29 April 2010 | John Salisbury

The UK’s care sector is costly and uneconomical. John Salisbury explains how better procurement of temporary agency labour could make a huge difference

Contrary to popular opinion, the care sector is not immune to the effects of a recession. Although other industries have responded to the downturn by streamlining operations and staffing, care organisations have failed to keep up. In an ongoing battle to attract permanent recruits the sector continues to rely on expensive labour arrangements. Care homes are preoccupied with front line clinical work so their approach to procurement tends to be haphazard. They use a large number of agencies which provide varying levels of service at differing rates, resulting in blurred visibility of spend, limited control over supply and no way of managing indirect costs.

As a result, the recession cost the care industry as much as £814 million in lost profits last year, according to the Plimsoll Care Homes Industry Report, which analyses the UK care homes market and the 502 largest companies in the sector. Industry experts predict further cut backs in the year ahead.

So what can these organisations do to reduce running costs while maintaining quality? The answer: they must become more strategic in their procurement of temporary agency labour. 

GAINING VISIBILITY

One of the most important steps is to gain visibility of how many and what kinds of workers are being employed and in what areas of the business. In other words, establishing how and where spend is allocated.

Most care organisations will have geographical variations in recruitment spending as a result of specific regional or skills needs, market and demographic dynamics. Individual homes are often responsible for employing their own workers, which leads to national costs creeping up without head office awareness. Temporary agency labour is often referred to as an ‘invisible cost’. Having a clear picture of that total spend creates opportunities for cost-cutting and more efficient budgeting by enabling companies to maximise existing resource and take control of finances at a national level.

Equally, gaining visibility of charges and rate calculations is effective in identifying areas of over-spend and where agencies may be over-charging. The lack of government regulation has given unscrupulous agencies the go-ahead to mystify charges and rate calculations. Some have a bad reputation for imposing high margins, profiting from erroneous travel schemes and even forming price-fixing cartels.

Breaking down charges and analysing how they are calculated for individual jobs across different agency suppliers is a significant step towards eliminating expensive oversights. Ideally, all final agency rates should be made up of the basic pay to the worker, NI contributions, holiday pay and the agency margin. Rate calculations for holiday pay and NI should follow one of two principles approved by HM Revenue & Customs.

GAINING CONTROL

Most care organisations that use temporary agency labour do so without formal partnership agreements. They rely on a large number of suppliers operating under different terms and conditions. It can result in high spending through both the direct costs of getting over-charged, and the indirect expense of recruiting poor quality staff. This is why care organisations need to obtain formal control over their supply base. 

Start by rationalising supplier lists. Only when your supply base is consolidated down to the most reputable agencies will organisations be able to abolish the indirect costs associated with supply of poor quality workers.

By grouping vendors into a managed ‘panel’ of agencies or a preferred supplier list (PSL), care organisations can establish standards for service, pay rates and charges. Standardised rates will usually only be accepted where there is some mutual benefit – in this case, from less competition.

Standardising rates has three advantages. First, it eliminates agency-imposed high margins - they will have to stick to the set rates. Second, it reduces the chance of indirect costs arising from low-quality service provision by forcing agencies to compete on service rather than on price. Third, and what care organisations are often unaware of, is that if rates are standardised to an optimum level (where the market-driven charge rate is balanced with a competitive pay rate) the quality of temporary staff will improve.

The service level standards are perhaps easier to introduce, and best implemented via formal service level agreements drawn up by an organisation’s legal team. They should include KPIs, which agencies can be measured against in order to monitor performance and control costs.

INDIRECT COSTS

A common complaint from users of an unmanaged temporary agency workforce is the huge volume of paper invoices and time sheets involved. A more strategic approach is to use a time sheet and invoice-processing system. Converting paper documents to electronic files (saving time, removing postage costs and stamping out errors).

Less obvious is the need to mitigate the risk of legal exposure. According to Employment Agency Standards, there were 2,393 infringements of the law among recruitment agencies in 2009, and the prevalence of legal side-stepping across the industry should not be ignored. Significantly, the Care Quality Commission identified a tendency among agencies to cut corners on worker checks during a recession as a means of keeping costs down and highlighted some serious implications for how the quality of care may be affected.

Further, with a series of employment laws brought in by the government last year, opportunities for expensive litigation have increased. In the care sector, there is now more chance of homes being fined for failing to adhere to laws on migrant workers, ISA registration, working time regulations and of course, agency working itself with the introduction of the Agency Workers’ Directive. A lack of clarity over responsibilities means it is often the users of temporary agency labour, rather than the suppliers, who are fined for breaches. A large part of managing and controlling costs involves keeping on top of incoming legislation and implementing formal terms of business with suppliers. Formal agreements, which clarify the responsibilities of an employer and agency, are also effective in removing a care organisation’s legal culpability where agencies breach the terms of the contract.

* John Salisbury is managing director of de Poel, a purchaser of temporary agency labour(jsalisbury@depoel.co.uk)