An Evidence-Based Approach to Funding the ELC Sector · Evidence-based funding of the ELC sector...
Transcript of An Evidence-Based Approach to Funding the ELC Sector · Evidence-based funding of the ELC sector...
Jean-Francois Cecile, PhD, MBA Praxiprog Inc. www.delcee.co.uk
An Evidence-Based Approach to Funding the ELC Sector
DETERMINING UNIT COST AND FUNDING RATES FOR TARGET PAY RATES
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Contents
Executive Overview ................................................................................................................................. 3
Introduction ............................................................................................................................................ 4
The standard running cost is inadequate to support ELC funding policies ............................................ 5
Issue #1 - The running cost does not differentiate between ELC delivery models............................. 5
Issue #2 - The running cost evens out meaningful information ......................................................... 6
Issue #3 - The running cost ignores the key roles of age groups and occupancy levels ..................... 7
The need for an accurate, comprehensive approach to unit cost calculation ....................................... 8
Accounting for an ELC provider’s occupancy level per age group ...................................................... 8
Accounting for an ELC provider’s adult to child ratio ......................................................................... 9
Solution – a simplified unit cost calculation example ......................................................................... 9
DELCee – Real-world data and the need for tools .............................................................................. 10
Benefit # 1 - Accounting for the contribution of key ELC parameters to unit cost .......................... 11
Benefit # 2 - Visualizing the impact of varying key ELC parameters ................................................. 12
Benefit # 3 - Determining the funding rate through sensitivity analysis .......................................... 12
Conclusion ............................................................................................................................................. 14
References ............................................................................................................................................ 14
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Executive Overview
A tenet of the Scottish 2020 Expansion is the requirement for ELC providers to pay the real
living wage for staff delivering funded hours. An evidence-based, data-driven approach to
determining the funding rate would be welcome to support the implementation of the
Expansion. A key reason why stakeholders in the early years sector have diverging views as
to what an appropriate funding rate should be stems from the fact that available survey data
are based on unreliable, and therefore non-actionable unit cost values.
This white paper discusses several issues with defining the unit cost as a simple running cost:
the result of summing all the costs incurred by
an ELC Provider and dividing by the number of
sold or delivered hours. We then present an
alternative solution based on a novel,
comprehensive approach to defining unit cost
that considers all the key parameters involved
in delivering ELC services, including
occupancy, age groups and adult to child
ratios.
To simplify our description, illustrative
examples will primarily focus on wage costs.
Tools are needed to address real-world ELC
context and data, and cost-structures that
include wages, as well as fixed and variable
costs. To this end, we will provide an
overview of DELCee, a software application
specifically designed for unit cost calculations
and profitability analysis of the ELC sector, as
well as DELCeeSense, a sensitivity analysis
add-on to DELCee designed to help ELC
funders determine the impact of concurrently varying funding rates and an ELC provider’s
staff pay rates.
A better Unit Cost ✓ Key ELC factors are
considered including
➢ occupancy
➢ adult to child ratio
➢ age groups
✓ The Unit Cost reflects
cost structures for various
ELC models
Why use DELCee? Benefits include: ✓ Key ELC parameters are
considered in unit cost
calculations
✓ What-If scenario analysis,
varying funding rate and
staff pay rates
✓ Evidence-based support
for funding policy
implementation
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Introduction
Funding challenges in the ELC sector are a common occurrence across the UK, and a key facet
for the various stakeholders is agreeing on what constitutes an appropriate funding rate.
In Scotland, some specific concerns have been raised regarding the Scottish 2020 Expansion
intended to almost double the number of
funded hours for 3-5 years old and eligible 2-
3 years old (1, 2). The increased government
spending is tied to a requirement for
participating ELC providers to raise their staff
pay rate to the “real” living wage (5).
Discrepant views exist as to how much the
2020 Expansion will cost, how it will be
implemented, and in terms of its overall
impact on ELC Providers, as notably pointed
out by Audit-Scotland (3) and others (4).
As a preliminary step towards determining the funding rate and assessing its impact on ELC
providers, stakeholders need to agree on the actual cost of providing one hour of childcare.
In this white paper we will examine the current - or standard - way of calculating the unit cost
and we will discuss some of its limitations. We will refer to this standard unit cost as a “running
cost”. We will then propose an alternative and better approach to calculating the unit cost
and present some of its benefits.
To illustrate key concepts in this white paper, we will rely on simplified or abstract ELC delivery
contexts. Real-world situations are more complex, and they require the use of tools to
process real data and generate actionable results.
