DOING WELL WHILE DOING GOOD
The business of education
Our purpose and position
Congo American LC is a for-profit company. Our business purpose is to return profits to our shareholders while providing valuable services to our customers and contributing to the development of Congolese society.
Our model is to operate high-quality, cost-effective educational programs at a significant scale and earn a fair profit margin of 15% - 20% on the gross revenues.
Our position the DRC market is as the first American-owned and operated private education services company. We are the quality leader, the preferred provider with a premium reputation. We aspire to have products for all segments of the market.
Education as a business
Education in developing countries can be a very profitable business. Damelin in South Africa and Wizard English in Brazil are a couple of good examples. Both started as "mom & pop" education operations and over the years have grown into extremely valuable businesses.
That is our intent for Congo American and the Accel brand of schools, starting with American Language Institute and American Technical Institute. (Read more about their structural relationships here.)
Our plan for establishing a lasting education business in DRC is as follows:
Establish a modestly profitable operation to prove that education can be a real business in DRC. Create a base of practical support and begin establishing a reputation in the market.
Pursue steady growth through expanding our proven concepts and prudently introducing new ones.
Find additional pockets of profitability by deploying our administrative expertise and infrastructure into partnerships and school management contracts with carefully selected organizations.
Become a value-added aggregator of existing private schools in the country, putting the best schools under a prestigious national brand, optimizing quality and cost-efficiency through economies of scale and shared expertise.
How it's going so far
During the first five quarters of academic operations, we have learned how to deliver a much better product while cutting costs in half. The following chart illustrates:
What follows on this page is the story behind the first five quarters of academic operations and an explanation of how we are cutting costs to achieve profitability at a lower student count than originally projected. Continuous reference is made to the expense & income chart above.
About the income line
Our Congolese associates and advisors expressed high expectations for early enrollment because we are the only English language center in the country that features American teachers in the classroom. We will surely meet their enrollment expectations, but it didn't happen as quickly as we Americans thought our Congolese friends were saying it would happen. The two cultures have different perceptions and expressions of time.
Acceptance of new institutions in Congo is hindered by a high level of skepticism based on the prevalence of phony education providers. It takes time to establish a trustworthy reputation, built by personal experience and spread by word of mouth.
Other factors limiting our early stage enrollment growth included difficulties related to our location, the unappealing nature of our initial curriculum, and the holdover misperception of our competitor as a gateway to connections with Americans.
The jump in enrollment in Q3 of 2018 resulted from three factors:
The change to the new National Geographic curriculum
Increased advertising announcing the new curriculum
A seasonal influx of high school students taking classes during the school break
The small dip in Q4 of 2018 reflects the resumption of the regular school year for the high school students and reduced availability of funding for marketing.
In future quarters, we expect steady, moderate growth. Our clients are telling their friends about our curriculum and our new convenient location. We are starting to enroll many students who are turned off by the troubles being experienced by our competitor. Depending on availability of funding, we will also have an effective marketing presence on Facebook. In response to heavy demand from our clientele, we also intend to introduce a TOEFL preparation course during Q1 2019.
To see how we covered the expenses that were greater than our income, please see the financing page.
The cost side of the equation
Some of the expenses shown in the chart above were paid with cash from investors, some with cash from tuition payments, some with borrowed money, and some were compensated in shares of the company. See the financing page for more details.
As the expense chart above indicates, balancing income with revenues requires not just a modest increase in enrollment, but also further cost cutting in the expense categories.
The following sections describe our approach in each category of expense. For a quick overview, focus on the summary bullet points and come back later for the details.
This is comprised of the work performed to start up all aspects of pedagogy, academic administration and business processes.
This phase has concluded.
Details: At its height, there were as many as seven Americans in the country working on this process. Their services were mostly paid in shares, but cash expenditures for their travel, lodging and operating expenses also added up.
Local instruction costs
This category includes our Congolese teachers and academic administration -- our largest expense category. It is also the most important aspect of our product offering. A great curriculum and the presence of Americans can't carry the company if the day-to-day teaching in the classroom is dull, negative or inept.
We geared up for more capacity than proved necessary, both in teachers and supervisors.
We have cut this expense by 78% (fourth quarter year-over-year comparison) and are cutting a little more in Q1 2019.
The ratio of local instruction costs to income went from 170% down to 36% (fourth quarter year-over-year comparison)
Teaching staff has agreed to further reduce that ratio to 27% for 2019.
Background: In start-up mode, we hired more teachers than we needed. We also had an unsustainable HR model, offering salaries and benefits that the market would not support. Some of the people we hired were great teachers; the best ones are still with us. But with others, working for "an American company" (assumed to have limitless resources) merely fed a sense of entitlement. The country's outdated labor laws, combined with a corruptible enforcement system, make it very difficult for an employer to defeat an employee's expectation of a long-term paycheck regardless of the financial state of the business or quality of the employee's performance.
