by Jennifer Reingold | Fortune Magazine | http://for.tn/1yKJS8g
This story is from the February 2015 issue of Fortune.January 21, 2015, 7:00 AM EST :: Okay, not everybody. The venerable publishing company is trying to reinvent itself for the Digital Age—in the most fraught, political, emotion-racked field there is: your children’s education. That’s stirring up a lot of anger.
John Fallon doesn’t look like the devil incarnate. With his ruddy cheeks and cheerful-but-not-too-posh English accent, Fallon, 52, seems more like a buddy from the local pub than the chief executive of a company with $8.2 billion in revenues that is trying to recast global education—and managing to upset a lot of people in the process.
Fallon, who succeeded longtime Pearson CEO Marjorie Scardino in January 2013, is at the helm of an ambitious quest to reinvent the 171-year-old publishing company, best known for its ownership of the Financial Times and its international textbook business, as a “global learning services company.” The goal is not merely to build a more successful and sustainable business—an imperative as Pearson’s traditional print operations shrivel—but also to improve the lives of millions of people throughout the world. “It doesn’t matter to us whether our customers are hundreds of thousands of individual students and their parents in China, or thousands of school districts in America,” says Fallon. “What we’re trying to do is the same thing—to help improve learning outcomes.”
Pearson CEO John Fallon | Photograph by Jason Larkin for Fortune Magazine
The problem is, legions of parents, teachers, and others see the new Pearson in a very different light. Many of them, particularly in North America, where the company does some 60% of its sales, think of it as the Godzilla of education. In their view, Pearson is bent on controlling every element of the process, from teacher qualifications to curriculums to the tests used to evaluate students to the grading of the tests to, increasingly, owning and operating its own learning institutions.
Liberals distrust Pearson’s profits: “Always earning,” snipes teacher Pamela Casey Nagler in a blog, mocking the company’s “always learning” slogan. Conservatives despise the idea of foreigners shaping U.S. education. “We feel like Pearson is an alien enemy and they are propagandizing our children,” says Chris Quackenbush of Stop Common Core Florida. Others malign Pearson’s competence, its “history of mistakes,” according to a recent letter signed by 47 New York City school principals.
Most of all, people fear the company’s reach. Alan Singer, a professor of secondary education at Hofstra University in New York who has written extensively about the company, calls Pearson a corporate “octopus.” Diane Ravitch, the former Department of Education official and author of the bestselling Death and Life of the Great American School System: How Testing and Choice Are Undermining Education, has derided what she calls “the Pearsonizing of the American mind.” The company’s name has penetrated far enough into popular culture that comedian Louis C.K., whose daughters attend public school, has blasted Pearson in tweets.
Education has always been a fraught field, of course. Few things are more emotional than shaping the minds of children, as Pearson learned during decades in the textbook business. But today standardized testing seems to many to have become the goal of education—as embodied in the No Child Left Behind program and the new Common Core standards—rather than a means of implementing it. Add in the increased use of technology to teach students, government cutbacks, and the private-sector-funded reform movement, and companies have more clout than ever when it comes to what and how kids are taught.
In the U.S., testing is the most searingly divisive issue. The business of assessing students through high school has grown 57% in just the past three years, to $2.5 billion, according to the Software & Information Industry Association. Some believe “high-stakes testing” is the best way to create accountability; others think it measures little and incentivizes the wrong things. Either way, it is now the largest segment within educational technology—and in little more than a decade, Pearson has gone from no presence to dominating the realm.
Fallon has gotten used to absorbing jeers aimed at Pearson. He emphasizes that the company’s goal is to help students succeed—and that the ultimate decisions remain in the hands of educators and government officials. Moreover, the company says its research indicates that among Americans who’ve heard of Pearson, 83% have a positive impression of it. “It’s inevitable in a field as important as education that feelings are strong,” Fallon says. “We are here to serve parents, governments, teachers, and most importantly students. We’re trying to take the right actions for the long term, rather than the most popular ones. And if sometimes that means we get both praise and criticism—hopefully that shows we are charting a sensible middle path.” He insists, “the more people engage with Pearson, the more they tend to say, ‘You’re not who we thought you were.’ ”
Pearson’s push into data-driven education has been a smart strategy. It began with Scardino, who expanded Pearson’s publishing and education brands far beyond Penguin and the FT during her 16-year tenure. And it has accelerated under Fallon, who has expanded further into emerging markets and who has spent the past two years trying to wrestle a hodgepodge of businesses into a more coherent whole.
