Business Today

The skills opportunity

Goal: To train 500 million Indians over the next 10 years. Possible now: Less than five million a year. But, as this exclusive McKinsey article argues, the gap is an opportunity for private entrepreneurs to make India a factory for skilled talent.

Ramesh Mangaleswaran and Ramya Venkataraman         Print Edition: June 27, 2010

Skill development is not an end in itself but a means to employment or to the "capability to earn". This implies that trainees will be willing to pay for courses as long as two conditions are met: one, they know, before enrollment, that there will be a positive "return" on their personal investment; and two, they can manage near term cash flows, including the opportunity cost of time.

This can make skill development a viable business opportunity as long as the provider can "get the model right". Indeed, on doing the math, one realises that the training gap of 450 million is one that the government cannot meet by itself. However, it can facilitate the creation of a fertile ecosystem that encourages private participation.

Building a Skills Development Business
Air hostess training for graduates. IT and BPO skills training. Hospitality training as a diploma for class XII graduates. It is difficult to think of for-profit vocational training providers who look beyond popular categories such as these.

However, not surprisingly, majority of the 500 million vocational training opportunities are outside these "clearly attractive" categories. As a result, most of the current private forprofit plays are small in scale (with IT training being an exception) and therefore uninteresting for large business houses and ambitious entrepreneurs. Offering skills that are less established or that cater to socio-economically disadvantaged trainees has been the forte of government initiatives, reputed non-profits, and to some extent, industry associations.

Counter to this trend, we believe that the best opportunities to build large scale businesses are in what we call the "second" or "relatively high risk" segment (see: Whom to Support?). This group is defined by two characteristics: one, skill groups that still have largely organised employers but where differentiation in skill level is not as clearly understood (for example, lowerend service sector skills, construction skills, basic manufacturing skills such as welding and forming), and two, trainees who are relatively economically disadvantaged and typically range from "class 8 drop-out" to "class 12 pass".

Our economic analysis of this segment shows that by getting the model right, an entrepreneur could build a business at scale (around 5,00,000 to a million graduates a year) and also take in an internal rate of return (IRR) of 25-30 per cent, which is dramatically higher than the 10-12 per cent notional IRR in the current non-profit or small for-profit plays. Players who would like to build such a large-scale skill development business will need to consider seven imperatives— three of which are on the revenue side, three on the cost side and one is organisation-related.

One, ensure tight linkages to potential employers. Skill development businesses must ensure employer involvement in making decisions about which skills to include in the training programme, curriculum design, faculty training and assessment of trainees. Employers have a natural incentive to contribute since they value highquality trained manpower; moreover, this linkage also significantly improves trainee placements.

Strong employer linkage is the most common feature of best-practice vocational systems worldwide. In Switzerland and Ireland, for instance, employers help design programmes, set curricula, provide faculty and on-thejob training, and sometimes even support school operations.

Some businesses with large manpower requirements may also choose to "spin off" a skill development or training company, creating a winwin where trainees are attracted by their being an "anchor" recruiter and the business receives priority access to a quality talent pool.

Two, establish and communicate extensively a quality assurance mechanism that is well- recognised by the industry and eventually by potential trainees, therefore enabling them to sign up for courses that guarantee employment.

Three, leverage a dual-pay mode that collects revenue not only from the trainee, but also from the recruiter, who pays a fee for recruiting a high quality trainee. Successful institutes may also create support mechanisms to help the trainee pay fees; for example, through microfinancing or bank tie-ups.

Four, take a "lean" approach to course design, focussing strictly on what is directly linked to greater employability. We find that several courses of six to eight months duration can be optimised to four to five months with no loss of employability. Fully utilising available class time, standardising delivery methods and leveraging industry apprenticeships for part of the training (that come at "no classroom cost" to the institute) are some levers that can significantly bring down the real cost of the course and the opportunity cost of the trainee's time.

