Opt In: Profits and Testing

Are for-profit companies incompatible with public education?   Some opt out advocates think so.  Critics of testing argue that we are sending millions of dollars into the hands of ‘Big Testing’ companies.   And those companies, motivated by profits, shouldn’t be trusted with our student’s futures.   (Examples of this thinking here here and here)

Instead of sending taxpayer money to Pearson, CTB McGraw-Hill, and Houghton Mifflin Harcourt, we should instead send those funds to our local schools … to reduce class sizes or raise teacher salaries.

Moreover (the critics say) the large testing companies use their profits to lobby state and federal government officials, which only leads to more and more emphasis on testing from our Department of Education

I will admit at the outset that I am skeptical of this ‘exploitative big business’ narrative.    This sounds a lot like repackaged anti-Establishment rhetoric from the past.   Did I fall into Austin Powers’ time machine and arrive back in the 1960s?  Austin Powers

Let’s start with some facts about testing.  It is true that Pearson, ETS, CTB McGraw Hill, HMH, and others are large corporations.  It is also true that states have contracted with these large companies to run their testing programs.  And it is also true that testing revenue is highly concentrated with the top 5 companies, which together command almost 90% of the market.    And there is big money at stake — upwards of $700M per year on testing.   And much, much more is spent with these same companies on text books and software.

What brought about this concentration?    The companies did not orchestrate it in a smoke-filled back room.  The impetus was No Child Left Behind and Race to the Top – initiatives passed under the Bush 43 and Obama administrations.  These bi-partisan initiatives established the legal and regulatory framework for standardized testing.  And they created strong incentives for states to implement annualized testing (NCLB) around a common set of academic standards (RTTT).

Educational service companies, who already provided text books on a large scale to our schools, responded to the opportunity.  They saw the coming surge of government spending, and responded with large investments, and with mergers and acquisitions to scale up their services.  And they (competing against each other and many smaller for-profit and non-profit organizations) emerged with a big share of the testing business.  Is this surprising behavior in a market economy?I Smell Money

What about all of that money spent on testing?  A recent study showed that 45 states spent a combined $669M per year on assessments.  Critics seize on these big numbers and say, “What a waste of money. Think what local districts could do with this money if the states eliminated testing.”

This sounds like a reasonable argument until you do the math.  The $669M per year spent on assessments works out to only $27 per student.  This is hardly big money.  If Pennsylvania were to follow the critics advice and return the funds currently spent on testing to our schools, UCF would receive the massive sum of (wait for it) $90,000 in state funds, or 0.1% of our annual budget.   If we used this money to reduce our class sizes (as the critics suggest), we could hire 1 additional teacher (barely), and lower our student : teacher ratio from 13.75 to 13.70.  It hardly moves the needle.Savings from Test Elimination

The testing cost of $27 per student is less than the cost of our 6th grade chrome book pilot at CFPMS ($100 per year per student).  New carpet installed at Hillendale over the summer cost us $22/year per student.  We recently bought school buses, which cost $100/year per rider.  These are all costs of doing business.  As such, we should seek to minimize these costs, testing included.  But let’s not kid ourselves that testing for $27 per student is financial drain on our school system.

Are we making a mistake concentrating so much influence over our kids with a small number of large companies?   Not necessarily.   One smart way to reduce the cost of testing is to combine our purchasing power with other districts and even other states.  (We already do this for many commodities including computers, fuel, and office supplies).

Because many states have adopted the same learning standards (Common Core), there are now economies of scale in the testing business that were previously absent.   With a huge market for the same assessment (all 42 common core states can use similar exams) testing companies can invest once in test development, and spread those costs across many more school districts.  This actually lowers the cost of providing testing.  So by going with the big guys, a district actually saves money.  The best estimate is that our costs are 30% lower as a result.

And, contrary to what the critics would like you to believe, it is the state that dictates the standards and the testing requirements to the testing companies, not the other way around.  Go read the contracts.  Here is an extract which makes it pretty clear who is calling the shots — it is PDE, not the testing vendor.

Some complain that Pearson and CTB McGraw Hill make profits.   If these companies are awarded business improperly (e.g. no bid contracts) then criticism of the deals is warranted.  But profits are not in themselves a sign of corrupt practices.

How profitable are testing companies?  In 2014 Pearson earned $733M in profits on revenues of $7.6B from all lines of business, globally.   That is a profit margin of 9.6%.  If this is excessive, how should we feel about our computer labs filled with Apple computers?  Apple earned $39B on $183B in sales, for a profit margin of 21.7%.  Or our Google Chromebooks (22.8% profit margin)?  Or Canvas which is (aghast) funded by Venture Capital.    In a market economy we trust competitive forces to drive prices down and quality up.  Successful testing companies will be those that best meet the needs of school districts and students over the short- and long-run.

We should not be troubled that the Pennsylvania PDE has contracted with Data Recognition Corporation to develop test items and score the PSSA.   I would be more worried if our testing providers were unprofitable.  Profits are a sign that a company offers a good product at a competitive price that customers want to buy.  Profits are future resources for the company to invest to improve their product.  Profits make it likely that the company will survive and be able to service and support its customers in the future.

NonProfitShould we buy from low-margin or unprofitable companies only?  Are you getting good support for your Kodak Instamatic Camera?  Are you getting value from your Blackberry?  I’ll pick you up in my Delorean, and we can have a Jolt Cola at Border’s Books to discuss.  And then go rent a movie at Blockbuster.

And if UCFSD were only to buy from non-profit companies, our schools would be unable to operate.  How much of what UCFSD buys is even sold by non-profits? School buses?  HVAC equipment?  Desks?  Whiteboards?  Tablet computers? Team uniforms?  Fertilizer?  Paving services?  Software?  Electricians?  We live in a market economy, and we need not question the motives of those who provide us with services and products.   As individuals and companies act in their own self-interest, they provide products that consumers want, when they want it, at the price they are willing to pay, and all without central coordination.  (For two thought-provoking takes on how markets work, check out this video about the simple pencil and this essay by George Mason U professor Walter Williams.)

Do Pearson and the big testing companies lobby federal and state governments?  Undoubtedly yes.  But state governments are the customer of standardized tests.  How else do we expect a testing service provider to market and sell its products if not by talking to the state decision-makers?

In many cases the lobbying probably goes beyond ‘selling’ to trying to influence standards, laws, and regulations to favor their products.  I am sure this happens, too.   Given the way our political system functions (with all of its blemishes, defects, and conflicts of interest) lobbying by the rules should not disqualify a company from supplying services to schools.  I am no fan of lobbying, but if lobbying is a disqualifier for public school suppliers, we are right back to our problem of finding suppliers that don’t do any lobbying.  Our teacher’s union and many other suppliers all spend time and money lobbying.


For-profit companies provide testing services to our schools.   By doing business with large, efficient companies we actually benefit our schools by taking advantage of their economies of scale.

If we did away with standardized testing, the ‘windfall’ to UCF would be about 0.1% of our budget.  That is a drop in the bucket and certainly not a compelling reason to drop testing.

There will always be those who do not like market capitalism, and who believe that profits are a sign of illegitimate gain or exploitation.  I don’t see it that way.  Profits are a sign that a company provides a product that is of value to their customer.  So testing companies should be evaluated like any other supplier.  If the critics want to oust Pearson or DRC from our schools because they are a for-profit venture, then I hope they show intellectual consistency and purge our schools of Apple, Google, and every other for-profit vendor.  Good luck with that.