‘We are…concerned that the current policy of supplying skills and expecting businesses to utilise them…will not hold up in a shrinking economy.’
(The Innovation, Universities, Science and Skills Committee, Re-Skilling for Recovery).
In a recent comment piece, we looked at some of the ways in which the higher education sector is being mobilised to help employers during the recession. We conveyed our view from Known Unknowns that public policy tends to focus on the need to reform the supply of higher level skills, without fully understanding the nature of demand.
The most recent supply-side interventions are necessary considering the current economic climate, amounting to an acceleration of the already prioritised employer engagement agenda. However, we now move on to suggest that the biggest challenge lies in stimulating demand from businesses at a time when they are looking to rationalise their operations.
The evidence...
The weight of evidence suggests that employers are satisfying the adage that ‘training is the first to go’ when the bottom line is being squeezed.
The British Chambers of Commerce Quarterly Economic Survey for Q4 2008 suggested that intentions to invest in training fell to their lowest levels since records began in 1989, for firms in both manufacturing and services. Meanwhile, The Guardian reported at the end of January that half of large businesses (1,000+ employees) are cutting back on training during the recession.
Echoing these findings, but specifically for higher level skills, CFE’s three regional demand studies suggest that there has been a downturn in employers’ intentions to train paralleling the downturn in the economy, although other factors may also contribute. Known Unknowns (East Midlands) was in the field in September 2007, before recession fears were abound, and showed that 39% of private sector businesses (25+ employees) had undertaken higher level skills training in the past twelve months. With the recession looming, between August and September 2008, the West Midlands and Yorkshire and Humber studies found that the proportion of firms investing in higher level skills had dropped markedly to just 30%.
Graph 1 - Have you invested in higher level skills in the last 12 months?
It is more insightful still to look at what we call the ‘hard nos’: those companies that had no intention to train at higher levels in the coming twelve months. In September 2007 in the East Midlands this was 39% of the total number of businesses; a year later, this proportion was 49% in the West Midlands and 53% in Yorkshire and Humber.
Furthermore, and a possible indication of the thought processes in many organisations at this time, it appears that the cost of working with universities will be a more considerable determinant of an employer’s decision to engage with higher education. This wasn’t necessarily the case before concerns about the recession heightened. Looking at our wider demand studies chronologically [1], we can see that the importance of cost has risen with the declining economy.
Graph 2 - Average importance of cost in the decision to invest in higher level skills training, scale of 1-10.
The initiatives...
While initiatives with universities are encouraging the supply of higher level skills, little concerted effort, beyond rhetoric and encouragement, is being made to directly stimulate demand from employers for training at this level.
That said, according to The Independent, one item on the list when a group of vice chancellors met Universities Secretary John Denham was ‘innovation vouchers’. Under the scheme, which has been successful in the West Midlands, small businesses can obtain a voucher for £1,000 to spend at a university. These were an important part of the ‘Innovation Nation’ white paper anyhow, but there might be scope for the expansion of this scheme in the current climate to actively get employers engaged with their local university in one way or another.
Other ways of allaying the cost concerns mentioned above are being urged. John Denham has gently encouraged this, in the most recent grant letter to HEFCE, by asking universities to reduce their costs in-line with the VAT cuts.
Looking beyond universities, at training more broadly, there was a public rallying cry from the Confederation of British Industry (CBI), the UK Commission for Employment and Skills (UKCES), and eminent business leaders. They had a go at providing a stimulus with an open letter warning their peers to, ‘slash training at your peril’. The letter stated that:
‘Now is precisely the time to keep investing in the skills and talents of our people. It is the people we employ who will get us through. When markets are shrinking and order books falling, it is their commitment, productivity and ability to add value that will keep us competitive. Investing now in building new skills will put us in the strongest position as the economy recovers.’
It praised the £350m that is being re-directed from Train to Gain to support small businesses, although this is unlikely to impact higher level skills as universities deliver only 4% of training under Train to Gain. Meanwhile, Cogent, the Sector Skills Council for science based industries, is championing another initiative by offering a £50m Training Fund to employers.
One further suggestion came from the Chartered Institute of Management, who called for the Government to tackle the recession by offering tax relief to businesses that provide training opportunities for staff.
The benefits...
’Businesses that don’t invest in talent are two and a half times more likely to fail, whereas those that carry on training will recover more quickly.’ (John Denham, speech to the CBI on 24th October).
In order to stimulate demand, the benefits to employers of higher level skills training need to be clear, proven, and lasting. When investment decisions are scrutinised more extensively than ever, employers need to be able to invest in higher level skills with confidence. This, however, is hard to instil when the direct bottom-line benefits are not always clear or immediate. So, where might the benefits lie in a recession?
