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Realising The Demographic Dividend
Realising The Demographic Dividend
Realising The Demographic Dividend
Education
www.technopak.com
a quar terly repor t by technopak | Outlook 2011
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Authors: Rajesh Gopal, Associate Vice President I rajesh.gopal@technopak.com I +91-8826028822 Kapil Gaba, Senior Consultant I kapil.gaba@technopak.com I +91-9818244907 Design & Development Bharat Kaushik Design Manager I bharat.kaushik@technopak.com I +91-9811661493 Arvind Sundriyal, Senior Designer I arvind.sundriyal@technopak.com I +91-9910493934
OVERVIEW
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03 05 07
BUSINESS MODELS
ABOUT TECHNOPAK
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Overview
The education sector in India is presently at a point of inflection. There are rapid and defining changes occurring across the various educational segments, be it K12, Higher Education or Vocational Training. The government is supporting multiple initiatives as the private investors seek to resolve issues of access and formats. This has in turn given rise to challenges around affordability and accountability which have to be dealt with in order to catch up with the gap in capacity. Key factors influencing Indias increasing education appetite are: Demographic Advantage More than 50% of the Indian population is under the age of 25, this leads to increased demand for quality higher education and a skilled workforce. Increasing Affordability High income households (income more than US$ 10,500) are expected to increase from 5mn to 14mn by 2018 resulting in higher affordability. This will propel awareness towards education as a priority and an essential tool for career growth.
Exhibit 1:
Knowledge led Economy India, once considered an agrarian economy, is now dominated by the services sector. The share of services has increased from 31% in 1991 to 55% in 2010. This increase in the services sector has led to a steady increase in the demand for an educated skilled workforce. Increased Participation of Women in the Workforce A large young working population with a median age of 25 years, nuclear families in urban areas, along with emerging job opportunities in the services sector driven economy have led to an increase in the number of working women in India. The population of working women is estimated to be more than 25% by 2015. New Employment Avenues Globalization has led to the increase in newer employment avenues. Industries such as outsourcing (KPO, LPO), legal, retail, aviation, animation, healthcare, supply chain & logistics, have increased employment opportunities, and the demand for highly skilled manpower.
Since liberalization, capacity in the education sector has largely been expanded in the higher education and K12 segments. The result is marginally improved literacy levels though the exercise has not made a significant impact on employability. If the current momentum continues, a shift in population towards higher level of education will soon be experienced. Some impetus from the government and increased private sector participation can take it further, but still the population capable of contributing at the knowledge level will stay relatively low. Therefore a large part of the employable and willing population is likely to be engaged in skill intensive areas. And it will require breakthrough involvement by the government as well as the private sector to ensure that these masses are skilled to meet the requirements of the employing sectors. The Union budget 2011 has allocated Rs. 52,000 cr. for the education sector which is 24% more than the previous year. In addition the government has been fairly liberal in allowing private sector to invest in the sector within the existing regulatory framework. All this has made the education sector one of the most lucrative opportunities. While the emphasis is on all the segments of the education i.e. K12, higher education and ancillary services, vocational training looks the most promising as it develops. The biggest challenge for the for-profit vocational education and training sector is to make Indian youth employable and productive. In this inaugural issue of Technopaks Education Outlook, we focus on Vocational Education and Training which will see tremendous growth in the next few years, provided the participants in the sector are able to address a few challenges that are documented here.
2011 Level of Education Illiterate Literate Literate but no formal schooling School - Up to 5th standard School - Up to 10th standard School - Up to 12th standard Some college but not graduate Gradute Post Graduate Total %age 35% 65% 2% 33% 15% 7% 2% 5% 1% 100% Est. population (mn.) 424 787 24 399 182 85 24 61 12 1210 33% 67% 2% 35% 15% 7% 2% 5% 1%
2015 Normal Course %age Est. population (mn.) 425 846 25 440 190 90 25 63 13 1271
2015 Accelerated Course %age 33% 67% 2% 33% 16% 8% 2% 6% 1% 100% Est. population (mn.) 415 856 22 421 207 98 22 72 14 1271
100%
While schooling and higher education have their own challenges to deal with, the trickiest challenge lies in vocationally equipping the masses realistic estimates peg that number at 60 million people over the next 5 years. The magnitude of the challenge is well documented and accepted. The government has focused its attention and has announced a slew of measures in this context which include setting up ITIs, inviting private participation through their adoption scheme and through ITCs, the Modular Employability Scheme, National Rural Livelihood Mission, etc. However, most of these have not yielded expected results.