Fallon has restructured Pearson, cutting $215 million in costs and 4,000 jobs and acquiring digital and other education businesses overseas, most recently Brazil’s Grupo Multi chain of English-language school centers for $721 million. Net income has fallen some 18% since 2011, to $854 million in 2013, because of restructuring charges and the fact that the decline in the old businesses is outpacing the growth of new ones. But the company’s stock has stayed relatively flat, partly because Fallon has adroitly reduced expectations, likening Pearson’s reinvention to IBM’s move from hardware into services. He now says that the restructuring into what he calls a focused “One Pearson” is largely complete.
It sure hasn’t been easy. “John Fallon has had the most enormous baptism of fire,” says Tom Singlehurst, head of European media equity research at Citigroup. With the culture of standardized testing—which has been a cash cow for Pearson—under attack, Fallon has to convince the world that the company is truly a force for learning, and not just the executor of an approach that may soon fall out of fashion.
Fallon imbibed the world of education, if only indirectly, growing up in Manchester, England:
His father was an elementary school principal. But Fallon didn’t initially go into the field. Instead he worked his way up through local government and then into Pearson’s communications and international divisions. A survivor of throat cancer, he has become the earnest and forthright ambassador-proselytizer for the company and its ambitions.
Pearson’s theoretician is Michael Barber, its chief education adviser. Barber, 59, may today be the single most influential educator on the face of the earth. A onetime professor at the University of London, he still has the distant, abstracted air of an academic. Barber was a key architect of England’s educational reform under then-Prime Minister Tony Blair, which involved closing underperforming schools and toughening national standards. Blair later asked Barber to apply the same approach to other services. (His work earned him a knighthood.) After leaving government, Barber became the head of McKinsey’s education practice, then moved to Pearson in 2011. In 2013 he published a report, “The Good News From Pakistan,” examining the positive results of his education philosophy—which has the uneuphonious name “deliverology”—in that country’s Punjab region.
Sir Michael Barber, Pearson’s chief education advisor, may be the most influential educator on earth.
The rumpled Barber downplays the company’s influence, then describes what to an American’s ears sounds like advocating global educational standards. “It’s not remotely true to say we are setting the global standards,” he says. “What is happening is a global economy and technological change and that affects every walk of life. It’s not caused by Pearson. It’s caused by globalization. Students are going to be part of a global labor market. Either the work moves or the people move. People who emerge into a labor market will struggle with employment, and we see that now across Europe and America. That’s just the way the world is changing. We want to make sure when we say someone is good at math they are good at math anywhere in the world.”
For all the breadth of Pearson’s education ambitions, it has been in the business for a relatively brief moment in the corporation’s long history. The S. Pearson & Son construction company was founded in Yorkshire in 1844. By the end of the century, Pearson had become a giant whose projects included the Sennar Dam in Egypt, railroads in China, and even a tunnel under the Hudson River in New York City.
In the 1920s, Pearson diversified, buying the Lazard investment bank as well as the Château Latour winery and the Madame Tussaud wax museum. It then expanded into newspapers and book publishing in the 1950s and ’60s. When conglomerates went out of fashion, Pearson concentrated on media and publishing, focusing on what was then a steady, high-cash-flow business. CEO Scardino doubled down, buying Simon & Schuster’s education division for $4.6 billion in 1998 and selling off Tussaud and Lazard. Pearson was now the largest education publisher worldwide.
The real goal was bigger still. Education around the world was moving toward greater testing and use of technology. So in 2000, Pearson spent $2.5 billion to acquire NCS, the largest American testing company, and began developing educational products that went beyond the textbook. “Content has been king,” Scardino told The Wall Street Journal at the time, “but now we’ll have the ability to put content and applications together, and that will really allow us to be king.”
