Positioning a Chain of Child Care Centres away from the Competition

Entrepreneurs wanted: Help grow an enterprise from scratch in an industry that offers no barriers to
entry, chronically low margins, massive labour 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 non-profit,
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 labour
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 “grey 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 enrolment 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, labour 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 honour 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 paediatric 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 enrolment. 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 labour is in
more demand now than ever. And super brands 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.

Q. How did the service provider built a strong company in a weak industry?

Q. What were the challenges that the company faced?