Praxiprog has developed DELCee and DELCeeSense, bespoke software applications to help
ELC providers and funders address these real-world situations; we will provide an overview
of the key features of these tools.
“The limitations in the financial data make it difficult to examine the financial impact of different models of ELC and changes to flexibility. It is not possible to identify any relationships between the cost of funded ELC and the models available”.
*Early Learning and Childcare, p17, Audit Scotland, Feb. 2018
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The standard running cost is inadequate to support ELC
funding policies
Unit cost is usually computed as an aggregated running cost (see 6 for example) as follows:
1) Calculate Total Costs as the sum of all the costs (from past financial statements),
2) Calculate Sold Hours as the sum of all the delivered hours (from past session data),
3) Calculate 𝑈𝑛𝑖𝑡 𝑅𝑢𝑛𝑛𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡𝑠
𝑆𝑜𝑙𝑑 𝐻𝑜𝑢𝑟𝑠
The running cost defined above is very simple
to calculate; however, it is not accurate
enough, and as a result it is not helpful to
support an evidence-based approach to
determining an ELC funding rate policy,
notably because of the issues listed below.
Issue #1 - The running cost does not differentiate between ELC delivery models
Depending on their business or delivery
models, ELC providers have different cost
structures, especially when it comes to fixed
costs (e.g. rent, mortgage) and, most
importantly, staff costs.
To illustrate this, let’s assume the following cost structure for a Private Provider and a Third
Sector Provider, the main difference between the 2 cost structures being that wages
correspond to a larger fraction of total costs for a typical Third Sector Provider, as shown in
the right-hand chart below.
Figure 1 - Sample cost structures for 2 types of ELC providers
An ELC running cost is
straightforward to calculate from
consolidated financial and
session data …
… but it is a poor indicator of the
actual reality of ELC providers.
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The same data in a tabular format can be used to calculate the running cost, as shown below.
In the example above, the same running cost, shown in the last column and highlighted in
orange, is obtained for both ELC models.
This is clearly an issue since in our example the Third Sector Provider’s cost distribution is
more skewed towards staff costs, and as a result increasing staff wages will have a more
significant impact for that provider than for our example’s Private Provider. More generally,
understanding the impact of the 2020 Expansion on various ELC delivery models, with often
contrasted financial situations, requires a way of calculating the unit cost that can
differentiate between these delivery models.
Issue #2 - The running cost evens out meaningful information
Unit running costs are spread across a wide range of values, however they are usually
communicated as a single, averaged number. For example, the chart below (from 6) shows a
sample distribution of unit running costs for Scottish private and third-sector providers.
If we get about £3.7/hr for an average unit running cost, assessing the impact of raising wages
to the real living wage will not yield actionable results for those providers whose costs are
£2.5/hr or £6/hr for example. This is especially important since it is not uncommon for some
ELC providers to operate close to breakeven conditions, which means that seemingly small
unit cost variations may result in significant financial consequences.
Table 1 – Sample cost structure for 2 types of ELC providers - Tabular view
Figure 2 - Distribution of running costs based on survey results
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Even without averaging the unit running cost, and considering identical cost structures
(namely, when staff costs amount to the same percentage of overall costs), wage costs and
the number of delivered hours can vary in proportion in such a way that the same running
cost corresponds to different staff pay rates, as illustrated with the 2 scenarios summarized
in the table below.
Table 2 - An example of 2 cost structures resulting in the same running cost
This is clearly a limitation that prevents direct comparisons based only on the unit running
cost.
Issue #3 - The running cost ignores the key roles of age groups and occupancy
levels
To illustrate this third issue with the running cost, let’s assume that a nursery setting consists
of 2 rooms: Room 1, in yellow in the figure below, and Room 2, in light blue. Let’s also assume
1 staff that costs £10/hr (we will ignore fixed and variable costs for the sake of simplicity) and
5 children attending either one of the rooms, namely Room 1 in Scenario 1 and Room 2 in
Scenario 2, the other room remaining empty.
Figure 3 - Sample scenarios of settings with rooms based on age groups
Because the running cost doesn’t consider age groups or adult to child ratios, we get the same
hourly running cost in both scenarios (£2/hr), namely the sum of wage costs (£10) divided by
the number of delivered hours (5 hours, 1 hour per child), which is not a helpful or actionable
result.
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As we have set the number of children, occupancy levels will be determined by the age groups
to which the children belong: for example, 5 children between 2 and 3 years old in Room 1
correspond to 100% occupancy (the limit is a regulatory requirement). To visualize the role
of occupancy let’s add extra columns for occupancy levels to the table below.