The move coincided with the George W. Bush administration’s No Child Left Behind initiative, which required districts to measure student and school progress through increased testing. The viewpoint was clear: Schools were failing their students, and the best way to improve was to understand—and measure—what teachers and students were getting wrong.
The assessment push continued under President Obama, who required states to compete against one another for federal education funding—using testing as the metric—in the government’s Race to the Top. And then, in 2009, 46 states committed to tougher new standards under the rubric of the Common Core, in hopes of reversing the steep decline in the performance of American students relative to those in other countries. That meant new teaching materials, new technology, and, of course, new exams—and Pearson was perfectly positioned, having already bought up many testing businesses.
Today analysts think Pearson controls some 60% of the North American testing market. “From 30,000 feet, the strategy makes sense,” says Claudio Aspesi, senior research analyst at Sanford C. Bernstein. “If you believe in the societal pressure to drive improvement in educational outcomes and there’s not money to put more teachers against students, the next best strategy is to try to use technology.” Pearson was no longer a sleepy textbook publisher; it was now a powerful player in every corner of a burgeoning but more controversial industry, one that spurs deep anxiety in the lives of millions of families.
It’s almost midnight, and my daughter is calling to me. She went to bed hours ago, but she is so stressed—at age 10—that she can’t sleep. She will do this nearly every night for two weeks until she finally takes the long-dreaded New York State English Language Arts exam.
Pearson is a palpable presence in her education at P.S. 41 in Manhattan. The company developed much of the school’s fourth-grade English curriculum as part of the Common Core standards. Pearson also designed the test for it.
All of this in an education world where tests increasingly are the be-all and end-all. “Mom,” she says, tears spilling onto her pillow, “why is one test so important?” She answers her own question with grim, distressing logic: “If I don’t do well on the fourth-grade test, I won’t get into a good middle school. If I don’t get into a good middle school, then I won’t get into a good high school, and if I don’t do that, I won’t get into a good college, and then I won’t get a good job.”
I cringe, feeling that I have failed as a parent if this is what she believes. And yet she has a point. In New York City, that test helps determine which middle school you get into. In her classroom, the pressure was so great that the teacher referred to the tests by aliases: the “waka-waka” and the “whablah.” They were the elementary-school equivalent, it seemed, of Harry Potter’s nemesis Voldemort, more commonly referred to as “he who must not be named.”
In a remarkably short time, the worthy notion of holding students and teachers accountable seems to have morphed into a system centered on “teaching to the test.” Parents who first welcomed higher standards now protest weeks of frantic test preparation; some principals have threatened to opt out of the exams altogether. Says Linda Darling-Hammond, a professor at Stanford’s Graduate School of Education (who worked with Pearson to develop a test, the EdTPA, for evaluating teachers): “Until about 2002, there was always an understanding that tests are prone to error, that they only measure a narrow slice, and that they should only be one piece of information among others. We’ve lost that perspective in policy.”
This is not Pearson’s fault, of course. State and local governments made the policy choices. Yet it is fully in the company’s interest for standardized testing to increase (a December 2014 company report trumpets the coming “renaissance in assessment”). Fallon is quick to defend the principle, saying that the rise of big data allows for the opportunity to improve learning by measuring exactly what is and isn’t working. “This idea of the shift from sort of inputs to outcomes, I think, is one that is now becoming all-pervasive in pretty much every area of public policy,” he says. “So why should education be any different?”
To be successful in measuring outcomes requires not only good intentions, but also competence. And here, Pearson has some explaining to do. Robert Schaeffer, public education director of FairTest, an advocacy organization that says it “works to end the misuses and flaws of standardized testing,” has kept a log of the company’s quality-control problems. The low lights include everything from printing errors to frozen screens at test time in 26 Florida counties.
