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9:50am EDT August 29, 2006

When Gary Graves came on board at La Petite Academy Inc. as its COO in 2002, the company faced a multitude of financial and accounting woes.

There were problems in meeting all the requirements of its loan covenants. Its auditor had found some slack in its internal accounting controls, and it had to restate earnings for a couple of years — all bad omens for a business that, while not a public company, held public debt and had the burden of meeting reporting requirements under the Sarbanes-Oxley Act.

But as difficult and critical as it was to get those troubles behind it, Graves says there was another issue that was even more crucial when it came to the company’s long-term survival and success.

“The people side was most important,” says Graves, who became president and CEO of the early childhood education company a few months after arriving at La Petite Academy. “In all my life, while certainly having access to capital and having the financial resources are important, most of the constraints that I’ve seen have been people-related, not having enough good people. I could have all the brilliant ideas in the world — which is not the case — but I learned a long time ago to surround myself with very capable people and let them do it, obviously creating boundaries they can operate in and letting them go out and do their job. Then you get a lot of leverage throughout the system, because then it’s not just the CEO who’s the person who’s saying turn left or turn right.”

La Petite Academy, owned by J.P. Morgan Partners since 1969, was headquartered in Kansas City, Mo., until May 2002. That month, it was relocated to Chicago by the previous management, where it expected to find a deeper talent pool to run the company and a more centralized geographic location.

But of the roughly 250 people in the corporate headquarters at the time, only a few relocated to Chicago. Graves says it was a poorly executed move because the company hired temporary help that received minimal training to fill the Chicago positions.

“So we had a very chaotic back office support center operation for about a year,” says Graves. “I came on board and inherited a fair amount of contractors and temporaries, and we went about creating a real company.”

Opportunities ahead

While La Petite had its share of problems, Graves dug into the literature about the industry and surmised that it also could have a pretty promising future. Research told him that the industry was a viable one, and that it was trending toward professionally managed preschool versus unsophisticated daycare operations and unlicensed providers.

Despite that research, the previous team seemed to have lost its focus, venturing into noneducational businesses geared toward working families.

“The plan I put in place returned to its original focus: to provide the best educational experience for children age 3 and up,” says Graves.

Graves saw two areas where he could improve La Petite’s long-term performance: getting the best people in the right positions to manage the company and improving the product offering to meet the expectations of its customers.

“I knew this was a people-intensive business, and that I was good at building strong teams and keeping them in place,” says Graves.

He looked at the people issue at La Petite and overlaid his prior business experience on it. Graves hadn’t come from a background of education or daycare or any other business that on its surface looked much like early childhood education. But while La Petite is in a fairly specialized business with challenges that most others don’t face, Graves saw strong parallels to previous businesses he had worked for.

La Petite Academy, with 13,000 employees and 649 academies, displayed some striking similarities to those businesses and could benefit from the same structural and operational strategies that he had accumulated during his career. He had worked in businesses where strong controls were needed to manage individual business units — similar to the way academies function — where cash is collected at the sites, profit margins are thin and much of the workforce is young and in lower-wage positions.

“My background up to this point has been in multi-unit, geographically dispersed businesses, and they’re not very glamorous or high margin,” Graves says. “I was in the foodservice business when PepsiCo owned the restaurants, with Boston Market as they were coming up and with a company that owned and operated parking garages and other multi-unit businesses. They lend themselves to folks with a strong controls background and understand how to make similar boxes deliver similar results, and we went about getting those kinds of people on board.

“You’re not going to see leapfrog technology or anything like that. It’s one of focusing on the basics, and that’s what we hired people for and got them in to do.”

Revamping the field

Graves started by revamping a key field position, that of the district managers.

Each district manager had 17 schools, and some of their territories stretched across several states, making it difficult to reach each academy frequently enough. Graves reduced the number of academies that each had responsibility for to 12 and weeded out underperformers, creating a need to hire people to fill the vacancies and the newly created positions.

But when he began recruiting, he didn’t look for people with industry experience.

“Two-thirds of the people we hire have other multi-unit experience with companies like Wal-Mart, Best Buy, Starbucks, Disney Stores, so in my vernacular, they’ve seen the movie before,” says Graves. “We can teach them what they need to know about early childhood education from a management and leadership perspective. It’s a lot harder to teach them how to manage geographically disbursed boxes that are supposed to execute the same mission and manage all the controls and customer service aspects of it.

“We’ve been really successful by bringing in that layer of blood.”

And fortunate, as well, says Graves, in that there is a rich supply of talent available to manage the academies. Managers involved in multi-unit supervision in many industries work in a demanding environment that puts them on duty almost without a break.

“If you’re a multi-unit operator in the foodservice business, that’s a seven-day, 24-hours-a-day industry these days,” he says. “That’s an incredibly difficult job. We can be very competitive against the industry from a salary and lifestyle perspective. While our district managers work incredibly hard, we’re not open for business on Saturday night or Sunday.”

Graves rebuilt the field audit team, which monitors financials and record-keeping at the academies. District managers present their business results three times a year to Graves and the senior management team. It’s a balanced report that includes evaluation of financials, customer service and human resources.

Graves says that the district managers have made improvements at the academy level.

“They, in turn, have upgraded the people that report to them, what we call the academy directors, the people that run the schools,” says Graves. “So a big part of the turnaround plan was improving the people and giving those people an improved curriculum to execute.”

Graves initiated new a bonus program for academy directors, scuttling one that allowed them to earn incentives without necessarily improving their performance. Now, directors get a quarterly bonus tied to bottom-line performance at their schools. Items such as new equipment or facilities improvements ahead of schedule are also offered as rewards.

Because La Petite Academy has no long-term contracts with customers, the company has to sell itself every day. And to give directors more of a sales orientation, they receive training that helps them sell the merits of the academy to prospective clients.

To keep tabs on how well the directors are presenting to potential customers, La Petite instituted a secret shopper program, in which district managers are called by individuals posing as parents checking out prospective early childhood education programs. The results of those engagements are used to help directors do a better job of fielding such calls and explaining the benefits of enrolling children in La Petite Academy.

Bolstering the curriculum

Noting that the trend in early childhood education was moving toward a model more focused on education than on simply daycare services, Graves scuttled initiatives that the previous management had begun that were more related to the care model.

Graves built a 12-member curriculum development team, most with classroom experience and master’s degrees, and came up with a more advanced curriculum called Journey designed to help children prepare for kindergarten. Since 2003, La Petite has invested more than $2 million in its Journey curriculum.

That investment appears to have paid off, as an independent education technology company evaluated La Petite Academy students and found that, on average, they nearly doubled the expected developmental gains in math and early literacy skills two years running. Revenue for fiscal 2005 was $394 million, up from $391 million in fiscal 2002. EBITDA has nearly doubled, from $17 million to $33.7 million, and the company has gone from a $58 million operating loss to $19 million in operating income in that same time period.

Graves’ practices what he preaches when it comes to running a multi-unit operation. He spends considerable time on the road, visiting academies and holding town hall meetings with employees, where he explains the business side of La Petite, why it invests in some areas and not in others, and fields questions, often tough ones, from the La Petite work force.

“Sometimes they’re softballs, and sometimes they come in hard, right at your chin,” says Graves, but he insists that he needs to be visible to employees, even if it’s just for brief meetings.

“I’m out in the field a lot in this business,” says Graves. “You have to be. You can’t be a coach if you can’t see the players.”

How to reach: La Petite Academy, www.lapetite.com