Appendix 1
Extract from:
Cost calculators: Children’s Homes Provider perspectives.
Executive Summary
This brief paper summarises issues that Children’s Homes providers currently
perceive related to the potential introduction of cost calculator methodologies and
models into the sector.
It was specifically prepared following an introduction to the intent of the West
Midlands region to introduce such a tool, as presented at the Commissioner:Provider
Forum on 5th May 2011.
The sector is however aware that several other regional groups are planning to
introduce cost calculators in parallel.
The conclusions of this paper are that providers would invite commissioners and
regional groups to enter into an open and transparent consultation with the provider
organisations to discuss a range of issues related to the cost calculators.
Those issues fall into the following areas:
Transferability of tools from adult sectors
Contextualisation: Outcomes and Quality
Comparability and verification of data
Practical realities
It is also a call to those with budgetary responsibilities for this effort to analyse
business plans and financial payback analyses for the projects that are rolling out the
cost calculators, and to make those plans public.
Credentials.
The issues discussed below are largely drawn from my own personal perspective.
However, through Revolution Consulting I have started to gather input from a
number of providers in the sector to add further perspective.
My own views come from:
I am a Fellow of the Institute of Chartered Accountants in England and Wales (with
almost 25 years commercial experience).
I have over 10 years’ direct experience of the Children’s Home sector having been
Managing Director of the largest service provider, and chairman of the trade
association until 2005 and having established a completely new service from scratch
from 2007 until it’s subsequent sale in 2012.
Through Revolution Consulting I have worked on projects with many Local
Authorities, regional groups and providers gaining intimate insight into detailed
financial dynamics on both sides. In other consultancy projects I have evaluated the
benefits from the application of cost calculator tools in the Adult Learning Difficulties
sector.
The Commissioning Support Programme published a paper that they commissioned
from Revolution in 2009 looking into the relative financial strengths of services for
children and the implications for commissioners. This is available on the CSP
website, or directly from Revolution Consulting (contact@revolution-consulting.org)
Background
The Commissioning Support Programme report referred to above (and updated
since) highlights dramatically different financial performance in the Children’s Home
sector compared to the other sectors (Residential Special Schools and Fostering). I
have long advocated that commissioners at all levels get smarter in their
understanding of what this means. In particular, it is impossible not to conclude that it
is in fostering and residential schools where the larger profit margins are reported
and where, logically, commissioners might better direct their activities.
I have recently commissioned a study of the sector from the point of view of looking
at how many different databases/preferred provider lists/regional commissioning
systems are in existence and which providers potentially have to engage with in
order to do business in England and Wales. The shocking conclusion was that there
are at least 8 regional databases/systems, 19 authorities use their own systems and
don’t use regional tools, and there are another 70 corporate procurement portals that
authorities may use. Several providers do not believe that the investment required to
gain entry to, and maintain position on, so many databases and portals is not
justified in terms of the actual utilisation by individual authorities.
The potential for costs calculators to be implemented in a similarly piecemeal fashion
across the country is a recipe for gross inefficiency.
As I write this version of this paper the Bank of England has just announced that it
expects inflation to reach 5% in 2011. Most providers have been squeezed by
inflation, VAT increases, Employer National Insurance increases, and yet been faced
by demands for reduced fees. Community Care also reports that Children’s Homes
providers have noted a dramatic downturn in referrals since the Comprehensive
Spending Review. It is therefore not difficult to envisage that some Children’s Home
providers will again be experiencing sustainability issues. The burden of a big
modelling exercise that has at least some intention to reduce their prices/costs risks
closure of homes, loss of capacity, reduced competition and capability in the sector.
Where the tool comes from
The cost calculator tools being discussed have their roots in application to the Adults
residential sector, and to Adult Learning Difficulties settings in particular. Clearly
some Directors in local authorities perceive that the tool has been responsible for
real cost savings in that sector, and therefore that it may have application over in the
Children’s residential sectors.