FairTest says Pearson has made 13 significant errors from 2013 to today, including scoring mistakes that prevented 5,300 students from qualifying for gifted and talented programs in New York City. The company mis-scored questions on Virginia’s Alternative Assessment Program for students with learning disabilities—leading to 4,000 students being told they had passed the test when they had actually failed it. (In each instance Pearson rectified the problem once it came to light.) Argues Schaeffer: “There’s been a higher percentage of reported foul-ups by Pearson than by other companies.”
The company questions the findings. “We’ve never seen any methodology to suggest Pearson is less accurate than any other assessment company,” a spokesperson says. “In fact, we believe we are one of the most accurate.” He adds, “Any time mistakes occur, however rare, that’s unacceptable to us.”
Pearson’s behavior in winning lucrative contracts has also sometimes been troubling. The company used its nonprofit foundation—led primarily by Pearson executives—to pay for education leaders to take expensive trips to such places as Rio de Janeiro, Singapore, and Helsinki as they were contemplating hiring Pearson to develop the materials for their states’ version of the Common Core. In 2011, New York State attorney general Eric Schneiderman launched an investigation into such behavior. Pearson settled the case in 2013 without admitting wrongdoing, paying a $7.7 million fine and agreeing to separate its foundation’s efforts from those of the company. Said Pearson at the time: “We recognize there were times when the governance of the foundation and its relationship with Pearson could have been clearer and more transparent.” In November 2014, Pearson announced it was closing the foundation altogether. It appeared to have little further utility.
Another mess involves a partnership between Pearson, Apple, and the Los Angeles Unified School District, which in 2013 announced a $1.3 billion project to provide an iPad, loaded with Pearson educational material, to each of the 650,000 students in the district. The plan immediately bogged down in bureaucracy, technological problems (kids disabled controls and used the tablet to surf inappropriate sites), and accusations of influence buying by the winning bidders. Public radio station KPCC reported that the company’s foundation subsidized attendance by educators, including some members of the bid committee, at a Pearson conference. (The company denies providing subsidies.) At the conference, Pearson distributed iPads to the attendees. (The company says recipients agreed to use them only for district business.) All this took place before the bidding process had even begun. The FBI is investigating—it seized boxes of documents from the LAUSD offices in December—and the new schools supervisor terminated the contract last fall, announcing he would put it out to bid once more. Pearson says it has not been asked to provide information to investigators.
Protesters demonstrate against the Common Core in which Pearson plays an extensive and vital role in Mississippi earlier this year.Rogelio V. Solis—AP
In other places, complaints about the state’s contract and oversight process could hurt the company. In Texas, for example, where Pearson has a $468 million contract to provide tests and educational materials, an audit found poor monitoring of the billing process at the Texas Education Agency. The same audit found that Pearson hired 11 staffers from the agency, two of them involved with the contract, shortly after it awarded the contract to the company (the agency waived rules delaying some of the employees from being hired by state vendors). As a result of that association—and complaints from school activists about how parts of U.S. history have been treated in its texts—some observers believe Pearson’s contract may not be renewed.
Fallon was not the CEO when those incidents occurred, but the task of improving the company’s reputation is falling to him. Adding to the pressure is the growing backlash against Common Core—which has been so beneficial to Pearson’s fortunes in recent years. Already three states have dropped out, and antipathy is mounting from both the left and the right. Schaeffer of FairTest thinks the movement may be rolled back now that Republicans are in charge of Congress. Even Fallon acknowledges that something has gone awry. “I do think as a wider community we have to put assessment and testing into context,” he says. “And I do think we have to be wary of layering too many different things onto one moment in time.”
That said, even if the standards are changed, they are likely to be replaced by new standards—and Pearson remains one of the only players with the size and scope to handle large testing or curriculum contracts. Pearson doesn’t enjoy the withering criticism from countless directions, but the truth is, it may not matter that much: Even if the curriculum changes drastically, the company may well still provide the means by which it is disseminated.
