Supplemental Educational Services can be a very, very profitable business.

The place to start this “back of the envelope” financial analysis is the individual class.

Assume “Ms. Tutor” (Ms. T), a former literacy specialist in the Chicago Public Schools (CPS), who went into private tutoring some yeas ago.  Ms. T was recently qualified to offer Supplemental Educational Services in k-12 literacy by the Illinois’ state education agency, and works with students in a middle school in need of improvement near her residence.

On the revenue side of Ms. T’s income statement, NCLB Section 1116(e)(6) sets the per pupil payment at the lesser of the amount Chicago Public Schools must set aside for SES divided by the number of children who are eligible for the service and take advantage of it, or the actual cost of the services received by the child. As a practical matter, the first number seems to dominate.

In the 2005-6 School Year Ms. T could have charged as much as $1,866.94 per pupil, but decided to set her rates in line with the national tutoring firms - Edison’s Newton Learning, for example, at $1570.00. She signed up 10 students, so her gross revenue was $15,700. To make calculations easier, let's just call it $16,000.

On the expense side, nothing more than the cost of a few lunches with former colleagues and friends-of-friends was spent on marketing because teachers at the neighborhood school referred students to Ms. T.  Tutoring sessions were held in a classroom at that same school. Three other providers also work on site, so she split the $2200 annual facilities fee CPS charged - primarily to underwrite building security. Her share was $550.

For curriculum, Ms. T decided to use a combination of Little Books and Peer Assisted Learning Strategies, both of which passed What Works Clearinghouse review. The first consisted of 26 reproducible books for a total cost of $12.00.  The second included three grade level manuals and reproducible materials for $35.00 per grade, or $105.  Reproducing 11 sets of student materials at 125 pages and 10 cents a page amounts to $138.  Miscellaneous paper and office products and the occasional prize or treat amount to $30 per student, or $300.  Ms. T’s direct costs total $1,105. For simplicity, lets call it $1100.

Ms. T plans to keep the $14,900 surplus for herself, but to get an idea of the gross margin on her SES business, we need to determine what part of that is attributable to her teaching, as opposed to her entrepreneurial initiative.  $30.00 per hour seems to be a rate at which Ms. T could attract qualified personnel. At 80 hours of class time and, just to be safe, another 40 for administration - and perhaps a $1000 end-of-term bonus to incentivize performance, Ms. T’s labor costs run around $4000.

It’s almost certain that there are other direct costs attributable to Ms. T’s home-based SES business, such as employment-related taxes if she were to employ someone to do the tutoring, but none of these are likely to have a material impact on her financial position. The bottom line is that on around $16,000 of gross revenues, Ms. T pockets around $10,000 (before income taxes) for organizing the business. That’s a gross margin of over 60 percent.

One way to think about the surplus Ms. T is taking to the bank is the premium the nation is willing to pay to make educationally significant progress on the state assessments that students could not achieve in schools in need of improvement. In effect, society, acting through the Congress, is telling SES providers - "if you can get kids to proficiency, you can keep whatever you haven't spent on that task." And, under NCLB Section 1116(e)(4)(D), "if you fail to contribute to increasing the academic proficiency of students for 2 consecutive years, that opportunity will ber taken away from you, because you will be removed from the SES program."

Since Ms. T has the same set of qualifications that every SES provider serving Chicago is seeking for its tutors, the chances are pretty good that her performance is comparable to the (unimpressive) academic performance of every other provider. Indeed, because she owns her own business and tutors students in her own neighborhood, it is entirely likely that her performance is at the top of that range.

But even if it is simply comparable, there are two points to ponder:

1. If Ms. T spent more of that $10,000 "surplus" on instruction, would it have a positive effect on student performance? Indeed, is it a surplus at all, or an example of taking funds that ought to be spent on the students?

2. What are Newton, Platform, Princeton Review, Huntington and the rest of the organized SES businesses doing with that surplus? And what value-added do they offer the taxpayer over Ms. T?

That’s what will be examined next.

Most of the factual data here can be gleaned from the attached documents. With them, you can do your own calculations. It's not quantum mechanics.