- Profit Making and Risk in Independent Children's Social Care Placement Providers
- Revolution Consulting (commissioned by Local Government Association), (December 2020)
In parallel with the continuing year-on-year upward trend in placement and spending activity there has been consolidation of providers leading to several large groups of services operating under single ownership structures.
Consolidation among independent providers is more advanced in fostering – the six largest providers have more than half of all placements made in the independent sector – than in children's homes where the 10 largest providers have around 30 per cent of all independent sector homes. Some of the larger groups of providers operate both types of service, and additional services including education, schools, and services for adults. They also provide services to other territories including Wales, Scotland, and Ireland.
This study was the second in a series that updates the information about the providers as each publishes its latest audited statutory financial statements. It expanded the original study sample to the 20 largest children's services providers as measured by their Ofsted-registered fostering and children's homes capacity.
The 20 largest provider organisations have income from children's services of £1.54bn, and profitability measured using the popular EBITDA (earnings before interest, depreciation and amortisation) method of £265m. This represents an EBITDA profit margin of 17.2 per cent.
On all those measures there has been growth on a like-for-like basis since the initial study a year earlier.
The periods of reporting that form the basis of the study are historical and thus there is a time lag effect. In this second study, the financial information accessed was typically related to a period ending before December 2019 and therefore did not show the impact of the coronavirus pandemic on the services. Almost all providers expressed concern about the impact but also a resolve to maintain these critically important services through the lockdowns and other restrictions.
Consolidation among providers, where one, usually larger, provider acquires ownership of another provider's operations, is a significant driver of growth.
Reference is made to other studies by Revolution Consulting carried out on behalf of the Independent Children's Homes Association which indicate that the income and profitability trends reported by the largest organisations are not replicated among smaller service providers.
Consolidation and acquisition activity has increasingly attracted professional investor involvement and ownership of providers. Acquisitions and investment in children's homes and fostering services requires capital investment which in turn appears as debt or borrowings of the provider organisations.
Debt levels are at record highs and the LGA has called for greater market oversight to monitor and manage the perceived additional risks of higher debts. Avoiding Southern Cross-style corporate failures as were experienced by local authorities in adult services acts as a strong motivation.
Despite the higher levels of debt brought by some financing structures there have been no corporate failures in recent years as owners appear to be able to manage the debt levels and continue to invest further. The report gives insight and a technical explanation of how actual cashflows related to debt are managed by private equity owners in particular.
In light of local authority budget overspending in children's services, the results of this study illustrate the challenges for policy-makers and for the commissioners of services in their market management and stewardship roles. There have been calls in previous studies – most notably Sir Martin Narey's studies of fostering and children's homes for the Department for Education, the health and social care select committee's report on funding of local authority children's services, and reports from the children's commissioner for England – for a greater focus on commissioning in these sectors. It is notable therefore that the Independent Review of Children's Social Care that began work in March 2021 has recruited the Competition and Markets Authority to study the operation of these areas.
Implications for practice
Market stewardship and oversight at a national level is proposed.
Local authorities need technical skills and commercial experience to be able to partner effectively with provider sectors that include providers of many different shapes, size, and ownership types.
The challenges of commissioning services for looked-after children are evident and renewed strategies and approaches are called for.
A third (update) study will be published in 2021.
