Lessons in growth Featured

8:00pm EDT August 25, 2003
If you've been in Pittsburgh for any length of time, you're probably familiar with the Art Institute of Pittsburgh, an icon to Pittsburghers in much the same league as, say, Heinz Ketchup or Kennywood.

Even if you don't know exactly where it is, or you never attended it as a student, you're keenly aware that it is a staple of the local educational establishment. And you wouldn't be surprised to learn that some of its grads -- 125,000 from its network of schools in North America since it was founded -- work for some of the largest and most prestigious corporations in the world.

On the other hand, if you were asked what you know about Education Management Corp., there's a good chance you would picture a blank canvas.

Ironically, the Art Institute of Pittsburgh is a small part of Education Management, its parent organization, a publicly traded company that employs 5,600 people in the United States and Canada, and that posted $500 million in revenue in fiscal 2002. It has posted better than 20 percent annual revenue growth in each of the past five years. Approximately 46,000 students are enrolled at its 42 campuses in 30 cities.

Education Management's tendency to remain under the radar is by design and is mirrored by its chairman Robert Knutson, who was also the company's CEO until Sept. 1, when President John McKernan took over the position. With the company since 1970 and in his current position since 1986, the former investment banker's public profile is about as high as that of his company. Knutson -- and others in the company -- say that's because the focus of Education Management isn't so much on promoting its own brand image as it is on its students and employees.

But if Education Management isn't the loudest on the block, it is one of the busiest and a solid financial performer among publicly traded companies in its industry.

"Notably, Education Management is one of the most consistent operators in the group, meeting or exceeding the Street's earnings estimates for each of the 20 quarters since becoming a public company," according to a January 2002 USBancorp Piper Jaffray analyst report.

Since its initial public offering in 1996, Education Management has grown by acquisition, organic expansion of existing schools and programs, and by adding curriculums. It has assembled a network of art schools, the Art Institutes, in 29 North American cities, and has gone on an acquisition hunt in the last two years, bagging three major education companies and expanding its program offerings.

That record is in contrast to its earlier experience, when it stuck essentially to its flagship offerings through the Art Institutes.

"At the outset, and for many, many years, our focus was in programs in art institutes," says Knutson. "In the last two years, we've broadened our academic program reach through acquisitions."

Not that there isn't a lot of opportunity in art education. Knutson says that just a little more than a million students are enrolled in art institute-type schools in the United States, with Education Management capturing about 3 percent of the market.

An obvious strategy, then, might be to cookie-cutter the Art Institute model, but Knutson says that's not enough to take advantage of the myriad opportunities in education that are available to his company.

"In the meantime, there's a lot else going on in higher education," Knutson says.

The power of an idea

Knutson likes to tell the story of how Education Management introduced culinary arts programs. The eight presidents of the various Art Institutes at the time were gathered at a meeting in 1986 in Seattle, overlooking the Puget Sound. Knutson, who acknowledges that his own culinary skills are limited to poaching fish and frying eggs, raised the possibility of offering culinary training within the Art Institutes system.

Eyes rolled and brows furrowed, says Knutson, and like a lot of new ideas, it got a cool reception.

One of the presidents, however, saw a connection between arts education and a cooking school and initiated a culinary arts program at the Art Institute of Atlanta. The concept blossomed, and other schools in the system picked up on its success.

Today, culinary arts training is offered at 18 of the Art Institutes.

"And I didn't do anything, except introduce the idea," says Knutson.

That approach has been applied repeatedly since, especially more recently. The focus in the past two years has been on acquiring more academically diverse and larger schools, with an eye on combining Education Management's existing competencies with those of the acquired institutions.

In 2001, Education Management bought Argosy Education Inc., a publicly held post-secondary education provider headquartered in Chicago, in a $79 million stock purchase deal. The Argosy deal brought master's, bachelor's and additional diploma programs in health sciences, business, information technology, legal studies and design technology.

Education Management acquired Savannah, Ga.-based South University for $50 million in April, gaining an institution that offers master's, bachelor's and associate's degrees in business, legal, health and technology. In June, it inked an agreement to purchase Cincinnati's American Education Centers in a $116 million deal, adding master's, bachelor's and associate's degree programs in the fields of health sciences, business, legal and technology. The three schools had a combined enrollment of more than 12,000 students.

Adding academic programs to a school location, Knutson explains, gains leverage on administrative overhead and facility expenses.

"As we co-locate and share programs, Education Management's delivery model becomes more powerful," says Knutson.

If, for instance, Education Management acquires an art school with a traditional day student population, it can use its expertise in other academic areas to offer additional degree or certificate programs to evening students at the same location. Degree programs could be fashioned that combine competencies in art education with psychology, for instance, to create a master's degree offered through evening classes.

With widespread Internet access available, distance learning is another component that Education Management expects to grow substantially. The distance learning market for fully online degree programs is growing at a rate of 40 percent annually, according to Eduventures.com, an education industry research firm. More than 350,000 unique students are enrolled in fully online degree-granting programs, generating $1.75 billion in tuition revenue for institutions in 2001/2002.

Traditional education institutions, says Knutson, have been slow to adopt online learning models, an area that the for-profits are embracing. The University of Phoenix, for instance, has 72,000 students taking courses online. The National Center for Education Statistics estimates that about 10 percent of higher education students are involved in distance learning.

"The idea of blended classrooms and online experience really augments the whole education process from the standpoint of students," says Knutson.

And, says Knutson, who doesn't venture far from his office without a laptop, driving the Art Institutes into offering leading-edge curriculums like game design, motion graphics and virtual environments has given the company experience and a familiarity with technology that it can apply in other areas within its system.

A growing industry

The for-profit post-secondary education industry has grown into a big business since the mid-1970s, when schools like the University of Phoenix emerged to take advantage of growing demand for adult education.

"If you look at the statistics, the publicly owned education companies have been growing at a much higher rate than higher education in general," says Knutson.

Indeed, the for-profit education industry has grown substantially in the last two decades. A 2001 report by the Education Commission of the United States reported a 78 percent increase in the number of for-profit two-year degree-granting institutions between 1989 and 1999. During the same period, the number of for-profit four-year institutions increased by 266 percent.

For Knutson, being at the helm of Education Management goes beyond the satisfaction of running a growing, successful public company. The business has held his interest for 33 years because of his regard for the value of education and how it can enhance lives and careers.

"I guess it's fair to say for me that it's a wonderful field of human endeavor because you're surrounded by human success," Knutson says.

And helping to create it, as well. How to reach: Education Management Corp., www.edumgt.com; Art Institutes, www.artinstitutes.edu; Eduventures, www.eduventures.com