VeT Market Size Private Market Size, US$ bn (2010) Government Spend, US$ bn No. of Institutions Growth Rate (Private Market) Regulation 1.9 3.2 ~11,000 public, ~4,000 private 18% Not Regulated
A quick look at the manpower requirement across key sectors over the next decade would help us put the challenge in perspective:
Chapter 1
Exhibit 3:
80% of the skill development market is at basic level Proportion and number of skilled workforce requirement in key industries between FY2008 -22E
Proportion (%) Industry/Service Auto and auto Components Banking, financial services and insurance Building, construction and real state Chemicals and pharmaceuticals Education and skill Development Electronics and IT software Food processing Furniture and Furnishings Gems and Jewellery IT and ITES Industry leather Media and entertainment Organized retail Others (including healthcare) Textiles and spinning Tourism Transportation, logistics, warehousing and packaging Unorganized Sector Total/ Average Annual numbers Level 1 50 20 81 23 20 20 81 80 75 89 20 52 60 86 40 20 90 63 Level 2 25 40 15 28 30 26 10 12 5 50 4 30 13 20 11 30 40 5 18 Level 3 20 30 4 45 45 50 9 7 19 40 6 45 32 15 3 20 25 3 14 Level 4 5 10 2 6 5 5 2 1 2 10 1 5 5 5 1 10 15 2 5 Level 1 17.5 0.9 39.2 0.4 1.7 0.6 7.5 2.7 3.4 4.1 0.6 8.9 10.1 3.1 7.1 8.2 91.8 207.9 13.9 Number (mn) Level 2 8.8 1.7 7.1 0.5 2.6 0.8 0.9 0.4 0.2 2.7 0.2 0.9 2.2 3.4 0.4 5.3 16.4 5.1 59.5 4 Level 3 7 1.3 1.7 0.8 3.9 1.6 0.8 0.2 0.9 2.1 0.3 1.3 5.5 2.5 0.1 3.5 10.3 3.1 46.9 3.1 Level 4 1.8 0.4 0.7 0.1 0.4 0.1 0.1 0 0.1 0.5 0 0.1 0.8 0.8 0 1.8 6.2 2 16.2 1.1 Total 35 4.3 48.7 1.9 8.7 3.2 9.3 3.4 4.6 5.3 4.6 3 17.3 16.8 3.6 17.7 41.1 102 330.5 22
Source: NSDC Skill Levels: Level 1 Non-technical, skill based; Level 2 Technical, skill based; Level 3 Academic, knowledge based; Level 4 Highly specialized, knowledge based
Exhibit 4:
15- 60 yrs 744 mn Unemployed 80 mn 90% need VeT Need Retraining 415 mn
60+mn people will need Vocational Training in next 5 years, while 400 mn need re-training Source: Technopak BoK
Chapter 2
the manual labour expected on shop floors is no match for the lure of a desk job in air-conditioned environs. The result is that the job market is flooded with barely employable graduates coming out of higher education institutes with unsatisfactory academic quality. Appreciating the importance of training: The learner seldom understands the value that the training adds to his productivity or future growth opportunities. In the near term, when he does not see his training fetching him a premium in the job market, he is not inclined to consider it. Economics of migration: Vocational training requires the learner to migrate to an industrial hub, usually away from the native place where his skills would be in demand. The economics of such a move, given the cost of living in an industrial hub, do not work out favourably. Paying for training: Historically, the training for vocational streams has been through the apprenticeship or on-the-job training method, in which the learner gets a stipend. Therefore the learner is generally averse to the idea of paying for training which will get him similar employment opportunities. In most cases, the learner comes from an economic background where he cannot afford the cost of training. Distrust: Most training organisations, especially in the private sector, are not local and therefore not known to potential trainees. Based on past experience with institutes that have made similar, empty promises of employment, the learner views even a genuine organisation with suspicion. Absence of credible, nationally known training providers does not help matters.