As Revolution Consulting I have carried out evaluations of such Adult sector
applications. The conclusions based on those evaluations are less persuasive.
In most cases, an objective assessment of the financial evidence to any reasonable
standard finds that the evidence of savings does not stand up well to close scrutiny.
Many projects did not set out to measure the financial impact objectively at the
outset and claims of savings are sometimes questionable.
In addition, the link between the cause of a claimed saving and the use of a costing
tool is often unproven.
It was my personal impression that the simple act of addressing the market in a
parallel fashion for each referral rather than a serial approach was as likely to have
generated benefits without the use of the costing tool.
From Adults to Children
When considering the potential to apply the adult based tools to Children’s services,
further factors come to mind:
A. In simple terms, adult residential settings do have some stability about them in
terms of a homogeneity of needs, homogeneity of care packages and resources, and
stability of demand and occupancy that potentially allow the cost calculator to have
some utility. My every instinct is that application to children’s services is much more
difficult, complex and volatile.
B. Children and young adults in the care system display a wide range or needs and
challenges, often multiple and complex challenges in each placement. Costing
models risk ignoring the skill and judgement of professionals and providers in
matching young people to placements, and in providers who risk assess on an
almost daily basis both the cohort at a site, and the strengths of the staff group, and
then organise staffing to best manage the needs on each day based on the activities
of the cohort. In other words, done properly, you cannot hope to model staffing levels
anywhere near accurately because of this variability. Adults homes tend to have
more rigid and predictable staffing rotas.
C. There is not stable demand, supply or occupancy rates in the majority of
Children’s Homes. Financial outcomes, costs, fees etc. are far more sensitive to
occupancy than to anything else. Homes are on average much smaller than in
adults’ services, a fact that magnifies the impact.
The case in point to illustrate this is a two bed unit. If the provider costs the
placements when full, and then the next day a child leaves, then the costs DOUBLE
per bed overnight. With that level of impact then facts such as whether the cost of
care worker is +/- 5% becomes irrelevant.
Quality and Outcomes
The Cost Calculators do not measure outcomes or quality. This alone is their
greatest failing.
The tools risk putting outstanding rated homes that achieve placement stability,
engagement with education, and therapeutic input, alongside failing homes that
simply contain young people. Without a tool to measure outcomes consistently
across providers the cost information has no context and could be rendered
worthless.
Several independent reports (e.g. Demos – In Loco Parentis) in the last year have
strongly advocated that whole life costs are what is important in the assessment of
value of services for children. Point in time snapshots of costs fail to achieve this.
Different accounting approaches
For any kind of credibility the tools have to be applied to all provision, including local
authority provision, charity/voluntary sector provision and private sector provision.
The accounting rules and statutes governing the information required for reporting in
each of those sectors are different for each sector. It was accepted by the presenters
at the West Midlands event that the model therefore is unable to make fair
comparisons on a similar basis.
My accountancy experience is that organisations in these sectors have very different
overhead infrastructures, and that two organisations in the same sector may well
utilise different overhead allocation methodologies. Hence comparability is further
undermined even within each sub-sector.
Checking the figures
Various statutes require that financial information reported publically shall be subject
to independent audit. Small organisations (including many providers) are exempt
from audit requirements.
The cost calculator tools potentially provide a mountain of detailed costing data.
Providers are concerned that the following issues have not yet been addressed:
1. The depth and complexity of data goes beyond what could be said to be
reasonably required by contract terms. The cost of producing the data may
therefore need to be passed on to the purchaser as a separate and additional
charge for the information.
2. There would appear to be no mechanism to audit or verify that all providers
have applied the same accounting approaches or indeed whether the figures
provided are accurate.
3. Local authorities will need to invest in resources to handle the data provided.
This is both a capacity issue and a capability issue. The volume of data is
potentially vast, and will require new skills to interpret. Providers would be
concerned to know that the people receiving the information were qualified
and experienced in understanding financial accounting in all forms and
sectors.
