A study published this week by the Further Education Funding Council reveals colleges are concentrating on satisfying the demands of individual students.
The FE sector needs to catch up with changing times in the workplace, the report shows. Traditional patterns of day release for students in work have long gone, but colleges have failed to respond to the decline in those enrolments by developing alternatives.
Sixth-form colleges score particularly badly, offering only a small proportion of short courses designed to meet employers' needs.
The inspectors lay out a series of steps the sector should take if it is to meet the Government's recommendations in the two competitiveness white papers, Forging Ahead and Helping Business to Win.
The report is based on a detailed survey of 15 training and enterprise councils - providing an employers' view of college responsiveness - and 27 colleges, together with an analysis of 208 college inspections.
It shows colleges are catering for a wider range of students, answering increased demand for full-time programmes and taking their services into the community.
If the two interests conflict, the study says "colleges tend to resolve the issue in meeting student demand". They are unlikely to cap numbers on a particular course because of a local shortage of jobs.
Where enrolments on day-release programmes have dropped, colleges have not always analysed the reasons, or explored more flexible ways of delivering education and training to employees. Few have partnerships with employers to accredit staff learning and skills.
Employers report that college staff rarely visit local companies in order to establish training needs.
The FEFC study recommends colleges gather more information on local labour markets to allow them to plan programmes more effectively. They should adopt charters setting out what employers can expect of them - so far published by just one in 10 in the sector - and should survey employers' views on their courses.
Colleges also need to do more to improve their "underdeveloped" marketing to ensure they target potential new students and to check their strategies are working, say inspectors.