Recruiters Considerations:
The industry on its part has its own issues to consider: Little value or premium for trained person: The industry does not differentiate whether an employee has undergone formal training or learned skills on the job. Superior knowledge of tools, techniques, or better productivity do not fetch a premium. Due to lack of financial incentive after training, the individual does not consider formal training. Concerns regarding relevance of prior training: The skills that the person comes with may not be a perfect match with the organisations requirements. In such a scenario, the organisation has to invest time in teaching him the necessary skills. Just-in-time hiring: Most organisations do not maintain a bench of vocationally trained manpower. The hiring is done just in time and usually on a contract basis. The industry therefore does not have much incentive to invest in prior training. Crunched for time, the knee jerk reaction to hire anyone whether trained or not is the only recourse. In-house training set-ups: Given the insufficient infrastructure for industry-relevant vocational training, most organisations had invested in their in-house training set-ups on a need basis. So any gaps in training are met in-house. Importing manpower: For immediate or critical requirements, organisations are open to importing experienced manpower from countries like China and the Gulf. Even though this manpower costs more, it saves organisations the long gestation period and commitment required to train manpower within the country.
The third party in the equation, training companies are looking for their own answers to: Trainers: Lack of quality trainers, which is the biggest cost in a training set-up, directly impacts the bottomline. A person who is trained enough to do the job himself, chooses to go for the occupation, for want of better prospects, rather than train. Price points: A majority of students opting for vocational jobs come from the economically lower strata. Also, the jobs are of a routine nature and therefore are not economically attractive for a fresh pass-out. This stretches the possibility of recovering the costs involved in hiring trainers, developing content, travel and logistics of trainers and other administrative expenses, leave alone charging a premium. Capex: Setting up any educational institute is capital intensive and it is more so in case of practice oriented training. The lower price-points that the training company can command compound the problem, increasing the break-even period. Industry linkage: A lot of investment can be avoided if the training companies and the industry can collaborate to provide apprenticeship to students. While efforts to facilitate this are being made at various levels, there is still a long way to go before this arrangement becomes a norm. The reason that the three spokes of the wheel do not meet is the lack of an ecosystem where vocational training is intrinsic to the workforce development of the country.
In resolving this challenge there are some systemic issues that each of the participants in the sector viz. the student, the recruiter and trainer faces:
Students considerations:
The debate starts as a result of unwillingness of students and their parents to consider blue-collared vocations for employment. There are several factors leading up to the situation: Cultural bias: Culturally, there has been a deeprooted bias against manual labour in favour of work that requires intellectual expertise. In modern times, 5
Chapter 3
Exhibit 6:
Present training capacity (lakhs) 12.00 0.17 0.15 0.02 0.06 5.48 17.50 19.81 19.60 14.00
Projected number of trained persons by 2022 1500 1000 50 100 300 200 100 200 500 100
Ministry extends 75% support to companies to build training infrastructure and placement facilities for rural youth.
Regulatory Structure
Government of India
PMO
Cabinet
Ministry of HRD Department of School Education & Literacy Department of Higher Education
Ministry of Labour Directorate General of Employment & Training Skill Development Initiative Scheme Modular Employability Scheme
Ministry of Finance National Skill Development Corporation National Council for Vocational Training
ITIs/ITCs
Chapter 4
but also the operational micro-management required in running ones own setup. This also facilitates rapid scaling-up, which is the key to participating in this business. The decision also depends on whether the business is looking to establish itself closer to the industrial hub where economies of scale could be realised but would pose a challenge in recruiting the learner, versus going to the learner through a spread-out model, in which case it would be easier to reach the masses but would be an uphill task to place them and get them to migrate. Operating Expenditure: Education is known to be a negative working capital business, primarily because the student pays before the education provider incurs expenditure on training him. In this case though, a fair amount of pre-operative work is required before the training cycle sets in. Also, given the low price-points for this training, the default on training fee is unaffordable. Even if the training is funded or subsidised by the Government in certain cases, the institute will need a robust process to maintain the funds flow.