Our regional demand research has found that, resoundingly, 72% of employers believe that higher level skills have made a positive impact on their businesses. The chart below shows that staff motivation and skill levels were the areas where they had the most impact. The latter is of particular relevance in recession as it enables workers to do their job more effectively and undertake additional or new job roles, according to Beyond Known Unknowns.
Graph 3 - Impact of training
Further suggestions of positive impacts are on productivity and profitability. Anecdotally, in Beyond Known Unknowns, employers suggested that investment in higher level skills enabled them to charge more for their services, diversify into new markets, and be more competitive.
Attempting to counter the instinctive cuts in training budgets, the Cranfield School of Management insists that companies should train their way out of the recession, stating that cuts are a, ‘false economy’.
However, back to the numbers, links between training and productivity, while apparent, are uncertain and hard to demonstrate in cold, hard figures. But there is the suggestion of a ‘substantial association’ between training and firm survival - a key concern when, according to the Federation of Small Businesses, 50 such companies are closing each day. John Denham’s quote above was derived from the Collier et al. study which found that 27% of the non-training firms under study closed between 1998-2004, compared with 11% of training firms. However, the research brief, ‘Training and business survival during recession’ draws together numerous sources to suggest that such links are ambiguous.
It has also been suggested, led by NESTA, that innovation and entrepreneurship are other ways out of recessions which, according to Josef Schumpeter are, ‘a cold shower for the economic system’. If such a strategy is pursued, at either the micro- or macro-economic level, then higher level skills are imperative. The Economic & Social Research Council said that, ‘the key to genuine improvements in innovation lay through the encouragement of more skills training among employees’, and a Department of Trade and Industry (now BERR) report from 2005 shows that higher level skills, particularly those in leadership and management, act as drivers of innovation.
The future...
John Denham has insisted that, ‘we know that companies that carry on investing in training and staff do better when the economy starts to pick up’, and Peter Mandelson is urging business investment in skills, ‘to ensure that they are well placed to take advantage of the opportunities when global economic conditions improve.’
The UKCES also suggests that universities have a role to play now in preparing for the future. At the macroeconomic level, CEO Chris Humphries has urged investment in skills today that match the future skills needs of the UK, if we are to avoid ‘mistakes’ made in the two previous recessions. These skills needs, as suggested in ‘Working Futures’, are predominantly at ‘higher levels’ and occupational structures will continue to change in this manner, despite the recession.
Considering that, these forward-thinking sentiments are indeed justified, and higher level skills will help companies to adapt to the new marketplace beyond the recession. However, reverting to the microeconomic level, future-gazing does not chime with employers at a time when every day brings new short-term survival challenges.
Beyond Known Unknowns asserted that, ‘investment decisions are driven by rational strategies’. And the question has to be posed as to whether or not, when short- to medium-term strategies are under review amidst economic uncertainty, such decisions are rational when employers are ambiguous as to the benefits. Economic rationality is hard to argue when the benefits are hard to quantify - employers will be grappling with this as we speak.
Conclusion...
In the publication of Known Unknowns, we highlighted our view that public policy tends to focus on the need to reform the supply of higher level skills. We asserted that this needs to be informed by a more sophisticated understanding of the extent and the nature of the demand. This is possibly exacerbated in the current environment, which presents a different picture from even just twelve months ago.
While the supply-side is in need of capacity building and enhancement to be more responsive to employers, this work is effectively in vain unless demand can be stimulated among employers. Surely a ‘build it and they will come’ approach will not suffice and, concluding with the cross-party committee with whom we began, the onus should not be entirely on universities:
‘...increasing employer demand is not solely the task of the HE sector but requires greater commitment from employer organisations as well, as has been acknowledged by the CBI.’ (Innovation, Universities, Science and Skills Committee, Re-skilling for recovery).
Furthermore, from a policy perspective, might it be more productive to focus on the demand-side in the short-term? Considering that the HE sector is often accused of being cumbersome and slow-moving, whereas industry tends to react quickly to stimuli and changes - often it is important to do so as competitiveness and survival might be at stake.
Presently, attempts to persuade employers to invest in higher level skills need to go deeper. We know that there is an appetite for higher level skills training in firmer economic times, as 39% of East Midlands employers (25+ staff) were doing so in 2007. But in the current climate, an increase in business confidence is required. Employers need to be confident that an investment in their people will help them survive the recession, and prosper beyond it. How, and whether, this can be achieved is open for debate, but demonstrating the benefits, especially the tangible ones, and incentivising them to engage with universities will surely help.
CFE is active in the employer engagement agenda, working to understand the demand for higher level skills from businesses and also working with institutions to develop their capacity to work with employers, particularly through the Training Quality Standard. For more information please visit here.
1. CFE has also worked with individual HEIs and Lifelong Learning Networks to help them understand the demand for higher level skills from employers in their region.
This comment piece can downloaded here (pdf).
Thomas Fletcher
Project Coordinator