Solution: When it was clear we did not need and could not afford such large teaching expenditures, we started cutting back. It was an intense period of negotiation but we reached a settlement with almost all of the teachers in March 2018. On average, they agreed to take slightly more than half of their compensation in the form or shares and debt. Two of the original fourteen got attorneys and we have set up payment plans separately with them.
To keep the problem from recurring, we reformed our system. Since April 2018, our teachers have been on short-term contracts to teach specific courses for one "session" (quarter) at a time. They understand that if the institute serves its students well, more students will come and we will need more teachers. They know the contracts for future sessions will go to the teachers whose students progress well and give positive feedback on quality control surveys.
As a result, we achieved a year-over-year reduction of 78% in our costs of local instruction, even as student numbers increased.
Viewed another way, in our first quarter (Q4 '17), local instruction costs totaled 170% of tuition income. When we began the cost-cutting campaign, our target was to reduce that ratio to less than 40%. In fact, we brought it down to 36% in Q4 '18.
Going forward: We have a little more belt-tightening to do. Our teachers know that in 2019, the total amount available for compensating local teachers and academic admin will be contractually limited to no more than 27% of tuition revenues actually received from students. This motivates them to (a) attract more students, (b) minimize bureaucratic overhead, and (c) appreciate the value of larger classes, with a target average class size of 17 - 20.
This percentage-based approach to compensation is key to our ability to achieve our goal of operational break-even in early 2019. Our teachers are dedicated to the organization's long-term success because it is a good job for them and most of them are shareholders and creditors of the company. They understand that once we are financially stable and have started paying back lenders and investors, the percentage available for teacher compensation can go back up to around 36% of income from tuition.
It is unfortunate that the market doesn't value teachers more highly. Under our new budget, a teacher who works full time will make about $1,150 per month. When our financial situation improves, that will go up to over $1,600/month. Calculated on an hourly rate, we are well below what our competitor CALI pays. Despite this disparity, our teachers tend to stay with us because it is a very competitive job market, our working conditions and institutional prospects are better, and because CALI limits teachers to a maximum of 20 hours per week.
This includes all aspects of renting, improving, maintaining and operating classrooms, offices and expatriate lodging. It is our second biggest cost center.
Our original location was in the wrong part of the city and was bigger than we needed.
We were paying 81% of our tuition income for facilities expenses (rent, operations & maintenance)
Our new facility opening Q2 2019 will provide a much better location for attracting new students
The new plan will achieve facilities costs totaling no more than 23% of income.
Background: We started our adult English language training center, American Language Institute, in a hotel and office complex in a densely populated quasi-industrial part of Kinshasa. The compound is on a side-street 250 meters from the main national highway. The property includes a hotel building, an additional office building with a large meeting space, good space for parking and bare ground for future expansion. The hotel building has rooms for classes, offices and expat apartments.
The buildings have many issues but the landlord agreed to let us deduct the costs of repairs and upgrades from the rent. We negotiated a long-term lease with a right to purchase. We paid below what a typical international NGO would have paid for the site. We got much more space than we could have rented for the same price in an area closer to the business center of Kinshasa.
Initial renovations consumed the first half of 2017. During that time, we operated part of the facility as a hotel and restaurant but the income didn't come close to covering our lease costs. In July 2017 we got serious about making it into an education facility and had it ready to initiate ALI classes in early October.
We knew the location was distant from the more affluent parts of the city, but our Congolese partners said people in all parts of Kinshasa want to learn English. In fact our competition, CALI, has a satellite campus in a municipal library just a few blocks away. We believed students would overlook the inconvenience of the location because of our unique appeal as an American-run English center.
Those assumptions were correct but only to a point. The site is limiting our growth. That's why we have found a new site, which is perfectly located to advance our growth. The significance of location is discussed elsewhere on this website.
Location issues aside, the old facility proved to be more than we needed and it was costing too much. The expense for rent, repairs, maintenance and building operations consumed 81% of our tuition income. Our new financial model targets that ratio to be below 25%. We have learned that such arrangements are possible with the right partners and patient negotiation.
Solution: We notified the landlord we cannot continue at the complex and are negotiating with them for a termination to the lease. We intend to stay in the old place only for Q1 2019, and then move to the facility highlighted on the location page.
Going forward: We have negotiated rent at the new location to be calculated at 15% of tuition revenues. With 300 students, that works out to less than $3,000 per month. At the new facility, we will rent only what we need, yet there is room to expand into additional under-used space. The smaller space will require smaller expenditures on maintenance and operations.
