How We Built a Strong Company in a Weak Industry

Entrepreneurs wanted: Help grow an enterprise from scratch in an industry that offers no barriers to entry, chronically low margins, massive labor intensity, no proprietary technology, few economies of scale, weak brand distinctions, and heavy regulatory oversight. Serious inquiries only. Not many people would respond to an ad like this. But it pretty much sums up the opportunity that Linda Mason, my wife, and I decided to pursue 15 years ago when we founded Bright Horizons, our workplace child care and early-education company. And despite all the challenges inherent in the industry, we succeeded. We now operate more than 340 high-quality child care centers, serving 40,000 children and employing 12,000 people, and we have built a solid, profitable business. While we’re proud that our company is growing and profitable, our goal was always broader than just building a good business. Early in our careers, Linda and I had stints as management consultants, but we also had a great deal of interest and experience in human services. We both left business school, where we met, to run a CARE-sponsored effort in Cambodia to help refugee children. Later, we took leaves of absence from consulting to start a Save the Children relief program in Ethiopian refugee camps and famine-stricken Sudanese villages. When we returned after two years and launched Bright Horizons, we set out to create caring, educational environments for children that would give parents confidence in their children’s well-being. After briefly examining and rejecting the idea of a nonprofit, parent cooperative model, we concluded that to realize this vision on a national scale we would need to build a strong, profitable organization that would allow us to attract large amounts of capital. And so it was that we got into the child care field. We didn’t take the plunge blindly. Before we set up shop, we took a long, hard look at the industry’s weaknesses. And then we sat down and figured out a way to turn them to our advantage. Our Strategic Twist When Linda and I returned from the Sudan in July 1986, child care in the United States was run more or less like a commodity business. In fact, the largest company in the industry was trying to emulate the fast-food business, claiming to be the “McDonald’s of child care.” That struck Linda and me as a terrible model. An environment with high turnover and a paint-by-numbers curriculum is just the opposite of what children need and parents want. We thought we could do much better. The author has raised the standards for providing child care and early childhood education. But we knew that in order to succeed we had to come up with a viable business model. Jack Reynolds, a friend of ours who had been a colleague of mine at the consulting firm Bain & Company, gave us an idea. He pointed out that some innovative companies, like the children’s shoemaker Stride Rite, were setting up child care centers at their work sites, and that these centers tended to be of much higher quality than the ones run by the traditional chains. Why not, we thought, become an outside operator of such centers? By viewing employers rather than parents as the primary customers, we could tap into the financial and other resources of corporations and gain instant access to large pools of working parents. We could, in short, invent a whole new model for the industry. The first thing we did was recruit three industry experts to refine our ideas. We sat down with them at our kitchen table in Cambridge, Massachusetts, to formulate a solid business plan. (Our house, incidentally, had good entrepreneurial bones. We had purchased it from Mitch Kapor, who lived in it before he achieved fame and fortune as the founder of Lotus.) We quickly saw that forming partnerships with employers offered several advantages. For one thing, we’d gain a powerful, low-cost marketing channel. We wouldn’t have to sell our services to one parent at a time. More important, companies would view the centers as a way to distinguish themselves in the eyes of current and prospective employees. By giving employees access to convenient, first-rate care, they could increase the loyalty of their people and boost retention rates. Thus, our customers would have a vested interest in helping us pursue our core goal: delivering high-quality care. And employees themselves would be attracted to our centers. By having their children next door, they could reduce their commuting times, enjoy greater peace of mind, and avoid the stress of fighting rush-hour traffic to reach a child care center in time for pickup. Parents could drop by to have lunch with their children, and nursing moms could continue to breast-feed even after they returned from maternity leave. Our strategy, we believed, was solid. Only two things were missing: capital and customers. We pitched our idea to Bain Capital, Bain’s newly formed investment arm. Its founding partner, Mitt Romney, expressed interest, but he felt he needed a second opinion. Romney knew me quite well—I had reported to him at Bain—and he wanted reassurance from a more objective investor. That led us to the offices of the venture capital firm Bessemer Venture Partners. Bessemer’s partners were intrigued by our idea, but they, too, were a little nervous. They asked us to undergo a psychiatric interview as part of the due diligence process, and despite the unusual nature of the request, we agreed. After all, Linda and I were hardly the prototypical entrepreneurial team. We’d worked