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Saved by the Bell: The Rise of School-as-a-Service

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This guest post comes from Nick Hammerschlag of OpenView Venture Partners. Have your own thoughts on what is driving Boston’s innovation economy? Email Hive@Boston.com, on Twitter at@HiveBoston, and on Facebook.

Want to know the most shocking thing that I’ve learned while investing in education companies over the past few years? Schools are run like schools, and not like businesses.

OK, so maybe that’s not too shocking. Schools should be run like schools. They are, after all, environments where intellectual exploration, personal enrichment, enlightenment, and other lofty pursuits often supersede profitability and bottom lines.

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But I’ve also noticed that schools — from the elementary level on through to colleges and universities — are increasingly showing a willingness to think and operate more like businesses. They want to be more efficient and streamlined, and they’ve become more receptive to the value of technological innovation in the classroom.

Naturally, that’s created a tremendous opportunity for software and business process outsourcing firms to provide key services to educational institutions. And with global education expenditures projected to top $6.7 billion over the next several years, entrepreneurs (and investors, for that matter) should begin taking note. That’s a pretty big market, and one I’m actively looking to make investments in.

Where’s the money now?

With the rise of online learning opportunities (also known as massive open online courses or MOOCs), knowledge acquisition has never been easier. As a result, the balance of supply and demand in the field of education (particularly higher education) has been dramatically thrown off-kilter. Traditional learning institutions must now justify their existence like never before, operate in more cost-effective and efficient manners, and embrace and integrate technology at a rapid pace.

We’re already seeing the first phase of this revolution mature with the “enablement market.” Companies like Embanet and Deltak (which were recently acquired by Pearson and John Wiley, respectively) have built sizable businesses by helping traditionally not-for-profit higher education institutions create turnkey online programs that generate considerable growth and revenue.

These companies have become trusted advisers to universities, taking on everything from customer acquisition and marketing (finding students to pay for courses), student admission and enrollment, payment processing, and course development, to management of the programs they jointly offer with other university partners. Two other “large” companies in this space — Academic Partnerships and 2U (formerly 2utor) — are growing rapidly as universities search for ways to generate more revenue while spending less money (these schools are sounding more and more like businesses, aren’t they?).

This market is appropriately also referred to as “school-as-a-service 1.0,” and my sense is that, while these education-focused businesses will continue to grow in the near term, roadblocks will inevitably crop up.

For instance, as the school-as-a-service market becomes increasingly competitive and commoditized, service providers will likely begin to wage price wars and negotiating power will shift more to the side of schools and away from businesses. How that affects the appeal of the market (and the profitability of the companies who operate in it) will be something to monitor. Additionally, my hypothesis is that companies providing core pieces of technology for these education services companies, as well as directly to the educational institutions (like Instructure, one of our portfolio companies) will win in the long-term. That’s because they not only have the technological assets, but are also developing deep expertise, relationships, and their own consultative approach that will make it difficult for the current enablement/school-as-a-service businesses to compete.

Where does further opportunity exist?

In my opinion, this enablement phase is just the first beachhead in what will evolve into a massive market.

I still can’t figure out why there’s no multi-billion-dollar education-focused business process outsourcing firm in the market (unless, of course, I’m simply unaware of such a business). As higher education institutions become increasingly comfortable with outsourcing key software and businesses services (like Instructure’s canvas product in the cloud versus an on-premise hosted and supported version of the open source LMS project, sakai), there will be greater opportunity to provide key technology-enabled services as a replacement for in-house operations like human resources, finance, student advising, and admissions, among many others.

In fact, several early startups have already received funding to try and solve some of these problems. Matchbox, for instance, is a Boston-based startup trying to crack the college admissions workflow/process problem.

Then again, I can understand the hesitation of many entrepreneurs in this market. Historically, education has been an unattractive space to sell into because of its long sales cycles and government-like bureaucracy.

But that was then. Today, education-focused companies are experiencing much more efficient sales cycles as schools begin to recognize the critical need to implement revenue-generating activities and cost-efficiencies — and for good reason. If schools don’t do those things, there is a very real chance that they will “go out of business.” Preventing that from happening, quite simply, is the real opportunity for education-focused entrepreneurs going forward.

Nick Hammerschlag is a vice president at OpenView Venture Partners, a Boston-based venture capital firm focused on investing in expansion-stage SaaS and technology-enabled services companies.

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