It's a fair observation on life that recognising a serious challenge is often the biggest step to overcoming it. Likewise, acknowledging that there are many different ways to respond to that challenge helps to reduce its magnitude. But as we rush to look adversity in the eye is the reality that we too often overlook what we've achieved?

I believe that the further education sector has made significant leaps forward in recent times. The sector is beginning to adopt the position that it should always have been accorded in the education landscape. We must make sure this continues.

The good news is that the FE sector will be part and parcel of the Coalition's ambitions for lifelong learning and for building skills for a competitive economy. In truth, the sector is probably better placed than most other public services to lead the way in local accountability and customer driven funding – and we have always known that we are the most cost effective method of delivering education. Now that the political rulebook has changed and money is tight we can exploit - for the benefit of learners and employers - the responsive and competitive edge the sector has developed over many years.

All of this is a good place to be when resources are scarce. We are all waiting with bated breath for the Spending Review announcement on October 20. Last year's cuts in funding meant that if we hadn't taken action more than 80 colleges would have become financially inadequate. Given the rumours about what the Treasury is proposing in terms of funding in the future, last year may turn out to have been a stroll in the park. Under most of our scenario planning, if colleges don't take action, then a big proportion will become financially inadequate. At the higher end of the reduction scenarios, this applies to the majority.

Fundamentally, it is my duty to ensure that there is adequate adult FE provision across the country to meet the demand for learning from employers, individuals and communities. If colleges and providers do not take action to preserve the provision that they offer by cutting costs then, as a last resort, I will have to. Believe me, I am convinced that my having to take action is the wrong outcome. It generally comes too late, it's expensive, and it can be destabilising for staff and learners. So I recommend that the sector takes action – looking at both 'front office' and 'back office' costs.

While it is not for me to dictate the right solutions, I do urge everyone in the sector to examine the options and find the right models. Of course this advice is wasted on the astute, as they are already taking action: collectives, federations and mergers are in early development in various parts of the country. Strategic collaborations such as these are fairly obvious solutions. Not because bigger is necessarily better – but because it is more financially resilient and able to withstand shocks as well as take advantage of the opportunities scale brings.

And just to be clear, collaboration is not the same as merger. Mergers, where desired by the participants are fine, so long as they are done in a way that doesn't destabilise the institutions involved and they provide locally branded delivery bodies in suitable configurations. And so long as they do not involve public dowries; sound mergers should generate savings and banks are quite willing to fund this type of restructuring.

So there are already conversations about various options happening across the country and I find this encouraging. My own view is that hard federations are one of the better variants. They are less risky than mergers - marriage, unlike surgical conjoining, is easier to reverse - and hence less of a leap of faith. It is also faster and ensures that locality is maintained. Whatever option is appropriate, my fear is even the early adopters in collaboration discussions may not realise how quickly they need to move.

Other less ambitious options, to suit different circumstances, can yield savings too. For our part, we're assisting the debate and facilitating solutions where that makes sense. For example we're already working with AoC on a £15 million shared services development programme (courtesy of the Treasury) to encourage ideas and pilot projects that will address cost but also effectiveness.

What else are we doing? Well, I have no desire to preach without practising. I know that there are savings to be made among the funding bodies. The Skills Funding Agency is a stand alone planning body that will become a stand alone funding body. So we will shrink significantly in terms of role and cost. We will become simply a funder of learner and employer skills decisions; a provider of information for suppliers and customers to base decisions on; a facilitator of the process and a steward of public money. How that will work is being consulted on, but in my mind I see it as: 'allocation; information; arbitration and sanitation'. Unlike the past, it is not intervening, not planning, not commissioning and not leading learning and skills. All of that will allow us to become much smaller, much cheaper and more helpful to the skills system; and we have started shrinking already. That hopefully also gives us the moral authority to make the case for the sector reducing costs to preserve its success.

Let's not underestimate the task ahead. Colleges and providers are essential players in their communities, contributing to their economic and social well being. We can't let learners and communities down by allowing declining funding to damage this vital role. Collaboration is a crucial tool and one of the few that is fast and effective enough.

So as we look the challenge in the eye, with the assurance of what the sector has achieved so far, and knowing what individual colleges and provider must do to prosper, let's turn challenge into even greater success.

Geoff Russell is chief executive of the Skills Funding Agency

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