together in monsoon-soaked refugee camps in Cambodia and built an emergency program that served 300,000 people in Sudan, but we didn’t have much experience starting up companies. We also understood that the business world is littered with former husband-and-wife teams whose companies were torn apart as their marriages failed. Thanks to a good session on the couch and a buyer’s market in the booming venture-capital industry, we had our funding commitment in a matter of months. Soon after, we signed our first customer, Prudential. The insurance company was in the process of redeveloping its Prudential Center complex in Boston, and it was looking for innovative ways to demonstrate to the city that the project would be a boon to the community. A partnership with Bright Horizons fit the bill, and in August 1987 we opened our first child care center. As a bonus, Prudential’s public-relations team let the world know about the progressive model for child care that it was investing in—and that we were providing. We were on the map. Building Blocks for Success Even with the first few breaks, the early days were difficult. I cold-called hundreds of employers, without much success, and we began to experience genuine anxiety over whether companies would see the value of a partnership with us. Many companies, we realized, were terrified of their potential liability. We solved this problem by securing insurance 50 times above the industry standard and by indemnifying our clients. Those steps proved vital. With their fears calmed, companies started to focus on the benefits of on-site child care. Slowly, we built our customer base, and as our first centers opened their doors, the initial financial results looked encouraging. We had developed two basic models for making money. In the first, we assumed the financial risk for the operation and earned our profit margin out of the operating budget. In the second, the client simply paid us a management fee. In either case, the employers supplied the capital, investing, for example, in building and outfitting the centers. The average center broke even when it reached the 60 % occupancy mark. When our first few centers filled up to capacity in just three months, we had proof that our vision could work. Bright Horizons’ founders faced a stark challenge. They had to enter a business—child care—filled with structural disadvantages and figure out a way to build a prosperous and caring company. Our commitment to quality began to pay off as well. Our competitors in the late 1980s continued to think of the industry as a commodity business. They crowed to investors about driving down labor costs, and they downplayed quality altogether, usually meeting only minimal state licensing requirements. That approach created such dissonance between what was good for shareholders and what was good for customers that it seemed destined to collapse. And just a couple of years later, it did, as the largest traditional chain filed for bankruptcy protection. We took the opposite approach, reasoning that no Fortune 500 company would risk its child care center to an organization that paid its staff close to minimum wage, faced frequent violations of state licensing regulations, had high levels of parent dissatisfaction, and could not achieve national accreditation. We viewed quality as our strongest source of competitive advantage, and we knew that quality in child care begins with the employees. We surveyed the best centers we could find, and we discovered that they paid teachers 20 % to 30 % more than the average compensation in the field. We matched that premium and also offered comprehensive benefits, including health insurance, tuition reimbursement, 401K with a company match, and child care support. Our emphasis on quality didn’t end with employees. We committed to abiding by the strict accreditation standards set by the National Association for the Education of Young Children (NAEYC) rather than simply adhere to local licensing requirements, which vary widely from state to state. We also set out to create state-of-the-art learning environments for young children. Drawing on the capital investments from our corporate partners, we customized the centers so that their design, hours of operation, and age-group configuration matched the needs of our employer clients. And we developed a curriculum called “World at Their Fingertips,” which outlined a course of study for teachers but gave them control over daily lesson plans so that the curriculum would reflect the interests of the children in the classroom. Our curriculum marked a departure from those of most traditional child care programs, which either lacked curricular guidance altogether or mandated strict, cookie-cutter lesson plans. The creative curriculum reinforced a cycle of quality. It helped our centers attract the best teachers, who in turn had the skills to fulfill and refine the curriculum. Our commitment to quality delivers concrete benefits to our clients as well. It gives them the upper hand in the battle for talent. Merck, for instance, found that its retention rates among employees with young children—a group that had been prone to high turnover—improved dramatically. Chase Manhattan calculated that its center generated a 110 % return on investment through reduced absenteeism. And we don’t think it’s any coincidence that we’ve retained 99 % of our corporate partners. Our Near-Death Experience Because our early centers were so successful, we had unrealistic expectations about later centers. Replicating the