the market with a cookie cutter solution; there is not just one solution. Districts are saying: “Solve my own individual problems. Thanks for the content and the freebies, but that’s not what I want. Solve my problem in a way I can fund it and I’ll give you a lot of money.”
The funding sources are not fully geared to this yet, but it is a trend I can see coming.
So is open source or open content a threat to publishers? The customer is looking for a way to solve a particular problem. Publishers need the vision to combine different assets, use systems and content from other sources, provide the support and possibly take a short term hit to achieve long term success. These “smartest” publishers will not be threatened by open source or open content if they put themselves in their customers’ shoes.
You’re currently a free agent. You're a person that everybody in the industry wants to have on their team. So, you've got your choice of virtually any job title, job function, or company in K12 education. What is the thing you'd most like to do now?
Well, thank you, but I think you may be going a little too far.
Last spring, I left Edusoft but remained at Houghton Mifflin until its merger with Riverdeep because I was excited to work on some exciting strategic challenges. The time has come for me to move on. The last 10 years were great but there couldn’t be a better transition than the birth of my daughter, four months ago!
I have not decided what I will do next but there is one thing I know. It will be an exciting challenge! That’s all I know :-)
I love challenges. I love to combine thinking and action to make a difference. I’d like to find a challenge that is very complex, a company with problems, but where there is a lot of potential and upside.
The issue in education is that it really has to come from the top. The governors, the large districts, they have to develop a vision and stick with it. If I can help to make this happen, I could work with either a small company or a large publisher, in my company or for someone else, a traditional player or an new entrant. I get energized by a challenge.
I have not been fully employed for roughly 2 weeks but am already working on various exciting projects, consulting for an exciting education company and advising and helping several smaller innovative companies in other industries! I realize now I much I was really looking forward to these new and exciting challenges, combining big picture thinking and practical execution challenges. It is very refreshing!
I recall a funny experience when I was working at Vivendi Universal. I was meeting with senior executives of the music and movies divisions and they were looking at our offerings and the question arose, “why can’t a kid learn a math formula, but can learn a rap song after hearing it just once?” There was a music exec in the room, and he suggested we just have some of Universal Music’s rap artists become the stars of our math textbook.
Needless to say that it may have been a little too extreme for a 170 year old publisher… Some of these artists had arrest records, their lyrics were highly controversial, their life styles clashed with the education culture. What never really was debated was, if they could help kids learn math faster. Or, if we could take a piece of that idea, modify it, and come up with something even better.
I have been very lucky. A lot of people get siloed in their professional life. Their work experiences are focused on just one task or just one area. I’ve been allowed to work in nearly every area of publishing, M&A, marketing and sales, operations, business development, assessment, you name it. I have been incredibly fortunate to live in multiple countries, from South Africa to France or the United States, and have occupied senior management positions in companies as prestigious and diverse as the Boston Consulting Group, L’Oreal, Vivendi Universal or Houghton Mifflin There is a lot of value to having a global view of business. You learn to think differently.
Now might be an interesting time for me to look at the overlaps between consumer gaming, what kids do, and how kids learn. All the big players in the tech youth consumer markets are looking for opportunities in education. That may be one great opportunity. But there are many others in education as well as outside of education too. I want to remain open to opportunities and go where I can make a difference, find the biggest challenges and opportunities.
I came from the business side and fell in love with this education sector. I’d love to make the sector more attractive to investors, so we can have education fulfill its potential in this country. I’d like to give back on what I’ve learned. I am glad to have the time to step back, look at a lot of things, and decide where the next challenges and opportunities lie. This is an exciting time for me…