Five, innovate on the faculty model; for example, using a "hub-andspoke" model with expert high-cost faculty at hubs and low-cost facilitators at spokes, supported through strong processes and technology. Modularising the programme, consolidating student batches and running train-the-trainer programmes also help to bring down long-term faculty costs.

Six, drive significant reduction in physical infrastructure costs (we found at least 50 per cent reduction potential in several existing models) by using existing private or government infrastructure, "going closer" to the trainee through a large number of spoke locations (this also increases trainee access significantly), leveraging technology extensively, ensuring multiple shifts and making optimal decisions between owning and renting.

Seven, pull in the right partners with expertise in standards, curricula, placements and so on, especially when trying to ramp up rapidly. These seven imperatives can have three dramatic effects: bring down the cost of the course to 30-50 per cent of current levels (see Cutting Costs); reduce the "breakeven" for the trainee from nine-to-12 months to three-to-four months through both higher income levels and lower fees; and enable access to a much larger number of trainees. These effects, in turn, will translate to a large scale business with IRR in the range of 25-30 per cent, making it a worthwhile opportunity.

The Government Imperative
At the same time, India's skill development needs cannot be addressed by the private sector alone. For the "clearly attractive" segment that is served by private players already, government intervention may not be essential. However, for the second or "relatively high risk" segment that we have been focussing on (and which forms a large percentage of the country's needs), the right form of government participation can play a significant role in supporting and accelerating high quality and large scale private plays.

As with the private sector, we also see seven imperatives for the government: the first three relate to making private plays more viable and the last four suggest putting in place enabling mechanisms that can indirectly allow higher quality players to succeed.

One, provide targeted support to providers, based on "skill type", to ensure sustainable IRRs even in the more difficult skill groups. This support could include access to existing infrastructure at lower rates, very limited upfront grants, soft loans, loan guarantees and tax breaks.

Two, establish well-defined voucher and educational loan schemes for trainees, for use across a range of accredited private institutes. Three, run special efforts to foster skill development and bring in private providers even in the "third" category of largely informal sectors and skill groups, such as housemaids, drivers, plumbers etc.

The government's focus here should be on creating intermediaries or "virtual organised employers," potentially by enhancing the current employment exchanges significantly, building awareness among retail employers about gauging skill levels in these sectors, and, in the long run, tracking individual skill levels through mechanisms such as smart cards.

Four, create a world class labour market information system tightly linked to the employment exchanges of the government. This will play a key role in providing all stakeholders— trainees, providers and employers— with relevant information: location and needs of trainee groups, location and needs of employers, providers and their track record.

Five, establish a robust qualifications and accreditation framework that is managed by an independent nodal body. This nodal body should be at arms length from all delivery entities in the government and should have both an integrated qualifications framework and outcome-based metrics to regularly assess providers. This arrangement will provide private players with the flexibility to establish standards based on market needs, while allowing the accreditation framework to be used for providing government support either directly or through student vouchers and loans.

For example, New Zealand's Quality Control Association assesses both providers and trainees using a quality assurance framework, including 18,000 competency-based standards developed along with industry associations. UK, Brazil, Switzerland and Australia have independent coordinating bodies with a key role in quality assurance.

Six, invest significantly in central faculty development. Quality faculty are in short supply and expensive; filling in this gap will benefit businesses immensely. A government-sponsored faculty development engine should be created in public-private partnership mode, well-aligned with priority sectors, focussed on both generic training ability and skill-specific add-ons, and with a tiered approach to developing expert versus generalist faculty.

Seven, make vocational education and training more "mainstream" by deepening and formalising tracks with clear linkages to secondary and tertiary education and allowing students more flexibility to enter and exit vocational and academic tracks. For example, in Germany, Denmark and Switzerland, vocational education is a formal track with well-defined models for movement across upper secondary and vocational education.

Skill development has the potential to lift large parts of our population out of poverty and also make India a global factory for skilled manpower. Interestingly, in addition to being a national priority, it also presents an opportunity for private participation by business houses and entrepreneurs. Targeted government support can significantly accelerate the game.

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