success of the early programs proved more difficult than we thought, much to our investors’ chagrin. For one thing, the early centers were perfectly located; they were in areas with high levels of pent-up demand. Second, they were relatively small and thus easy to fill to a profit-making capacity. When we opened our next ten centers, they were 20 % to 30 % larger than the earlier ones, and none performed as well. We learned that breaking even in just three months, as the first centers had done, was unrealistic. By 1990, some of our investors began to question whether we had enough “gray hair” and “scar tissue.” We had opened approximately 30 centers and were launching several new ones each year, so the error in our center ramp-up model compounded itself. The recession in our home base of New England exacerbated our problems. One board member in particular questioned whether we knew how to eke out a profit in such a low-margin business. And several directors began to question whether high teacher salaries and low teacher-child ratios were just an artifact of our idealism and whether they were an essential element of our strategy. A critical lesson Linda and I learned was that when the going gets tough, board members often give contradictory advice. At first, we tried to respond to all their varied points of view—“focus on profitability,” “just keep growing,” “hire more experienced managers,” “lay off staff to reduce costs.” But we soon saw that we were being pulled in too many directions and that the vision for our young company was at risk. We had to take a stand. I wrote a long memo to the board arguing that the whole enterprise was built around a quality-focused, employer-supported strategy, and that the only hope of real success was to pursue it even more deliberately. Without such a strategy, we were doomed to be a second-tier player in an unprofitable field. After much soul-searching, the board agreed that Linda and I were still the right management team and that we had the right business model. (That decision led one of the board members to resign.) At that point, we became completely focused on managing our cash and ensuring that none of our centers lost money. We eliminated all distractions, such as several public-policy initiatives and an international joint-venture opportunity that we had been investigating. We also changed our expectations, projecting that new centers would become profitable in nine to 12 months instead of three and that they would reach a mature enrollment of 80 % to 85 % in 18 months. But we did not reduce compensation and benefits, compromise our teacher-child ratios, or otherwise retreat from our basic strategy of high quality. The new focus paid off. We soon posted our first profitable quarter. Thriving in the Briar Patch We came out of this painful period a much stronger company. Having to defend our model gave us the opportunity to refine it. Internally, we came to refer to our plan as the “briar patch strategy.” As readers of classic children’s literature will remember, the legendary Br’er Rabbit managed to escape from his nemesis, Br’er Fox, by persuading the fox to throw him into a briar patch rather than cook him. The wily rabbit easily freed himself from the thickets, chiding the fox, “I was bred and born in the briar patch.” We saw the child care business as our briar patch—a niche that is inhospitable to competitors but quite comfortable to those who understand its particularities. Our business model allowed us to methodically turn the following industry weaknesses into company strengths: By targeting an entirely different type of customer—not the parent, but the employer—Bright Horizons has succeeded in carving out a lucrative niche in an inhospitable industry. No Barriers to Entry. In theory, anyone can hang out a shingle and open a child care center. But our relationships with employers create formidable entry barriers for our competitors. When we operate a program at the offices of Charles Schwab or Bristol-Myers Squibb or on the campus of George Washington University, with the client’s financial and marketing support, it’s virtually impossible for anyone else to compete at that site. And each site provides a compelling model to demonstrate our success to potential new clients. This creates a virtuous circle: great clients build great facilities and drive innovation. We then have models that no other child care service can match. Because our competitors have no examples of operational, state-of-the-art, client-supported programs, they have trouble persuading a corporate client to take a chance on their untested program. Our current clients are also some of our best marketers. Proud CEOs often take their boards to visit their on-site child development centers, thus promoting our services to the other board members, many of whom run companies themselves. Chronically Low Margins. The child care industry has low margins—and always will—but our model emphasizes not margins but returns to invested capital. Because corporations invest a lot of their own capital in our child care centers, minimizing our own capital investment, we can achieve high returns—on average, 50 % per center. To date, our clients have invested a total of more than $ 500 million in on-site facilities, usually of our design, and they contribute about 20 % of our revenue annually. And because each new center achieves a positive cash flow in less than a year, we are able to self-fund our growth despite after-tax margins of only 3 % . This discipline has allowed us to produce