The capitalists are coming

Training
providers represent one of the last few cottage industries, but a shakeout in
the form of a wave of consolidation is on the cards. Is this good news for
their customers? By Philip Whiteley

The
training industry is highly fragmented, consisting of thousands of providers,
many of them very small. This looks set to change somewhat as big business gets
wind of the big bucks being invested in training and development.

As
knowledge and skills become much more important for competitive advantage than
tangible assets, business priorities are beginning to change. Training will
increasingly figure as an investment on the balance sheet, not as a cost, and
capitalists are starting to be attracted by the returns that this investment
can generate.

The
venture capital industry is starting to plough serious money into providers.
This will lead to mergers and potentially to the emergence of huge training
companies, similar in scale to the generalist HR service providers Exult and
Capita.

Among
the venture capitalists, ECI Ventures has led the way. It funded the £9.7m
management buy-in of the Hotel & Catering Training Company in 1998. HCTC is
the principal training provider for the hospitality sector, providing
vocational training across the disciplines up to NVQ Level 4.

ECI
followed this with a multi-million pound investment in SCT, which provides
training courses to manufacturing companies in south Wales. The amount of
capital provided was undisclosed.

Growing
marketplace

Ken
Lindsay, investment executive at ECI, first became interested in the sector
because he felt it was underdeveloped. “It became clear that it was a very
sizeable sector,” he says. “It is a growing marketplace, whether Government or
privately funded.

“Training
has really come to the fore [in companies]; and the Government is committed to
pushing training. The omens are coming together.”

The
market is “crying out” for consolidation, he adds. “Why have 20 providers when
you could have three or four which could deliver all of your training needs?”

ECI
last raised capital from the money markets, around £110m, two-and-a-half years
ago but is planning to raise between £150m and £200m in the near future.
Lindsay anticipates that at least some of this will go to training companies.

The
HCTC sees the pendulum swinging firmly the way of the larger provider, and is
looking for both organic growth and acquisitions. Turnover has already leapt
from £7m to £10m in the two years of its independence.

Organic
growth

“The
whole industry is going to change,” says HCTC chief executive Nick Rowe. “We
will see some deals happening. My aspiration is to turn this into a £40m to
£50m business in four years.” This cannot be achieved by organic growth alone.

Changes
to the infrastructure will accelerate this, with the switch from Tecs to
Learning & Skills Councils from next April.

“Take
delivery across the country: at the moment we have something like 72 separate
contracts with the Tecs, which are all different, but what we are delivering is
the same.

“One
of the things we are arguing for is to be able to go to the lead Learning &
Skills Council and get a national contract.”

Above
all, training providers want a simpler system for statutory funding, and a
reduction in the proportion of grants that are withheld until completion of the
qualification.

The
few national training providers that do exist have clubbed together to form a
“Group of 10” which lobbies the Government on funding arrangements.

Tecs
often withhold 40 per cent of funding until completion of a course, which may
be two years later. Rowe is confident that LSCs will be limited to a maximum of
35 per cent paid at the end of a course, boosting cash flow and attracting more
providers.

The
Tecs hold the amount in reserve to reduce heavy drop-out of courses that might
otherwise occur.

In
place of this arrangement the Government will look to inspectors to weed out
providers who would just seek the government cash and not bother about high
drop-out rates.

There
will be more inspections from the Training and Standards Council.

“That
has already started,” notes Rowe. “Anyone drawing down public funding will have
performance rated and put on the web site. I think there will be increasing
emphasis on quality and one of the things that is going to happen in the
industry is a lot of consolidation.”

Big
is better

But
is this all good news for the training manager? The pitch that “big is better”
will not find favour with everyone. Even blue chip companies, for example, will
use lone consultants to do specialist work on the brand or with the top
management team.

This
is a different market from those attracting public funding, and even there the
better small providers should have nothing to fear from inspectors.

David
Sherlock, chief executive of the Training Standards Council, says, “Bigger is
certainly better in some important respects – if you have a number of centres
you can use the classic quality assurance technique of comparing their
performance and analysing why one does better than another.”

But
he adds, “There are also some excellent small providers and we will not do
anything to discourage them.”

Moreover,
the fragmented nature of the training provider sector reflects piecemeal
expenditure by clients, rather than a considered preference for smaller
providers.

This
attitude is changing, with major companies finally waking up to the rewards
from a higher training spend.

HR
expert Rhiannon Chapman, a former chief executive of the Industrial Society,
reckons, “I do not think you should spend money at all on recruitment, but you
should spend a fortune on training. Recruitment is expensive. You could be
getting the right people but it is costing a fortune.”

This
is borne out in practice, Rowe of the HCTC argues, “Jarvis Hotels are very
committed to training and, quite unexpectedly, one of the things they have
discovered is that recruitment costs have gone down.

“The
latest statistic shows that across hospitality, annual staff turnover is 75 per
cent, which is quite horrendous. Even if you can get someone to complete a two
year course that is nearly twice as long as normal.”

Purchasing
and provision of training is now becoming a regular, mainstream part of
business. That represents upward progress.

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