Table 3 - Tabular view with occupancy levels per age group
The same unit running cost is obtained for both Scenario 1 with a 2 to 3-year-old age group
and an ideal 100% occupancy, and for Scenario 2 with a 3 to 5-year-old age group and a 63%
occupancy. In other words, the running cost cannot be used as an indicator of operational
performance (the capacity to match staff supply and ELC demand) in an ELC setting.
The need for an accurate, comprehensive approach to unit
cost calculation
A better approach to calculating the unit cost needs to include the effect of key ELC factors
such as pay rates and delivered hours, it also needs to account for age group distributions,
adult to child ratios, occupancy levels, as well as for cost structures associated with various
ELC delivery models.
Accounting for an ELC provider’s occupancy level per age group
There are 2 types of occupancy relevant to an ELC provider: 1) physical occupancy and 2) staff
occupancy, and unit cost calculations should consider both types.
1) Physical occupancy relates to how many children an ELC setting can accommodate, based
on its square footage and space requirements per child, in the age group to which the child
belongs. Physical occupancy notably affects how fixed costs are spread over the hours of ELC
delivered within a setting.
2) Staff occupancy indicates to what extent available staff hours (namely, an ELC provider’s
supply) are used to deliver ELC hours (namely, the demand from registered children receiving
the ELC service). Incidentally, it is worth noting that the supply depends not only on working
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hours for the staff delivering the service, but also on the age groups to which the children
receiving the service belong.
In the example shown in Figure 3, the staff occupancies for Scenarios 1 and 2 are 100% and
63% respectively, and as such an accurate unit cost calculation should yield a lower unit cost
for Scenario 1 than for Scenario 2.
Accounting for an ELC provider’s adult to child ratio
The adult to child ratio (ACR) indicates how an ELC provider decides to staff the rooms in their
setting. Although ACR and staff occupancy are related, as you would assign more staff to a
room if more children are expected or registered, they are not identical parameters.
For example, if 2 extra children in a given age group are registered to attend the same room,
more staff may be required and the ACR will be impacted; if one of the children attends 2
days a week while the other one attends full time, then occupancy will be impacted.
Minimum ACRs for age groups are defined by government standards, for example see (7) for
Scotland. However, ELC providers may choose to operate at a higher ACR than the one
prescribed by the standards, for example to improve quality, to offer more flexibility to
parents or to ensure an appropriate continuity of care. As a result, ACRs – one for each age
group - will be significantly different across providers, and therefore an accurate unit cost
calculation must also take ACR into account.
Solution – a simplified unit cost calculation example
Building on the example shown in Figure 3 we will further assume that the setting’s ACR is
0.25 (1/4) for the 2-3-year-old age group, and 0.17 (1/6) for the 3-5-year-old age group. As
we did earlier, to simplify the example we will only consider wage costs, which are enough
for the purpose of the current analysis. We added the ACR and staff occupancy to the charts
in the figure below as extra parameters to the 2 scenarios shown in Figure 3.
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Figure 4 - Unit cost calculation that considers ACR and occupancy per age group
In Figure 4 we used the following definition for the unit cost: 𝑈𝑛𝑖𝑡 𝐶𝑜𝑠𝑡 = 𝑃𝑎𝑦 𝑅𝑎𝑡𝑒∗𝐴𝐶𝑅
𝑂𝑐𝑐𝑢𝑝𝑎𝑛𝑐𝑦 and
the results of the unit cost calculations are also shown for each Scenario. As required for an
accurate calculation, the resulting unit cost is lower for Scenario 1, which reflects the better
operational performance in the setting under that scenario.
To summarize, using the new unit cost definition provides the following benefits:
➢ the unit cost is a true indicator of operational performance (namely: the capacity to
match supply and demand for ELC hours), and a higher occupancy level translates into
a lower unit cost,
➢ the unit cost considers the actual ACR in the setting, a reflection a key operational
context,
➢ the unit cost is calculated from single contributing factors, and as such it can be used
to determine the impact of varying key parameters (ACR, occupancy and pay rate)
independently. This will prove a critical feature to support What-If scenario analysis.
DELCee – Real-world data and the need for tools
The unit cost defined above is a more accurate, actionable indicator of the operational and,
ultimately, financial performance of an ELC provider. It is also more complex to calculate than
the running cost, which is at best a rough and impractical approximation of the unit cost.
In addition to wage costs, which were our
primary focus in the examples above, an ELC
provider’s fixed and variable costs must also be
considered. As such, several additional factors
need to be integrated, including a setting’s
Once the unit cost is calculated,
one needs to turn to a provider’s
fee structure, and integrate funding
rates into that fee structure.
