Employers are slow to recognise the benefits of Train to Gain, but those that do are reaping the benefits, according to Ofsted.
Its study of the scheme, which provides subsidies for workforce training and forges links between colleges and private training providers, recommends further incentives to increase take-up.
The report also revealed that firms using Train to Gain found it easier to win tenders because their staff were demonstrably better skilled. These benefits came on top of improved productivity, the scheme's main selling point.
But it said improvements could be made as too few employers were coming forward, and where training took place it could be extended to take staff to higher skills levels.
Christine Gilbert, chief inspector, said: "It's encouraging that Train to Gain is addressing the skills shortage, while also helping employers respond to increasing national and international competition .
"However, there is scope for further development of the programme to ensure it meets some key challenges. Not enough employers are approaching providers to receive training, while some employees aren't benefiting from the practical, higher-level vocational skills, or skills for life such as numeracy and literacy, that are crucial for their career development."
The report calls on the Department for Innovation, Universities and Skills to review the way employers and training providers are brought together. At present, a network of brokers acts as the link between the two sides. But Ofsted said this relationship would be more effective if targets were set that led to actual training, rather than just for making the initial introduction.
Ofsted also warned against assessment of workers' skills being valued as highly as training itself.
The report follows a recent recommendation by the UK Commission for Employment and Skills that high-quality colleges should be allowed to deal directly with employers without the brokerage system. This recommendation is likely to be accepted, opening up the market for colleges with good business contacts.
Principals have long argued that the brokerage system sometimes sets up training that would have occurred anyway or, in the worst cases, creates an extra layer of red tape that actually reduces the amount of training done.