returns of over 20 % per year to every class of investor. Moreover, our long sales cycle, which had been so frustrating in the early years of the company, has become an asset because it allows us to predict future revenues and earnings accurately—something investors value highly. Labor Intensity. Good child care demands well-qualified staff and high teacher-child ratios. In our view, labor is not a commodity, it is a competitive advantage—and that’s exactly how we treat it. Fortune and Working Mother have named Bright Horizons one of the best places to work—an unprecedented honor for a company in the child care field. Being known as the employer of choice in our industry has set us apart from would-be competitors. Clients want to hire us because they know they can put their trust in our staff. No Proprietary Technology. We can’t rely on patents to protect us. Nevertheless, we’ve been aggressive in working with employers to develop innovative technologies. Indeed, serving high-tech clients such as Cisco, IBM, Motorola, and EMC forces us to stay ahead of the industry technologically. Some of our centers, for example, use Web-connected cameras that allow parents to watch streaming video of their children from their computers at work. Centers send digitally scanned or photographed artwork to parents who are away on business trips, and others post menus, calendars, and student assessments electronically. We’ve developed on-line student assessment capabilities that let teachers and parents learn more about their children’s learning styles and upcoming developmental milestones. We could never have afforded to invest in these technological innovations without our clients’ support and expertise. Weak Economies of Scale. With more than 70 % of our expenditures going to teacher compensation, we have few ways to create scale economies. Yes, we can consolidate our centers’ supply purchases, but buying construction paper in bulk hardly creates significant advantages. Still, while economies of scale are hard to come by in our industry, we have gained many advantages of scale by spreading knowledge and techniques across our centers. Take our technology innovations. While we developed most of them working with a single client, we can deploy them in any center. We’ve also rolled out many other initiatives throughout our network, including a Get Well program in which mildly ill children receive special care and attention from licensed pediatric nurses on staff. We have also leveraged our reach by starting a program that allows a client to reserve space in any one of our centers in the United States or United Kingdom that is open to outside enrollment. This program helps address the child care needs of employees in small regional offices, employees traveling with their children, and employees working from home. Our scale advantage stems not from purchasing power but from our ability to innovate locally and deploy globally. Weak Consumer Brands. When it comes to their children’s education, parents don’t look for a national brand; they want a great program and are indifferent to whether it’s part of a larger network. That’s why traditional child-care chains get little value from their brands, despite expensive advertising campaigns directed toward parent brand-building. But our business model enables us to focus on a set of customers—employers—who value a partnership with a strong, trusted brand. Because of Bright Horizons’ reputation, customers routinely seek us out when they’re considering on-site care—we do a lot less cold-calling now. Our existing clients also help strengthen our brand by recommending our organization to other companies. Heavy Regulatory Oversight. Most child care companies take an adversarial stance toward licensing. By contrast, we see licensing as another way to gain a competitive advantage. Because of our focus on quality, we can meet the most stringent requirements. In fact, we avoid those states with the lowest standards for teacher-child ratios and other key measures, concentrating our growth in high-standards states where we can set ourselves apart. In addition, we work hard with child care advocates to promote the importance of NAEYC accreditation. We also give clients tools such as checklists and teacher-child interaction guides to assess quality when they visit centers, and we encourage them to bring in consultants. The more a client knows about quality child care, the more success we have. Lesson Plans for Any Industry From a business standpoint, our industry isn’t the most attractive one on earth (though we believe it’s one of the most important). But by taking a systematic approach to addressing its weaknesses, we’ve been able to grow rapidly and deliver attractive returns to investors. We think other companies can learn from our approach. In fact, more and more industries are becoming like the child care business in their competitive characteristics. Traditional barriers to entry are weakening as capital flows to new competitors and technology upsets once-stable markets. Web-based purchasing and universal access to information are eroding economies of scale. Specialized labor is in more demand now than ever. And superbrands are giving way to microbrands targeted to the tastes of communities or even individuals. In the future, good strategy will probably have a great deal to do with making strengths out of weaknesses—and finding a good briar patch to call home.

How We Built a Strong Company in a Weak Industry

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