4. The data provided is potentially commercially sensitive and therefore
confidential to each provider. Commissioners using cost calculators will need
to address the issues related to this.
Practical realities
The simplistic assumption about return on investment described at the West
Midlands event is fatally flawed. It takes no account of intangibles such as knowhow, or where in the project life-cycle a home or organisation sits.
Staff are rarely variable costs. Levels of sickness, staff churn, overtime rates, staff
rotas, payments for bank holidays, holiday cover, pension scheme membership rates
and contribution levels, employer burden (e.g. NI rates) do not stay fixed and
sometimes vary daily depending on events shift by shift.
Unpredictable costs can be significant – repairs, overtime, recruitment, training, staff
churn, insurance rates, fuel prices, VAT rates, interest rates.
The model doesn’t accommodate start-up/loss-leader pricing, or volume discounts,
or early payment discounts, or preferred provider discounts, or block contract pricing.
In short it is just not reflective of a dynamic pricing marketplace.
Recommendation
The sector needs to ask to see that a robust financial payback assessment of this
project has been made. This should include a real costing of the time and resources
required to implement several calculators across multiple regions. Benefits need to
be carefully tested and valued, taking full regard of the points and issues raised
above.
My every instinct is that in these stressed economic times the sector could invest
these resources more wisely in finding efficiencies in other ways (and other sectors).
I believe the efforts and funding going into cost calculators would be more gainfully
employed in looking for ways to address variable demand and occupancy patterns
that providers experience. There is ample clear evidence that local authorities and
providers create mutual efficiency through the smart use of techniques that lower
volatility of demand and secure greater predictability on the supply side. It is difficult
to comprehend how an onerous costing tool has any impact on the fundamental
dynamics of supply and demand, or what it does to improved outcomes for the most
vulnerable and challenging cohort in our society.
I believe the sector is always willing to see other perspectives, and I am sure that the
sector would benefit from an open and detailed consultation nationally on this issue.
That is what this paper invites.
Appendix 2
Service cost headings
1. An operational children’s home
1.1 Staffing.
Core rota residential care staff salaries, Employer National Insurance, bonuses, sleep-in
allowances, waking night allowances, Employer pension contributions, other benefits costs
(e.g. sick pay, holiday pay, maternity and paternity pay, private health insurance)
Supplementary sessional staff costs to cover core rota vacancies, holidays, sickness and
training absences. Includes all of the above cost elements, to the extent they apply to
sessional staff.
And/or – third party agency costs for agency staff, including the agency fee.
Registered Manager (and Deputy Manager) – costs as above plus expenses (e.g. travel
costs, GSCC registration). Ofsted Registration costs.
Other support staff costs. E.g. ancillary staff – cleaners, gardeners, cooks, staff mentors.
1.2 Staff recruitment.
Costs of HR effort to identify recruitment needs early.
Cost of advertising, other recruitment schemes, “recommend a friend incentives”…
Cost of processing replies and enquiries.
Costs of interviews and screening.
Costs of CRBs and other vetting both at initial recruitment point and on an ongoing basis.
Internal resources to manage this (people, database, prompting systems) and the external
CRB and postage costs.
Cost of having staff on induction but not yet on shift.
1.3 Staff training.
Costs of in house training – induction, safeguarding, etc
Costs of external training where bought in. Both statutory requirements (NVQ and CWDC)
and organizational development requirements.
Costs of operating supervision and appraisal systems, capturing information.
Costs of running talent identification and succession planning systems.
1.4 Staff leaving.
Costs of resources to manage complaints, insurance claims and employment law related
claims.
Costs of resources for exit interview processes.
1.5 Staff rostering.
Costs of people and systems to roster staff across multi-site operations, to manage daily
issues of sickness and other absence, to call on sessional or agency staff.
IT systems to support this activity.
1.6 Professional support to the home
Professional social work managers and administrators who support the care planning,
reviews, placement processes, across multiple homes. Also perform supervision of
registered managers.
