T HE P ARTHENON G ROUP Boston London Mumbai San Francisco What is Next in K-12 - Digital is Coming! Parthenon Perspectives February 20, 2014

T HE P ARTHENON G ROUP 2 What Informs Our Perspective? Parthenon teams have completed over 900 education projects in more than 60 countries Pre-KindergartenK-12University Vocational and Other Career and Professional Education Sector Projects Completed by Parthenon Parthenon Offices

T HE P ARTHENON G ROUP 3 What Informs Our Perspective? Public and private sector work provides us with a strong sense of what is happening “on the front lines” We advise a number of leading education institutions… …and work with the private companies trying to meet their needs Local educational authorities, states, and governments Charter schools, private K-12 schools, and other innovative education providers Global post-secondary institutions Foundations on the forefront of educational reform Educational publishing Assessments Tutoring Intervention/Special Ed Technology providers Consumer education products

T HE P ARTHENON G ROUP 4 Funding Pressures Parthenon anticipates a slow recovery in educational funding… Note: Fiscal Year July - June Source: Congressional Budget Office; ARRA documents; Global Insight; U.S. Census; National Center for Education Statistics; NEA; Parthenon Analysis YoY Growth of K-12 Education Spending, Actual vs. Forecast, FY F

T HE P ARTHENON G ROUP 5 Funding Pressures …as a result, the next several years will continue to see stagnant growth Note: Fiscal Year July - June Source: Congressional Budget Office; ARRA documents; Global Insight; U.S. Census; National Center for Education Statistics; NEA; Parthenon Analysis YoY Growth of K-12 Education Spending, Actual vs. Forecast, FY F State and local education spending is more “discretionary” than other state/local budget priorities (e.g., interest payments, Medicaid) Continued federal budget shortfalls are expected and rainy day funds are exhausted New stimulus-level federal spending is unlikely Rising enrollments typically impact K-12 expenditure levels positively due to per pupil spend formulas Increasing costs associated with education (e.g., teacher salaries) tend to increase K-12 budgets

T HE P ARTHENON G ROUP 6 Seeking Growth The only growth sectors have been in digital courseware and summative testing… Instructional Materials Market ( F) Note: Modular software is defined as physical software (i.e. CD disk); Courseware is defined as online only; Market does not include formative assessments Source: Simba

T HE P ARTHENON G ROUP 7 Seeking Growth …and district decision maker sentiments indicate that the digital transition, though gradual, continues… Strategic Preference for Improving Outcomes Source: Parthenon Survey November 2012; n = 104 district leaders, 148 school leaders

T HE P ARTHENON G ROUP 8 Seeking Growth …across a broad spectrum of uses Source: Parthenon Survey August 2014 (n=244 decision makers) Multiple products in the school / classroom for similar uses is standard Purchasing criteria centers around: ‒ Enhancing Student Achievement ‒ Common Core Alignment ‒ Price ‒ Student Engagement ‒ Ease of Implementation Spending Breakdown for Digital Courseware

T HE P ARTHENON G ROUP 9 Digital Considerations Moving from print to digital has tremendous implications on business models Products and services that fit within, and enhance, established workflows succeed; those that fight them fail Enhance Teaching and Administrative Workflows 1 Decision making for digital product often involves multiple constituents and often (though not always) moves to a district vs. building purchase Selling is More Complex 2 Subscription vs. license; Per user vs. per site; myriad funding streams Pricing Becomes Challenging 3 Districts are much more sophisticated about how well aligned content and services are with the Common Core Common Core, Common Core, Common Core 4 If you do not have a great product that is 1) easy to use, 2) engages students, and 3) enhances outcomes – don’t worry about the rest because it will not be received!

T HE P ARTHENON G ROUP 10 Enhancing Teaching and Administrative Workflows What did the Teacher / Administrator do three minutes before and after using your product? Teaching Workflows Administrative Workflows One of the largest workforces in the Country, who: Tend to work alone; Have established classroom rhythms; and are Change resistant – for good reasons Extreme budgetary and performance pressure grappling with: Rising standards and persistent performance gaps; Increasing statutory compliance complexity; Distributed workforce with high turn-over Highly politicized constituents (unions, parents, boards, politicians) Do not fight these workflows – odds are, you do not know better!

T HE P ARTHENON G ROUP 11 Sales is More Complex Sales into multiple constituents at the district level requires a field sales force “The Big 250” “The Next 1,000”“The Tail End” ~80% coverage can be achieved with ~25 reps 80% coverage can be achieved with ~ 80 reps Requires ~ reps (or inside sales) Concentration is especially acute when the largest school districts are considered – allowing reasonably broad student number coverage with a moderately sized sales force

T HE P ARTHENON G ROUP 12 Sales is More Complex Becoming more than a regional player will require a fairly national sales force Source: NCES 10-25K >25K

T HE P ARTHENON G ROUP 13 Pricing Becomes Challenging Subscription vs. license and per user vs. per site… Subscription vs. Perpetual License Often determined by how districts budget / purchase Large districts often demand flexibility Per User vs. Per Site Influenced by public perception “all students have access to XXX” Usage uncertainty plays a role Total Cost of Ownership All fees included Subscription vs. License breakeven at XXX years? Pricing Models (Subscription vs. License and Per User vs. Per Site)

T HE P ARTHENON G ROUP 14 Pricing Becomes Challenging Funding patterns require invoicing flexibility and a consultative approach Funding Sources for Digital Courseware Source: Parthenon Survey August 2014 (n=244 decision makers)

T HE P ARTHENON G ROUP 15 Common Core Expect districts to hold a sophisticated discussion surrounding “mapped to” vs. “built to” Common Core Forty-five U.S. states and the District of Columbia have adopted Common Core State Standards Note: Includes the District of Columbia, but not U.S. Territories (no student population data available); Oklahoma, Pennsylvania, and Georgia have decided to stay connected with the efforts in a Advisory capacity, but have not committed to administering exams from the two consortia; New York, although a member of PARCC will use their own versions of Common Core assessments (1.8M students); Alaska decided to stay with its own state standards, but is a member of SBAC; Minnesota adopted Common Core English standards in 2010, but kept its own math standards Source: NCES Student Data for grades 3-11,

T HE P ARTHENON G ROUP 16 About The Parthenon Group and our advisory services for investing in education The Parthenon Group is a leading advisory firm focused on strategy consulting, with offices in Boston, London, Mumbai, San Francisco, and Shanghai. Since its inception in 1991, the firm has embraced a unique approach to strategic advisory services built on long-term client relationships, a willingness to share risk, an entrepreneurial spirit, and customized insights. This unique approach has established the firm as the strategic advisor of choice for CEOs and business leaders of Global 1000 corporations, high-potential growth companies, private equity firms, educational institutions, and healthcare organizations. Parthenon has served as an advisor to the education sector since our inception in Our Education Practice – the first of its kind across management consulting firms – has an explicit mission and vision to be the leading strategy advisor to the global education industry. To achieve this, we invest significantly in dedicated management and team resources to ensure that our global expertise extends across public sector and non-profit education providers, foundations, for-profit companies and service providers, and investors. Parthenon has deep experience and a track record of consistent success in working closely with universities, colleges, states, districts, and leading educational reform and service organizations across the globe.. Learn more about us at Robert Lytle Partner, Co-Head of Education Practice Executive Assistant: Deb Spitzley Twitter Facebook | LinkedIn | Twitter EDUCATION PRACTICE Follow Us for Regular Updates