Alt Profit Making and Risk in Independent Children’s Social Care Placement Providers final 2023
There are solutions.
On the face of it our latest study of the financial reporting of the larger children’s social care providers seems to indicate that, despite the plethora of studies and reviews and recommendations in recent years, the provider sector has continued to gain scale while maintaining operational profit margin levels. However, look closely at the underlying information and there are signs that demand our attention.
This study largely looks at financial statements covering 2021/22, and we are already well into 2023 as we publish the report. There are examples in the 2021/22 reporting period of some providers experiencing operational issues (typically lack of available care staff) that have impacted negatively on their results. In such situations, the presence of debt levels that, in order to remain manageable, require a stable or growing operational cash flow for several years to come, brings a need for closer, real-time, monitoring and management of those situations.
Other providers warn that 2022/23 results 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. Certainly, the annual round of fee negotiations around the sector has reported some bruising encounters this year.
The external environment is tough. The shock of high inflation, increased interest rates, and the financial crisis at Birmingham City Council (and other local authorities not far behind) cannot be ignored.
There are solutions.
The solutions require a leadership mindset (within both local authorities and providers) that, instead of partisan and divisive language, looks to access and better share the glaringly obvious financial efficiencies demonstrated by these large providers. Through assiduous partnership development, balanced risk sharing, and straightforward hard work and attention to detail, techniques such as block contracts, joint ventures, profit sharing and other arrangements are all possible. There are examples of all of these already in operation around the sector, but they remain a stubbornly small minority of current activity.
Our leaders would also benefit by looking to ownership options. The prospect of rebuilding in-house services that were abandoned over the last two decades in favour of outsourcing is daunting for many councils and regions. Big picture thinking is needed.
Again, there are solutions.
Where there is concern around who are the investors in the provider groups, there is also opportunity. Local authority and other public sector pension schemes already invest indirectly in private equity funds. Perversely, the Ontario Teacher’s pension scheme showed us the way as long ago as 2010, via their period of investment and ownership in Acorn Care and Education (now part of Outcomes First Group). It is possible to share in the profit and return on investment of provider groups at an ownership level. This 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.
Are we strategically brave enough to consider this potential?
We will be running further seminars and workshops on these topics this autumn. For further details please contact us via contact@revolution-consulting.org