What a difference a year makes. In June last year FE Focus ran an article reflecting college predictions of more mergers in the face of anticipated cuts in public expenditure.

At the time, Peter Tavernor, principal of The Manchester College, said: “If you take the next three years, it is not unreasonable to expect a 10 per cent cut in expenditure, and so many of the colleges at the margins at the moment will be in trouble.”

A 10 per cent cut now seems conservative and the appetite for merger, federation and other efficiency-enhancing ventures has exploded as colleges wake up to the financial challenges ahead.

KPMG suggests that a third (34 out of 100 providers analysed) of colleges are actively seeking merger. Since it carried out its research in May, the number considering merger is likely to have grown.

The big questions for colleges are what sort of merger or collaboration they should consider and when to go for it.

For David Croll, principal of Derby College, there is a simple answer to the last question.

“It’s time for a wake-up call. You do not want to fall into the clutches of Geoff Russell at the Skills Funding Agency.

“It is better that colleges use their autonomy now and talk now to potential partners rather than leaving it to the last moment.”

It is widely assumed that the Skills Funding Agency (SFA) is prepared to let at least one college, possibly more, go bust. While this is unlikely to mean hundreds of staff laid off and thousands of learners shut out, it could result in a college being wound up and its provision redistributed.

The former Learning and Skills Council (LSC) made money available to support colleges in difficulty, including cash to bankroll rescue mergers by stronger colleges, but this is no longer the case under the SFA.

This will leave many colleges exposed. But although colleges must act quickly to secure their future, Mr Croll says it is also important to enter into the right sort of merger.

“Mergers will increase but they must be for a reason. If the success of it all depends on size then that could be a disaster,” he says.

“Although critical mass is important, the most important point is the strategic reason for merger.”

Derby College, with more than 20,000 full and part-time students, has enjoyed rapid growth, propelled largely by taking over smaller weaker institutions, a pattern common across FE in the past ten to 15 years.

But even if the SFA was still dishing out merger money, investing time and money to turn around a college in financial andor educational difficulty will prove too rich for many.

Mr Croll says: “Maybe future mergers are not necessarily strong taking over weaker colleges but maybe that two relatively strong institutions will be talking to each other with a view to collaboration or full merger.”

Strong-to-strong mergers are part of a new direction of travel for FE, according to Paul Lawrence, national director education advisory for KPMG. These types of collaborations have more in common with private sector acquisitions, where a business seeks to buy or partner with another organisation because it adds commercial value.

“There is real need for information and awareness raising about the ground rules for modern mergers. They need to have clear financial benefits and bring value for money,” Mr Lawrence says.

Ioan Morgan, principal of Warwickshire College, has overseen three mergers in the last 13 years, which he describes as “rescues”.

“In the past the LSC was able to offer small financial incentives to do this. But the money is not there now. So what’s there to incentivise a college to risk taking on a weak college?” he asks.

Mr Morgan, who retires as Warwickshire principal next month, is currently advising a number of colleges on solutions to the growing financial pressures.

“The financial situation is beginning to force them to consider alliances and strategies that they would not have considered even 12 months ago,” he says. “There is an awful lot of frantic activity at the moment about how to save costs and eventually the discussions come around to how to preserve provision and save the student experience.”

Mr Morgan’s observation goes to the heart of a dichotomy in FE: how to reduce costs while maintaining and hopefully improving the educational experience for students.

On the one hand are those leading the agenda for business-like solutions to make FE leaner, fitter and more responsive to the demand for education and training. On the other, although the groups are not mutually exclusive, are those who worry that an overly commercialised FE system could conflict with colleges’ wider educational and social responsibilities.

Ian Pryce is a strong advocate of the lean and mean model for FE and he favours collaboration with the private sector. But as principal of Bedford College the rush to merger is tempered by geography - the area is characterised by large market towns, each boasting a sizeable college - and by his own concerns that it may not hold all the answers.

“The only thing I worry about is the whole herd instinct: that everyone has to save 10 to 20 per cent and that mergers appear out of that,” Mr Pryce says. “But I think that our financial literacy is still poor and people think they cannot make these sorts of savings without merger. But it is possible. Our admin costs are 50 per cent lower than some colleges.”

Mr Pryce also believes that the number of college mergers and federations is limited by what he calls the “gene pool” of management in the sector.

“So either you bring in people from outside or, if you assume that the FE system sustains only 300 good principals then perhaps that’s what we should aim for,” he says. “I think if you are a reasonable good principal then you can run a smaller college. However, this will get harder.”

Financial and management expertise in FE is an issue for Chris Hearn, head of education at Barclays Corporate. He and his team are currently offering transformational funding to colleges to help drive rationalisations, acquisitions or mergers. But before they can access the money, colleges must produce a business plan that is sufficiently robust to satisfy the bank.

“Management capacity is key. Managers have grown up to respond to a particular quality and funding situation but now it is all about merger, federations and many other things that they are not necessarily geared up to exploit,” says Mr Hearn.

“People know what’s coming but they do not necessarily know what the options are and how to achieve change. Do all colleges have the skills for change and transformation?”

Mr Hearn thinks that colleges will pursue a range of solutions depending on the shape of their business, their mission and geographic factors. But he is clear that strong colleges taking over weak institutions is about the worst scenario for any college, requiring considerable skill and effort to turn them around. The merger of successful institutions is, says Mr Hearn, a good model.

Back in Manchester, Peter Tavernor is entirely of the opinion that FE has to think differently in the face of the challenges ahead. And he’s not only thinking differently but thinking big.

“The scale of the challenge is such that you just cannot meet with normal measures. A better way to look at this is that it is an opportunity to earn your way through the crisis,” he says.

One particular opportunity is The Manchester College’s discussions with a higher education institution with a view to creating a pound;350 million further and higher education provider.

“In an age of austerity you have got to try to find opportunity and this does not come out of a Christmas cracker,” says Mr Tavernor.

And while colleges weigh up their options, so too are large private training providers. The Government is keen to encourage private sector involvement in FE where appropriate.

Big organisations like VT Group, Pearson and others are surely biding their time until the moment is right to make a bid to take over and run a college.

Phil Rood, communications director for VT, says: “To come in as the private sector to run a school or one college would not make sense so, at the moment, we are sitting on the fence and we will wait to see if opportunities that arise make it viable for a private company.”

For some, the final obstacles to increased private sector involvement in FE are national pay agreements, contracts and final salary pensions.

Ioan Morgan says that the situation is reminiscent of old the Silver Book contracts - a national agreement specifying lecturers’ teaching hours - that were scrapped in the early 1990s prompting a bitter dispute with the former lecturing union Natfhe.

“We must have a discussion about these issues. It is a precursor to change in the FE sector,” he says.

As FE explores corporate solutions to the challenges ahead, it seems that the changes they bring will not be painless.