Testing has helped Pearson reduce its dependence on old-fashioned publishing. Since 2008 its U.S. textbook revenues have fallen an estimated 17%; sales at the FT Group, despite recent improvements, have dropped 29% since 2005, in part because of divestitures. Meanwhile some 60% of Pearson’s revenues now come from what it calls “digital and services”—which basically includes every revenue source other than those from printed materials—compared with 37% in 2006.
Online education is clearly a huge opportunity for Pearson. It’s cheap and accessible anywhere that has an Internet connection. E-learning was a $91 billion market in 2012, according to an estimate by IBIS Capital, and it’s growing fast.
So Fallon is now pushing Pearson toward direct-to-consumer education, primarily overseas. There are millions of potential customers, mostly adults, who often don’t have access to top universities or vocational schools. It would allow the company to diversify out of North America, and needless to say, selling directly to adults is less emotionally charged than the K-12 market. It’s also a way for Pearson to put its outcome-based strategy in place with less interference, and—the company hopes—show that it works. Says Tamara Minick-Scokalo, head of international for Pearson: “Where we can really play a role is in doing more of the total education value chain.” Translated from management jargon into plain English, her statement seems to confirm every critic’s worst fears: Pearson wants to be involved at every stage of education.
Fallon listens to a student in Shanghai
Since 2010, Pearson has spent more than $2 billion on international adult education: The purchases include a 75% stake in CTI, a chain of computer-training schools in South Africa; Wall Street English, an English-language school business in China; and, as noted earlier, the Multi chain of English-language schools in Brazil, for $721 million. Pearson is also helping run and promote the online degree programs at schools such as Rutgers, the University of Florida, and Arizona State—which is likely to receive a windfall with Starbucks’ 2014 announcement that it will pay for full-time employees’ college studies, as long as they enroll at ASU Online. More than 1,000 students are already enrolled.
All of this change, including Fallon’s strong shift to centralization, has shaken Pearson itself, which was long a diffused, friendly, and somewhat sleepy organization. Morale has tumbled; reviews on the career site Glassdoor.com describe a scene of constant reorganizations and confusion, with only half saying they support the CEO. One typical comment, from a self-described VP: “ ‘One Pearson’ is a nice motto theoretically, but may not work operationally because aircraft carriers are hard to turn. John Fallon, your good intentions are getting lost in the botched handling of the most recent reorganizations. Get real and listen to the folks in the trenches.”
To his credit, Fallon is trying. He is making town halls and interactions with employees as central to his job as time with investors and clients. At a meeting with the Boston community college sales team—as well as at a later sit-down with students and faculty at Bunker Hill Community College—he responded to tough questions honestly and came across as authentic. “What are we not doing well?” he asked more than once and then listened intently. Employees weren’t shy, volunteering struggles with faulty technology and lamenting the large amount of turnover in the Boston offices.
A middle-school test-taker in Masachusetts gets help using an online Common Core exam managed by Pearson. Boston Globe via Getty Images
Fallon is also trying to make Pearson more accountable—only logical for a company that is helping to set the world’s educational standards. In late 2013 he announced that Pearson would, in effect, eat its own cooking. Much as it assesses others, it would assess its own performance, reporting the results in each business publicly by 2018 in what it calls “efficacy.” Pearson has developed specific criteria for the success of each business or initiative with more than $1 million in sales, says Barber, and promises that it will publish the results and hold itself to those standards.
The level of disclosure goes far beyond what most public companies are required to report. Fallon says that if Pearson’s programs are not having the desired outcome—if, say, English-language improvements in its Chinese schools do not meet the criteria—the company will abandon them. “If we say our purpose is to help people make progress in their lives through learning,” he says, “we’d better be able to demonstrate that.” The move requires guts—after all, few companies willingly put themselves under a microscope—but it’s worth noting that the company has given itself five years to get ready. That’s far more than many of its own customers receive.
Can Pearson make the grade? Fallon has the vision—and for a little while longer, at least, the apparent support of investors. Yet the internal challenges, not to mention the external opprobrium, mean the strategy’s success is not at all assured. “I think [Pearson] would be delighted to have as much clout as [the critics believe],” says Bernstein’s Aspesi. Fallon has set the timer; now he needs to pass the test.