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staffing structure (pay rates, annual leave allowance, pension costs etc.) and its physical
capacity.
Tools are needed to be able to assess real-world impacts of varying funding rates – which are
part of a providers’ fee structure - and pay rates, while at the same time integrating actual
ELC cost structures.
DELCee is a such a tool: a software application developed to meet the specific needs of ELC
providers, funders and investors. A complete description of DELCee is beyond the scope of
this white paper, and we will focus on discussing some of the benefits of using DELCee as
they relate to calculating unit cost and determining funding rates for existing and target wage
costs. Further details about DELCee are available at (8).
Benefit # 1 - Accounting for the contribution of key ELC parameters to unit cost
The figure below shows the DELCee dashboard view. Comment boxes highlight key
parameters considered in the unit cost calculation, as well as in the Fee Structure.
Figure 5 – An annotated screen capture of DELCee's dashboard showing where key ELC parameters are considered.
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The unit cost is shown as the red curve in the chart in the top left-hand corner of the
dashboard view. In line with the sample results shown in Figure 4, the unit cost in DELCee is
a function of occupancy, not a single value.
Benefit # 2 - Visualizing the impact of varying key ELC parameters
Considering the role of key ELC parameters separately enables them to be varied
independently. DELCee includes 2 input modes, for Actual and Model data. In Figure 6 below,
Actual fields shown for 5 ELC parameters are values computed from financial and operational
data. Model fields, above the Actual fields, can be keyed in directly or entered using a slide
bar.
Supporting 2 input modes is key to enabling What-If scenario analysis. For example, if the
actual, blended Pay Rate were at the minimum wage, or £7.83/hr, we could toggle the Model
button and immediately visualize the effect on the unit cost of increasing the Pay Rate to the
real living wage, or £8.75/hr. The figure below shows how switching input mode is achieved
in DELCee.
Figure 6 - The Actual and Model modes available in DELCee for ELC parameters
Benefit # 3 - Determining the funding rate through sensitivity analysis
DELCeeSense is a sensitivity analysis add-on that leverages DELCee’s modelling capabilities.
The figure below shows an annotated screen capture of the tool.
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Figure 7 - DELCeeSense input parameters and result table
At the top of the view are a series of panels for ELC input parameters. Funding rates, pay
rates and market rates (i.e. the rates for non-funded hours) are defined in this panel. Input
parameters can vary within a range of values, using a configurable increment. For example,
in the example shown in the figure above the funding rates were set between £5/hr and £6/hr
for the 2-3 years old age group, and between £3/hr and £4/hr for the 3-5 years old age group.
Once the inputs have been defined, the Control Panel on the left-hand side is used to issue
commands that 1) gather and process the input parameters, and 2) send them to DELCee for
calculation of the unit cost and unit fee.
Results are copied back into the Result Table, as shown in the last 4 columns of the table in
Figure 4 above.
Using DELCeeSense’s Result Table (or, alternatively, using automatically generated charts),
ELC funders or investors can quickly determine the effect on unit fee, unit cost, and unit
operating margin of varying the funding rate for various pay rate values, for example at or
above the real-living wage.
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Conclusion
In this white paper we have presented an actionable, accurate way of calculating an ELC
provider’s unit cost, as an improvement over a flawed and impractical running cost.
Our calculation’s approach is based on including the effect of key ELC parameters separately,
in such a way that their distinctive role in a provider’s operational and financial performance
can be properly determined.
Tools are required to address real-world contexts with various cost and fee structures. We
have presented an overview of 2 such tools:
❖ DELCee, a bespoke and innovative software application specifically developed for ELC
Providers,
❖ DELCeeSense, a sensitivity analysis tool designed for ELC funders to automatically
determine the effect of varying funding rates and other key parameters.
DELCeeSense generates a data-driven, evidence-based assessment of the impact of
funding policies on ELC providers.
References
1. https://www.gov.scot/Publications/2015/12/4790/322740
2. https://www.gov.scot/Publications/2017/10/9506/downloads
3. http://audit-scotland.gov.uk/report/early-learning-and-childcare
4. https://www.ndna.org.uk/NDNA/News/Reports_and_surveys/Annual_Nursery_Survey/2018.aspx
5. https://www.livingwage.org.uk/
6. https://www.gov.scot/Publications/2016/09/8729
7. https://www.gov.scot/Publications/2011/05/16141823/5
8. www.delcee.co.uk
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www.delcee.co.uk
DELCee and DELCeeSense are Trademarks of
Praxiprog Inc. – US patent No. 62/662414 pending