It’s hard not to pick on Goliath when things unravel. For Pearson, the world’s largest education company, some of its recent tumult in past years have been self-imposed, even deliberate, under the helm of John Fallon. Since taking the reins as CEO in 2013, he has aggressively shed assets considered tangential to the publisher’s digital transformation strategy.
The sales include iconic brands such as The Financial Times and the company’s stake in The Economist and Penguin Random House. Even its digital education assets, including PowerSchool, a student information system, was sold because it didn’t fit with Pearson’s focus on learning outcomes. Another tool, a learning management system called Fronter, was also divested. The company’s U.S. K-12 courseware business is next.
Cutting assets has meant cutting jobs—thousands of them. And coupled with declines to its traditional textbook and U.S. higher education businesses, the headlines were grim. In 2016 the company reported a $3.3 billion loss, its largest in history.
But last year, Pearson posted a profit, the first sign that its rocky journey to transform itself into a digital-focused learning company may have turned the corner.
At ASU + GSV Summit, an education industry conference, this week in San Diego, we sat down with Fallon to learn about what’s next for Pearson. The interview below has been condensed and edited for clarity.
EdSurge: When you took over as CEO in 2013, there was much made about transforming Pearson’s digital transformation. Now, five years later, how would you describe where you are in Pearson’s overall digital transformation journey?
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Fallon: It’s an exciting time. For the first time, we’ve reported our revenues on pure digital, digital enabled, and non-digital services. Roughly 60 percent of the company’s revenues are now digital or digital-enabled. If you look at an area like higher-ed courseware, we led the first generation of digital transformation with products like MyLab and Mastering.
Now we are well-placed to lead the next generation. A lot of money that perhaps we used to spend acquiring companies, we are now investing organically. We are investing around £750 million [about US $1 billion] on research and development, and new products and services this year, particularly on digital in higher education.
We’re also making big investments in authentic assessments that know more than whether you’ve got the answer right or wrong, but why, and providing much more granular, personal and adaptive, feedback to students based on the years of data that we have, on the tens of millions of students that we’ve got.
In higher education we launched the new Revel app, and also pioneered the market in inclusive access, where we provide to students the opportunity to buy our courseware in ways that provides more affordable choice, but also better outcomes.
This is the Spotify generation. Students will pay for use. They don’t want to buy to own, and they only want to pay to use things that are directly relevant to their course and their outcomes.
Other companies are looking towards bringing together curriculum and assessment, and provide the whole package to try to improve student learning outcomes. But with Pearson putting the K-12 courseware business up for sale—that seems to not be your strategy.
I think that’s clearly very much our strategy in higher education. We don’t see the same immediate opportunity in K-12 courseware, because of the way assessments are run, and the specifics of the business are that it requires us to make very significant investments in the courseware adoption cycle, which provides less synergies with other parts of the company.
In K-12, our assessment-led business is clearly moving to a world of fewer, better, smarter assessments where we can provide much more adaptive, personalized, useful feedback to teachers, parents and students, as well as to state departments of education.
I think we have a very good K-12 courseware business and we’ve continued to invest in it. But it just doesn’t fit with everything else that we’re working on at the moment.
Not long ago, education startups looked to publishers like Pearson as an exit strategy. And Pearson would buy a lot of things. What do you see as Pearson’s role in the startup ecosystem?
We are a keystone investor in Learn Capital [an education technology investor], so we continue to invest in early-stage education technology, partly because we want to encourage the sector, and partly because we want to also identify innovative ideas that will scale over time, to benefit from them both in economic terms and from strategic terms.
I think we will still look to partner with large numbers of people. We want to be very much part of an ecosystem, but what we are less likely to do is directly buy the companies. We don’t need to buy them to get the benefits to our customers or the strategic benefits to Pearson. People should not be expecting us to write them a big check and buy them out, but they certainly should be expecting them to be a good long-term partner who can help them scale.
We’re going through at the moment a major process of consolidation and simplification, which I think will bring major economies of scale to Pearson, and will deliver very significant margin improvement and cash flow benefits over the next few years.
In years past, Pearson has given a heads up that financial performance may be rocky for a particular year. In 2018, do you anticipate things will run bit smoother?
This year, for the first time in a few years, we expect to deliver underlying profit growth.
We are expecting our higher-education business—the courseware business, which is still 30 percent of Pearson—the market to decline this year and next, and then stabilize and grow again. U.S. higher-education courseware is clearly suffering the same trends that everybody else is seeing. Once we complete the analog to digital transition, which will happen by about the end of next year or 2020, business will start to grow again. But at the moment we’re seeing significant disruption from the secondary market in physical textbooks, and that’s having a bigger economic drag than the benefit of the digital growth.
So, we’re running our higher-education business on the basis that it will continue to decline at about 5 percent per year for the next couple of years, before it will even out and grow again.
The other 70 percent of the company will grow. The great thing is the breadth and scale of Pearson means that we can absorb that, see the growth elsewhere, and not have to cut back on investments. We’ve got the pipeline from that billion dollars of research and development coming through, particularly around that faster growing markets, and we’ve got the benefit of a further very significant efficiency and simplification program coming through.
We’re bringing over 50 different finance and HR systems together, bringing all our different content management systems onto one content management system, simplifying the way we go to market around mobile…
“Efficiency” and “simplification” — euphemisms for further reducing headcount?
We’ve been very clear on that we’re in the middle of a further consolidation program, announced last year, which will see another 3,000 roles lost in the company, and another 300 million pounds plus cost savings.
That’s the challenge that faces every company in the world, which is as we go through the digital transformation, you have to re-engineer, remake, rethink the way that you do things each and every year. What’s not in any doubt in my mind is by 2020, we have a faster-growing, more profitable business that’s delivering a much better job for our customers, and which is having a real impact on outcomes in a very positive way.
Regarding impact, should we expect that the efficacy reports that Pearson will publish about its products will show any humbling reports? If all the reports say every looks great…
Well, you can read the reports and you can make your own judgment. They’ve all been externally audited by PwC, and they all have an external academic partner who has also conducted the-long term research.
What they tell you is what you would expect, which is that outcomes are not something we deliver in isolation, that any product is only as effective as the customer or partner you work with and how they use it.
Efficacy is not an end game. I see it as a bit like continuous improvement. It’s about learning, not guessing. But what’s humbling for all of us, Pearson as well as everybody else, is we have to learn much more. We still have a huge amount to learn about how we actually deliver better outcomes, and so I’m not embarrassed when we have an efficacy report that says, “Well, this didn’t quite deliver.” I’d be embarrassed if we didn’t learn from that.
This is not about sales and marketing. This is about how we get the best possible return for that billion dollars that we invest each year, and we’re not going to get the best return unless we’re constantly asking and challenging ourselves as to, “Well, does this deliver what we thought it did? If not, what can we learn?”
Because we need to learn, not guess, and that applies not just to Pearson, it applies to everyone else at this event, and everyone else involved. We really have to take a much more practical, hands-on research-based approach, and that’s about continuously improving and challenging, and that’s what efficacy’s about.
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