Regional or operational managers and directors overseeing larger groups of operations,
reporting to corporate centre, ensuring good QA, responsible for outcomes and economic
performance of their homes. Costs may include company car and fuel costs and expenses.
1.7 Internal QA and Reg 33 costs
Internal or external people and related costs of QA.
1.8 Property Costs.
Capital acquisition costs
Stamp duty, legal fees, search fees
Mortgage or borrowing costs
Or Rental costs, plus finders fees, lease negotiation costs and legal fees
Repairs and renewals costs
Maintenance team costs – including associated NI, pension, vans, tools, equipment.
Heat, light, electricity, postage, telephone.
Equipping the house – furniture, crockery, cutlery, appliances,…
Equipping the office at the home – desk, IT, fax, filing, safe,…
1.9 Variable house costs.
Related to number of children/staff in residence
Food
Consumables
Personal care
Cleaning materials
Activities
Pocket Monies
1.10 Transport
Capital cost of house vehicles
Or rental thereof
Mileage paid where personal car used
Maintenance and running costs
Fuel costs
Repair costs
Fleet management costs
1.11 Advocacy
2. Fostering
2.1 Carer payments
Allowances
Payments
Fees
Cost of vacancies if on retainers
Travel expenses
2.2 Carer recruitment and assessment
Advertising costs
Internal and external Form F costs
Process management costs
2.3 Carer training
Pre approval costs
Post approval training costs - ongoing
2.4 Carer Support
Cost of venues
Cost of cover
Cost of facilitating support meetings
Cost of link workers, offices, phones, vehicles or mileage
Cost of out-of-hours support
2.5 Management of service
Cost of social work qualified management
Supervising social workers
Office, IT etc..
Internal QA
External registration
Cost of respite provision
Education liaison
2.6 Equipment/Home alterations
2.7 Advocacy
2.8 Panel costs
2.9. Staff training
2.10 Property and Offices
2.11 Cars/vehicles and expenses
3. HR support
Cost of trained HR professionals and administrators to support recruitment, HR policy
development, remuneration development, staff and carer vetting, contracts, insurances, staff
and carer leaving systems, staff and carer training recording, staff and carer development
processes.
Offices, furniture, IT equipment, facilities for the HR team.
4. Payroll support
Cost of trained payroll and incentives professionals and administrators to ensure all staff and
carers are properly paid, to deal with queries, budgets, changing employment and tax
legislation.
5. Insurances
Property and contents
Public Liability
Employers liability
Personal accident
Travel
Professional Indemnity
Vehicle insurance – house vehicle, company cars, staff using own vehicles
6. IT
People, hardware, software, systems to run the organisation
Offices etc to house the IT support.
Security, Disaster recovery resources.
7. Corporate management and overheads
Directors and managers and associated costs.
Strategic development and liaison with owners and financiers.
Corporate offices and admin support throughout.
Stationery, post, copying, office consumables, rent, rates, heat, light, furniture, IT etc…
8. Finance/Legal.and return on investment
Financial reporting team
Invoicing, credit control, paying suppliers
Legal liaison
Contracts management – leases, car contract hire, photocopiers, phone company deals,….
Purchasing/procuring resources.
Bank charges
Interest on borrowings
Ofsted registration and other regulatory costs. (External QA, External H&S accreditation,
Financial audit)
9. Referrals , marketing, tendering
Interface to customer/placement offices
Managing enquiries and referrals
Managing contracts
Monitoring contract compliance
10 .Marketing, advertising services to potential customers.
11. Education related
In house tutoring
Education support resources
School liaison
12. Professional services
Therapeutic services bought in
Psychologist support, Psychiatrist support
Assessment costs
13. Education
Provision of registered education provision involves similar structures of:
Staff costs
Management costs
Property costs
Education resources (books, materials, activities)
Transport costs
Insurance costs
And reliance on the HR, Finance, Payroll, Legal, IT and corporate services.
14. Return on investment