NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

By 2020, India will account for nearly a quarter of the global workforce, and the average age of India’s population will be 29 years (compared to 37 for the U.S. and China). To reap the benefits of its so-called demographic dividend – which is paired with a growing demand for skilled talent across the country’s services and manufacturing sectors – the Government of India created the National Skills Development Mission (NSDM).

NSDM’s vision is to train 500 million people (1.5 times the population of the United States!) with employable skills by 2022. To achieve that goal, NSDM has promoted a public-private partnership (PPP) model of financing, through the National Skills Development Corporation (NSDC), for various models of vocational training programs. One result has been a rise in the number of private players focusing on vocational training programs in India today and positive momentum for the sector.

Addressing India’s ongoing skills gap: The view from the field

Despite this massive government investment in vocational training, however, Indian workers continue to acquire very limited employability skills in schools. McKinsey & Company’s education to employment survey showed that Indian employers leave around five to 10 percent of positions unfilled; 40 percent attribute vacancies to their inability to find candidates with the right skills.

To overcome this gap, surveyed employers spend a substantial amount, offering new hires an average of roughly 30 days training in their first year, compared to an average of 21 days by global companies.

Given the fact that the skills gap disproportionately impacts urban poor youth, the Michael & Susan Dell Foundation (where I am a program officer in the Family Economic Stability team in India) has worked to catalyze the vocational training sector in urban India since 2007. As a result, I get to interact with some of the brightest minds working on this problem. Based on these interactions, I believe any entrepreneur trying to build a sustainable and scalable business in skill development must address the following four issues:

1. Understand student “need” versus market demand: I speak with many entrepreneurs who assume that, given the demand supply gap, there must be a huge demand for high-quality vocational training products. They make a fundamental error by confusing need with demand. We may believe students “need” training, but that belief doesn’t map to what un- or under-skilled youth are actually demanding. As a result, most vocational schools have trouble achieving break-even capacity.

Why is there such a mismatch? One of the main drivers for vocational training is the belief that it will lead to higher income; however, even when students get jobs after vocational training, employers often fail to correctly value their new skills. So training may not lead to immediate, significant increases in income or placements in jobs that students aspire to. My advice? Any entrepreneur wanting to build a successful business must focus on placement rates – for instance, without a good job placement rate, your offering has no value to students. Costs permitting, student counseling might also be an effective way of aligning student expectations and preparing them for the work force.

2. Understand employer demand: As customers of (and revenue sources for) vocational training programs, employers are at least as important as students. Employer demand stemming from staffing and retention challenges is real and acute. The opportunity for entrepreneurs is to develop training that complements what employers offer in-house. Offerings to increase retention, especially those co-developed with employers, also have huge potential.

3. Design products that meet both student and employer needs: Successful models typically have strong ties to employers plus a student fee that’s optimized so that graduates can “recover” their investments over a short period – even through small income increases. Other models may address the needs of working students who are looking to “up-skill.” These may include shorter duration courses or weekend courses that demand less time away from work. Finally, both students and employers benefit most from programs that recognize that a significant number of students haven’t worked in formal jobs before. The most successful programs pair classroom and hands-on training, and address soft skills and work readiness skills such as time management or other disciplines that students need to succeed in these new job environments.

4. Focus on unit economics: Understanding unit economics is critical for any successful startup. Taking a unit economics approach to individual training centers and making each one operationally sustainable makes it easier to replicate success and scale solutions.

Most models have a high dependence on government funding to achieve breakeven. However, entrepreneurial startups have to contend with unreliable payment cycles. A rule of thumb used by one of our entrepreneurs is to only open a new center if you’re confident of getting revenues from two of the following sources – students, employers or government.

A window of opportunity

India’s political focus on skill development has opened a window of opportunity for social entrepreneurs, the most successful of whom will address ecosystem challenges such as the mismatch between need and demand. Funders, in turn, will need to combine a mix or grants and patient capital to help committed start-up entrepreneurs fine tune their offerings and establish a firm footing. Getting the balance right could mean the difference between achieving the ambitious goal of training 500 million students or not.

Rahil Rangwala is a program officer with the Michael & Susan Dell Foundation in the Family Economic Stability team in India. He primarily oversees the foundation’s Low Income Housing Portfolio.