that work which requires manual skills is ordinary. This will need to be followed by counselling the student about the utility of the training for a prosperous and productive future. Even in semi-urban areas of the country, we can see people waiting for years in the hope of getting a desk job. In such circumstances, it is essential for the business to find a model which inspires credibility and trust in what the institute is delivering. Connect with the Industry: In practice-oriented vocational training, the industry connect is the strongest pillar. It can help not just save capital expenditure in practical labs by working out an apprenticeship/trainee arrangement with local industry participants but can also be a good source of part-time trainers. As this culture is not so prevalent in the country, the entrepreneur looking at this area would have to be prepared to establish this connection. Trainers: To highlight the obvious, trainers are central to a training business. Sourcing a good trainer, deploying him at the required location and creating an environment which is conducive to training is the third challenge. With the traditional academic approach, it may be difficult to think of a trainer being paid more than his counterpart in the industry, but in this case, it may well be a reality. At the same time, the advantage in this stream of education is that it does not take years to create a trainer and part-time trainers sourced from the industry can also be deployed. 10
Financial:
Capital Expenditure: As an educational setup requires huge investment, this is the biggest deterrent for most entrepreneurs with great ideas. The solution can be either to lease spare capacity of existing educational institutions or to franchise the business, thereby reducing not only the investment
Operational:
Recruitment: Recruiting a student will be among the biggest initial challenges. The first task would be to break the mindset
Capacity utilisation: Education is similar to manufacturing in the sense that the capacity not utilised is sunk cost. There will be many factors which will come into play while scheduling training sessions availability of trainers especially parttimers, students working while getting trained, multiple streams and batches running in parallel, ensuring optimum utilisation between theory and practical infrastructure and the works. With scarce resources, ensuring the highest churn will be the key to operational efficiency. Content: Content for vocational training is highly contextual in the sense that it varies in every country, every industry, and every trade. Therefore, unlike other streams of education, this content cannot be easily replicated from other sources. Even if the content is taken from an existing source, a fair amount of effort and money would have to be invested in making it relevant for the desired skills in a changed scenario. Assessment: As the saying goes, The proof of the pudding is in the eating; the same way to recruit from the institute, every industry needs to know the relevance and level of skills imparted. The institute needs to devise an independent, impartial skills-assessment mechanism which accurately
reflects the skill level of the learner. Absence of a failproof mechanism here can prove to be unsuccessful in inspiring the recruiting industry, making the business unsustainable in the long run. Placements: Placements are the ultimate benchmark for an institutes success. It is debatable whether it should be the same case with higher education institutions, where the focus must be on academic excellence and rigour. But in case of vocational training, where the sole objective of its existence is to provide employability and a productive future, the relevance of placements cannot be over-emphasised. A robust and relevant placement mechanism, which succeeds in satisfying the recruiting industry as well as the student, will be the ultimate test of the business. Many innovations are taking place in order to build a successful vocational training business model. Increasingly, training companies are exploring ways to source students, train them and place them in the industry, thereby subsidising training costs through recruitment commissions. Also, gram panchayats and other locally influential organisations and NGOs are being tapped into by organisations to generate acceptability of their training.
Business Models
The diversity and the width in the field allow various different methods of operations. Unlike other businesses, this business will have three broad revenue streams: Business to Consumer (B2C): For industries which have a high aspiration value where the student would be willing to invest in his/her own education. E.g. Grooming, hospitality, healthcare, travel and tourism Business to Business (B2B): For industries with a large and urgent requirement of manpower and where the employers would be willing to pay for training rather than wait for students to wake up to the opportunity. This will also be true for industries where the student does not have the ability to pay. E.g. ITeS, retail, construction, food processing. Business to Government (B2G): Core industries which do not have a high aspiration value and the labour force employed would not have the ability to pay. E.g. Power, mining, textiles
Assumptions No. of students trained per annum (600 per quarter) Average Fee (INR) No. batches in a day No. of students at any point Area required per student (Sq. ft.) Total area required (Sq. ft.) Rent, utilities & maintenance (per sq. ft. per month) Student-trainer ratio No. of trainers Indicative P&L 2,400 18,000 2 300 80 24,000 35 01:12 25
Chapter 5
Annual revenue Expenses Salary trainers Salary - administration staff Content & course material Technology Sales & Marketing Annual rent, utilities & maintenance Consumables Training cost Placement cost Miscellaneous EBITDA EBITDA%
4,32,00,000 60,00,000 24,00,000 34,56,000 12,00,000 9,60,000 1,00,80,000 12,00,000 2,50,000 12,00,000 43,20,000 3,10,66,000 1,21,34,000 28%
Centre Financials
Vocational training is a broad area spanning multiple industries, course categories, training methodologies, operating structures and student profiles. While putting down financials of the business is a risky proposition in the absence of a detailed operating model which would vary in every single case, we shall attempt to put an indicative P&L on a base case scenario.