Unlike the former site, the new facility does not include housing for American volunteers. But even adding a $2,000 monthly budget for off-site apartments, the total cost for facility rental is $5,000 a month, less than half of what we have been experiencing. Add $1,500 monthly for operations and maintenance at the new classroom site, and costs total $6,500 monthly ($20,000 quarterly), a ratio of 23% of our tuition income.
Costs of expatriate staff
The most important role of our American staff is to rotate through the English classes, giving our students a couple of hours each week to interact directly with the American accent. This, together with the National Geographic curriculum, is our unique value proposition for the Kinshasa English language training market.
Americans also have played important parts in developing academic administration, business processes, training and mentoring of office staff, and creating and managing marketing. It is our objective to train Congolese counterparts to eventually fulfill these support functions.
Expat staff was compensated $382,000 for services from August 2017 to December 2018.
97% of that compensation was paid in the form of shares in the company, so it didn't affect our scarce supply of cash.
The practice of compensating expats (in shares or cash) was phased out in Q4 2018. Until financial performance improves, all Americans will be volunteers.
This is a reduction of 100% in this major cost area.
Even if they don't receive compensation, expats generate costs for travel, visas, lodging, etc. We have streamlined our program to require half as many Americans to deliver the same classroom exposure to our students and admin support to the company. The non-services costs of expats will thus be reduced from 24% of tuition revenues (2017 - 2018) to 9% in 2019 (projected).
The marketing page explains our approach in this area. After an initial push, our marketing spend has settled in at around 7% of tuition income. Our budget for 2019 keeps marketing at that same ratio.
Costs of local admin staff
This cost center pays for our very dedicated administrative staff, including finance, bookkeeping, registration & academic records, sales, facilities, HR and legal. They positively and ethically navigate the treacherous waters of Congolese business culture while trying to meet American business expectations.
Admin staff costs were cut from 57% of income to 31% (fourth-quarter year-over-year comparison).
For 2019, the admin staff has committed to additional reductions.
As with the teaching side of the business, admin was overstaffed at first. But many of the positions were temporary internships so the first rounds of cuts weren't as difficult as with the teachers (described above).
More recently, though, deeper cuts were necessary to start transitioning to our break-even target for 2019. We had to say goodbye to some very loyal staff members because they just weren't productive under our new rigorous standards. This is very difficult; these people are our friends. Some have invested cash into the company despite their poverty. Terminating their positions is traumatic because jobs are hard to find, and losing a job that pays as little as $300 a month imposes a huge hardship when the employee is the only wage earner in his or her extended family. Still we did what had to be done.
The remaining staff is extremely dedicated. Their monthly compensation has ranged from $300 for cleaners to $1200 for senior management (when there has been cash to pay it). Often these wonderful people have kept working even when pay was reduced, or late, or had to be paid by shares or long-term debt. Sometimes they have even loaned funds to the company or each other to get through tough times.
They will have to make further sacrifices. They know their income will only increase as the company's income increases and as they meet heavier workloads not by hiring more staff but by improving their individual and collective productivity.
Additional cost factors
A few other cost-related factors are worth noting. One is historical, the other prospective:
K-12 partnership. A major component of our cost imbalance in 2018 resulted from the financially unsuccessful experience with Collège Moderne le Figuier, described more fully on the K-12 page. We were conservative with our expenditures but still the overall venture generated costs of transportation, admin, teachers, etc. that were not recompensed.
The contract with our new K-12 partners is structured to avoid those risks. The program is designed with a much lower cost profile and the agreement requires our partner organization to pre-pay significant deposits to ensure they bear the full risk of the factors within their control.
Class size. The new percentage-based budgeting approach is designed to focus the entire organization on the importance of maximizing our economic efficiency by increasing our average class size. All disciplines, especially teachers, will start to see the direct link between their personal compensation and large, happy classes of paying students.
Adams and Bienvenu (above, left) helped lead their fellow Congolese teachers in agreeing to share in the sacrifice of the startup. Tyler and Mariesa (at right) proved that Americans will volunteer their time to teach in Kinshasa.
If you have read this far, you will appreciate that it has not been an easy couple of years getting this business going. (Read why we persist here).
None of it would have been possible without the American and Congolese associates, volunteers, investors and lenders who collectively bore the costs in money, time and positive effort. Click "Financing Information" to learn more.
For all of this sacrifice and investment to bear fruit, there is more work to be done. We have achieved significant cost reductions and refinements of our academic program and business process. Hopefully the explanation above demonstrates that the additional cost reductions and operational results are within our reach.
We just need the final cash investment to make it happen. Please contact Hugh Matheson to take part in the capital campaign.
© 2019 Congo American LC