The Skills Funding Agency (SFA) has cut 15 per cent of its staff as it prepares for reduced budgets and a new, streamlined funding system.
Agency chief executive Geoff Russell said axing more than 260 jobs was just the start of the process of becoming a smaller organisation which interferes less in the work of colleges and training providers.
In a speech to the employment and skills summit last week, he said: "It would be nonsense for funding bodies not to accept that the challenge to become better and less expensive applies to them as well.
"As of yesterday, we reduced our headcount by 15 per cent and we will continue to shrink - but also radically to simplify and improve the way we fund and regulate the sector.
"To allow you to do better for less, we need to get out of the way and give you the freedom to run your businesses in new and innovative ways."
Over the last decade, the number of staff working on FE funding has halved from 6,000 to 3,000 before being divided among the SFA and the Young People's Learning Agency (YPLA), a change which the Public and Commercial Services Union said would disrupt staff's work and put more money into quango chiefs' salaries.
The agency last week published details of staff pay scales, which confirmed that Mr Russell took a cut of around pound;50,000 in taking the SFA job after heading the Learning and Skills Council on more than pound;200,000.
But with YPLA chief executive Peter Lauener on a similar salary, splitting the agencies still increased chief executive pay overall. Ten senior staff receive salaries of more than pound;100,000, while 65 are on pay grades that start at pound;75,000 a year.
Mr Russell said details of the new approach to funding would not be complete until next month, when the Government is due to publish its skills investment strategy. But he said it would be based on four principles: installing a simple, flexible system with accountability and incentives built in; building trust that the system works; improving information and advice to customers; and intervening in rare cases of failure.
Mr Russell said: "It's likely that funding for adult FE will become more of a `payment by results' system." He claimed it would work "pretty simply".
"We would provide a menu of outcomes - including employment - that would attract public subsidy. When developing business plans, providers would consult with their community about the nature and volumes of outcomes needed.
"We would fund those business plans by providing a block of cash based on fairly simple learner categories. Providers would then be able to use that cash as they see fit to deliver their plans. The catch is that part of the funding would depend on delivering the planned outcomes."