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Some trends are already visible and every serious player will have to subscribe to them to varying degrees in order to succeed: Services oriented trades will be more popular as they require limited investment in training set-up, are likely to experience robust demand from the industry and can be replicated easily across various centres. Trainers and Content will be the biggest differentiators. Relevance of the content and competency of the trainers in delivering the same will translate into the quality of students provided to the industry. Organisations will make attempts to use technology extensively in order to bring in consistency and optimisation of the delivery cost. Large investment of human and financial resources will be made in Train the Trainer programs. New algorithms will be developed to optimise capacity utilisation especially for businesses training for multiple industries and trades. Foreign partnerships will be the norm. A lot of western countries have a head-start and are decades ahead of us in realising the value of vocational training. We already see such partnerships being forged to get access to relevant content, assessment capability and training capability. Another factor is a positive rub-off on the brand and a possibly better perception of the institutes pedigree.
We will see key partnerships being forged from various countries including Western Europe, Ireland, Australia, USA, Britain, Switzerland, etc. Some prospects may also come in from China, Hong Kong, Taiwan and Singapore. The key factor would be relevance of the content and the experience in training thousands of students in a multi-centre model. Multi-centre network will be the way to proliferate. Most players would expand through franchising to reduce their investment as well as to take advantage of the franchisees local connections for student sourcing and placements. There may be multiple tiers and formats of the centre adopted to suit the requirement of specific markets. Also, the centres will offer trade relevant to each market therefore bringing in a certain level of heterogeneity in operations. Objective assessment will be the cornerstone of an institutes operations. While some institutions may tie-up with assessment companies of repute to do the assessments for them, there is a possibility of some institutions floating a separate assessment arm as an independent business. Strong linkages with the industry will be imperative. This will be important to ensure that the content is in keeping with industry expectation at all times. Also
placements can be assured only by working closely with the industry participants. Therefore, placement tie-ups will be formed both at national as well as local level. Alliances will also be in the Hire-Train-Place mode which will be a win-win for both the institute as well as the industry. Placements will be central to the business. The market will be very sensitive to the outcome which invariably is to get the desired job at the end of the course. The job will have to be at an appreciable premium as compared to the one the student would have gotten without the course and the qualification. There would be little scope of certificate peddling. Training for export will be a lucrative business expansion. With western countries coming under severe strain due to ageing manpower issues, countries are expected to be liberal with immigration of skilled personnel. There may be businesses set-up solely to cater to this segment. Currently, people go to a host country, get trained there and settle down. The new model may allow for people to be trained before they legally move to a foreign destination for employment. Globally valid certifications will aid such movements. Manufacturing oriented trades are investment heavy. Therefore, manufacturing oriented training set-ups will be developed as large campuses close to manufacturing hubs. 14
Technopak believes there are multiple models by which this opportunity can be exploited and it simply needs smart management of resources and partnering with the right agencies to make it successful. Some of these models focus on the short-term and can break even in less than a year, but that might be able to address only one or two industries and might not develop into a billion-dollar business. While there are a few business models which can achieve large-scale numbers, those would have a higher gestation period.
The question is: How many entrepreneurs are willing to capitalise on the opportunity and wait for three years to break even? There are countless thoughts and ideas; its time to translate them into action!
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About Technopak
Indias leading management consulting firm with more than 20 years of experience in working with organizations across consumer goods and services. Founded on the principle of concept to commissioning, we partner our clients to identify their maximum-value opportunities, provide solutions to their key challenges and help them create a robust and high growth business models. We have the ability to be the strategic advisors with customized solution during the ideation phase, implementation guide through start-up and a trusted advisor overall. Drawing from the extensive experience of 200+ professionals, Technopak focuses on six major divisions, which are Fashion & Textile, Retail & Consumer Goods, Healthcare, Education, Food & Agriculture and Leisure & Tourism.
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For further dialogue, please contact: Associate Vice President, Education rajesh.gopal@technopak.com T: +91-8826028822
Rajesh Gopal
Kapil Gaba
www.technopak.com