Revolution Consulting’s fourth annual study of profit levels, debt risk and financial outcomes of the largest independent children’s social care providers, produced for the Local Government Association, comes against a backdrop of unprecedented focus on children’s services. Calls from a parliamentary select committee in 2019, from the children’s commissioner for England in 2020, and from the Independent Review of Children’s Social Care in 2021 resulted in the Competition and Markets Authority (CMA) carrying out a review of these markets from 2021/22.
The CMA concluded that no action was needed to overtly control prices and profits, and that it was through better commissioning by local authorities that purchasers should gain improved influence. The independent review’s conclusions largely adopted the recommendations of the CMA in its own 2022 report, with the government backing this vision in its Stable Homes: Built on Love policy paper published in early 2023.
In calling for profit caps and price controls, the immediate responses to the publication of our latest profit and debt report from council and children’s services leadership bodies appear to challenge the CMA conclusions and the direction set out in Stable Homes: Built on Love, highlighting this fraught policy environment and how different the public and private sector perspectives can seem.
An example of contrast is the speed of strategic activity. The speed of growth strategy execution by the largest, predominantly privately owned, provider organisations is clearly evidenced in the income and profits reported across the series of our studies since 2021. It is difficult to avoid comparison to the much slower speed of policy and commissioning strategy development across the same period.
Similarly, calls for closer financial monitoring of providers, not least to avoid another Southern Cross-style collapse, and for investment in more impactful regional commissioning have been around for several years. The monitoring regime and proposals for regional care co-operatives in Stable Homes: Built on Love are welcome, but pilots are only just beginning to get off the ground.
Our latest study of financial outcomes broadly indicates that the provider sector has continued to grow while maintaining operational profit margin levels. However, look closely at the underlying information and there are some signs that demand our attention.
First, this study largely looks at financial statements covering 2021/22. There are examples in this reporting period of some providers experiencing operational issues, such as lack of available care staff, that have started to impact negatively on their results. For some, profits reported are flat or reduced in the most recently reported year compared with a year earlier.
Monitoring volatility
In such situations it is very important that commissioners look at the manageability of any debt burden that an affected provider may be carrying.
Debt owed to banks and financial institutions – as opposed to the owners and shareholders – requires regular payment of interest and of the capital amount of any loan. In general, provider organisations require stable or growing operational cash flow over several years for debt burdens to remain manageable.
Reduced profits bring a need for closer, real-time, monitoring of these situations. Actions that might be necessary in a worsening situation need to be designed to protect the children and young people and the stability of their placements as a priority.
Providers in this latest study also warn that 2022/23 results, when available, will show the impact of a step change in costs related to cost-of-living inflation and the impact of significant staffing shortages. The degree to which these additional costs have been met through increases in prices paid by local authorities is not yet evident. The annual fee negotiations round has reported some bruising encounters this year.
Commissioning solutions
It is impossible to ignore the tough external environment facing local authorities. The shock of high inflation, increased interest rates, and the financial crisis at several authorities, according to the latest County Council Network report, indicates a need to rebalance these sectors, and in doing so, play a significant part in easing financial pressures on councils.
Taking an analytical view, the high profits of the largest providers can be seen as evidence of substantial, efficient, and effective models that offer services across multiple local authority areas.
Clearly providers have captured and developed substantial assets, including deep know-how and experience in how to meet the needs of children and young people, including those with complex and multiple needs.
The challenge is how local authority commissioning can be supported to better access these valuable assets and do so with a better financial balance to the sector.
The research highlights three clear routes to develop.
1. In-house investment
There is already evidence of councils looking to develop their own in-house services, with investment targeted at recruitment of foster carers and additional Department for Education funding of £259m for children’s homes in 2022.
Our experience is that provision must be needs and purpose focused to meet the plethora of multiple and complex needs of children requiring care. Most operators will describe how it can take up to three years for a newly established home to be functioning well at near to full occupancy.
The prospect of rebuilding a wide range of in-house services that were abandoned over the last two decades in favour of outsourcing is therefore daunting for many councils.
An alternative mindset is to recognise that opening new services from scratch is tough, takes years not months, and needs deep know-how and experience to operate effectively. A strategy that looks to acquire access to the considerable experience and know how – and clear financial efficiencies – of existing provision is compelling.
2. Commissioning routes
Commissioning solutions require a leadership mindset that looks to access and better share the knowledge and financial efficiencies demonstrated by providers over a long term.
Through assiduous partnership development, balanced risk sharing, hard work and attention to detail, techniques such as block contracts, joint ventures, and profit sharing are all possible. The economics of addressing the investment and fixed-cost elements of service provision through greater guarantee of occupancy and income are immutable and irresistible. There are leading examples of these techniques in operation around the sector, but they remain a stubbornly small minority of current activity, and learning – of both what works and what can go wrong – is not readily shared.
We also find that, once the procurement and contractual arrangements are in place, there is often unexpected synergy in the coming together of professionals from all sides that can result in unanticipated developments and enhanced understanding of one another’s pressures.
3. Ownership routes
Where there is concern around who the investors are in the provider groups, there is also opportunity. In addition to the potential for profit sharing and joint venturing, there are strategic opportunities for the public sector through direct investment.
Local authority and other public sector pension schemes already invest indirectly in private equity funds for the benefit of current and future public sector pensioners.
The Ontario Teacher’s pension scheme provided a clear example of what is possible as long ago as 2010, via their period of investment and ownership in Acorn Care and Education (now part of Outcomes First Group). This shows us that it is possible to share in the profit and return on investment of provider groups at an ownership level.
The approach has the potential to act as a balancing hedge. For example, if a local authority pension scheme were to take an ownership stake in a children’s services provider, and thereby benefit from strong profits and return on that investment then the annual funding rate into that pension scheme from the local authority may be reduced.
Be braver
Whichever routes the sector takes will continue to require strategic oversight. We must guard against precipitating significant failures if we, for example, commission large-scale shifts away from the private sector. We should also look to the innovation and passion of the small providers and voluntary sector bodies and ensure they are not disadvantaged in strategic, or procurement-led approaches.
The challenges faced by the regional care co-operatives are significant, but we must embrace these opportunities to take brave strategic steps, to break out of the financial crisis and rebalance children’s care sectors.
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Revolution Consulting will be running seminars and workshops on these topics in the coming months. For further details email contact@revolution-consulting.org
