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On Educomp And Education’s Sub Prime Crisis – Forbes India

Flanked by acres of red earth-topped bare fields and demarcated plots on all four sides, the six-year-old Sanskaar English Medium School sits a few hundred metres off the Gulbarga-Bijapur highway in Hubli. The 19 classrooms from Montessori to Class 10 brim with the chatter of nearly 800 students. Each of the classrooms is fitted with an interactive digital ‘board’ that teachers use to mix multimedia content with their regular teaching.

In early 2011, Educomp inked a deal with Sanskaar to equip all its classrooms with its Smart Class range of digital classroom aids that allowed teachers to use interactive multimedia content to supplement the standard textbook-and-blackboard approach. Instead of paying roughly Rs 37 lakh to Educomp for the hardware and content, the school would pay it a monthly fee per class over a contract period of five years. In turn, the school would pass on the cost as a monthly fee increase of Rs 150 to Rs 200 per student.

Given India’s population, paucity of good schools and love for all things technology-enabled, the potential market for such a service was seen as a few hundred thousand schools. Smart Class itself grew like weed, from less than 100 schools in 2006 to over 6,550 schools by 2011. By May 2011, Educomp had delivered all the hardware to Sanskaar, ready to be installed and configured.

And there it would lie, for nearly two years. Under lock-and-key. In a storeroom.

A senior representative from the school says it cancelled the order back in May itself because Educomp missed contractual deadlines for installation and commissioning. Instead, it chose to place a new order with one of Educomp’s smaller competitors.

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Meaning, Educomp received no further payments from the school and lots of letters asking for the equipment to be taken away. Yet it was only when the school threatened to auction the ageing hardware that Educomp decided to finally take it back just a few weeks ago.

Divya Lal, the head of Educomp’s academic services, says Sanskaar acted with malafide intent and such cases represent less than 1 percent of Educomp’s 15,000-plus base of school customers.

The reason Educomp did not pick up the hardware in spite of the school terminating the contract was, according to Lal, to avoid creating a perverse incentive for other schools too. She also adds that Educomp recognised no revenue from Sanskaar, and wrote off the value of the contract in its books.

While Educomp may claim that such cases are too miniscule to matter, what was too big to ignore was the fact that many schools across the country weren’t paying it in time.

“The risk is that this technology sales model becomes akin to the sub-prime mortgage scenario that caused the credit crisis in the US. Like in the US where loans were given to people who did not have the repayment capacity, there is some danger that ambitious schools looking for a magic bullet are buying hardware and software they ultimately can’t afford,” says Karan Khemka, a partner with Parthenon, a strategic advisory firm with a special focus on education.

“It is the job of a financing institution, not an educational services vendor, to finance a school. Otherwise you end up bearing business risk, execution risk and financing risk. That’s too much to bear,” says TV Mohandas Pai, the chairman of Manipal Global Education (a group that competes with Educomp in various spaces) and erstwhile Infosys board member.

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Read the entire article here.

(c) 2013 Forbes India. Reproduced with permission from Forbes India.

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