With increased overall government funding and more individual customer focus there are high hopes of better services being provided to more people in need. However, the funding changes come with tighter margins and the requirement for many NFPs to improve systems and efficiencies and obtain additional funding. Further, in a more competitive environment complex strategic problems have to be considered such as revisiting business models and mergers and exits.
Avoiding becoming a “casualty” of the funding changes is demanding organisational transformations which are difficult but which could be materially rewarding for NFPs due to their inherent competitive advantages and the overall increases in funding.
Soft funding
NFPs had existed in an environment where governments were much more willing to provide “soft” funding to charities for disability and in home aged care services with monies:
- Paid in advance; and
- Retained when individual customers ceased to be provided with the relevant services.
Government feels obligated to fund services which are considered better provided by the non government sector.
Funding was (and still is for many services) principally through recurrent grants and block funding with a competitive landscape favourable to NFPs which dominate the provision of disability and in home aged care services.
What changed?
For providers of disability and in-home aged care services the world changed with the introduction of the following, both of which involve various grants and block funding programs being rolled back:
- National Disability Insurance Scheme (NDIS), the roll out of which commenced in July 2016 and will be completed in 2020.
- Increasing Choice in Home Care measure which was implemented on 27 February 2017 and with new home care packages being continually released (individualised packages started in 2015).
While promoting customer choice and a more competitive market they represent a dramatic movement away from previous funding models. Consequent funding disruption means:
- Margins are much tighter eg NDIS pricing limits.
- Funding is specific to customers and transportable if they leave.
- Systems are required to produce individual customer quotes, budgets and statements andallocate revenue and costs on a customer by customer basis. This becomes very difficult with large numbers of staff and suppliers servicing multiple customers.
Additionally, NDIS revenue is only paid once the relevant services have been requested by and supplied to the customer which inherently creates a working capital requirement for NFPs.
Surviving and prospering
Arguably these changes are best suited to a labour hire type business which is a significant departure from the utilitarian goals of NFPs. The requisite systems haven’t existed in many NFPs necessitating investment for instance in better ERPs for:
- Rostering and payroll – this gets complicated depending on the numbers of clients and the complexities of their needs and consequent staff skills requirement and the awards and conditions of those staff.
- Customer revenue and cost management – these need to be allocated and measured on a customer by customer basis and reported (see paid out) at any time.
- Marketing – NFPs need to target and track customer opportunities.
- Financing management – for managing working capital and customer accounts.
Particularly challenging is reducing overheads. To remain viable while providing NDIS services, it has been estimated that overheads will need to on average/sector wide be reduced from 15% of revenue to 9%. This will require significant transformation for any organisation and again potentially investment in systems to automate processes associated with staff management.
However, entities struggling with these changes should reflect on the inherent advantages which they retain in this changed market place through:
- Incumbency with clients
- Being established operators
- “Brand” appeal of services being performed by NFPs
- Many dedicated staff preferring to work for a NFP
These advantages together with increased funding to the sector create opportunities for NFPs to provide more services to more people.
Key strategic decisions – size matters!
The tighter margins and a more competitive market may also force strategic decisions such as whether to:
- Continue to provide or limit the extent of services eg focussing on high margin clients
- Merge to create scale
For these decisions, size matters and being:
- Small –reduces the requirement for investment in systems as centralised overheads are able to be contained.
- Large –provides economies of scale with investments in systems and people being able to be absorbed across a large customer base.
Consequently being a mid size NFP is where operators will be most squeezed.
Final thoughts
Where does all of this change leave the sector? Hopefully with better services for more people. However, the changes to the market mean that arguably the sector favours either large scale or smaller operators and those which are able to operate most like a “labour hire” businesses with efficient systems and while maintaining their philanthropic heart.
The changes and increases to funding has increased the incidence of unscrupulous operators entering the market and offering incentives such as free iPads and therefore this will likely prompt the government to tweak with the regulation of the sector. In any case, with the recent announcement by the Commonwealth Government of a Royal Commission into the aged care sector, expect the disruption to continue.
If you would like a confidential discussion about the services offered by Integral Financial, please contact me at svertullo@integralfinancial.net.au