Opinion | Apprenticeships could address India Inc’s human capital hurdle4 min read . Updated: 16 May 2019, 03:36 PM IST
Apprenticeship schemes spell higher returns than most capital expenditure plans. They could help firms raise productivity
Employers can’t manufacture their own employees because of three holes in the bucket: learning risks (employer pays for training but kid doesn’t get hired), productivity risks (employer pays for training, kid gets hired, but is not productive), and attrition risks (employer pays for training, kid gets hired, is productive, but resigns before the employer recovers the investment). The inability of employers to manufacture their own employees is supported by the work of late Nobel laureate Gary Becker on human capital, but he hardly suggested giving up on training investments the way many employers are doing. We’d like to make the case that carefully designed apprentice programmes could provide a return on investment higher than the hurdle rates of 12-15% used by most employers to evaluate capital expenditure proposals.
India has a highly underutilized and mostly unknown formal apprenticeship system that began in 1961. Our roughly 700,000 formal apprentices are less than 0.01% of our labour force (Germany has 2.7%). We have only about 35,000 employers appointing apprentices (UK has 200,000). The low penetration reflects the “regulatory cholesterol" for employers that thought of apprenticeships as a job rather than a classroom. The Apprentices Act has been amended four times, but the 2015 amendment laid the foundation for reaching an ambitious goal of 10 million apprentices. Two important changes are pending: more employers and linking apprentices to higher education. A compliance mindset has sabotaged employer adoption, but apprentices deliver three outcomes; lower people supply chain costs, lower attrition and higher productivity. Let’s look at each one in more detail.
Firstly, corporate India’s people chain costs have exploded over the last decade because of uneven demographics (south and west India will account for only 5% of population growth in the next 20 years but probably 45% of GDP growth), concentrated urbanization (we only have 52 cities with more than a million people compared to China’s 375), poor-quality urbanization (the massive divergence between real and nominal wages arises from pathetic public transport and the “regulatory cholesterol" that misprices land), and the low employability of those with formal education (degrees have become an ineffective proxy for candidate filtering and there is a mismatch between skills demanded and supplied). Estimates vary, but the total cost of hiring adds up to between one and three months’ compensation. We estimate apprentices can cut hiring costs by more than 50% because aggregation costs are shared by educational institutions, the government, parents, and non-profit foundations.
Secondly, employment shifting from being a lifetime contract to a taxi-cab relationship has meant attrition for fresh employees in the fastest growing segments of our job market (sales, customer service and logistics) of between 45-75% annually. Most infant attrition—resignations or absconding within the first 6 months—happens because of poor cultural fits, miscommunicated job descriptions, ineffective on-boarding, weak soft skills and mismatched expectations. But there are three upsides of well-structured apprenticeship programmes: soft skills are becoming more valuable than hard skills and are best learnt on the job; apprenticeship programmes are the shortest corridor to jobs; and increasing higher education connectivity means kids get the social signalling value of degrees almost free if they complete their apprenticeship period. We estimate apprenticeship programmes can cut attrition by 25-50% because their structure of learning-while-earning and learning-by-doing allow employers to take employees for a test drive, and employees to understand the organization, job and colleagues while creating additional incentives for completion of the apprenticeship period.
Finally, employee productivity is a complex cocktail of hard and soft factors like motivation, tools, process, skills, culture, industry, location and much else. Corporate India is reaching the limits of productivity improvements of hard assets, but is far from the productivity frontier of intangibles like skills, fit and teamwork. The productivity impact of industry and functional skills rises considerably when combined with the firm-specific skills that are often embedded in company work cultures. We estimate the practice of apprenticeships before employment nurtures social, intellectual and knowledge capital, and makes people productive 25-50% faster than direct hires.
Putting our three estimated upsides together, the financial returns of apprenticeship programmes for employers are compelling. Let’s assume freshers hired directly cost ₹15,000 per month, direct hiring costs of ₹30,000, 50% attrition by the end of 12 months, and that it takes 12 months to reach productivity benchmarks. By our savings estimates for candidates hired from apprenticeship programmes and paid the same salary of ₹15,000, they will only cost ₹5,000 to hire, suffer only 25% attrition by 12 months (which reduces the cost of backfills), and reach productivity benchmarks in just six months. Therefore, an investment of ₹1.8 lakh in an apprenticeship programme would result in returns of ₹2.2-2.5 lakh, which would be effectively higher than from most capital expenditure hurdle rates of 12-15%.
The fear of employers of the “regulatory cholesterol" of apprenticeships represents P.G. Wodehouse’s quip that a cat who sat on a hot stove will not sit on a cold stove again. But reforms have made apprenticeship programmes more viable. And in a world where Google knows everything, apprenticeships represent the future of learning. And the best form of corporate social responsibility is a well-run apprenticeship programme that readies candidates for in-house absorption, in addition to supplying job-ready candidates to other industry players and the economy.
With greater awareness, confidence and outreach, India can reach a target of 15 million apprentices with 0.5 million employers. An important pending policy tweak is degree connectivity: skill universities could easily add a million students if their proposals for apprenticeship-linked on-site and online campuses were granted approval. But the future is already here. Employers, students and universities without an apprenticeship strategy for the next decade will be handicapped.
Manish Sabharwal and Sumit Kumar are with Teamlease Services and Teamlease Skill University, respectively.