Funding follows the child and the national standard for early learning and childcare providers: guidance on criteria 7 - business sustainability

Section 4: A Risk-Based Approach

25. Planning and managing risk is essential for a local authority to ensure continuity of service provision in their area and identify risks to service delivery.

A risk to service delivery includes any aspect of the provider’s business model where a failure would lead to the service not being delivered (and which would impact negatively on a child’s ELC experience).

26. Figure 1 shows a simple risk management process that highlights the basic steps in understanding the risk of contracting with a provider.

Figure 1: Risk-based approach

27. Understanding the context, risk and mitigating factors will not only allow the local authority to review evidence accurately, it will also allow them to request an appropriate variety of evidence based on this assessment, as shown in Figure 2.

Figure 2: Using risk to inform evidence requests

4.1: Establishing the Context

28. Risks should be considered during any decision-making process. Risks can emerge directly as a result of a decision about risk or from external factors. The local authority should consider the overall supply market risks in their local authority area, within the context of a mixed economy model (with consideration of providers in all parts of the sector), to understand any risks in the structure of the local market.

29. Establishing the size, scope and type of organisation applying to be a funded provider will help a local authority identify potential risks associated with a setting. Local authorities can base their evidence requests on these considerations.

30. This aims to reduce the burden on providers applying by requesting pre-existing information from providers and limiting the amount of effort spent on creating new documents.

31. Table 2 highlights considerations based on provider characteristics that would be useful for local authorities to consider as these may change the evidence requested.

Table 2: Variations in type of provider and considerations for these

Provider Characteristics	Considerations	Impact on Available Evidence
Childminder (including those with one member of staff or more)	Childminders do not have to produce detailed financial information, however, are required to be registered with HMRC for tax purposes. Most childminders operate as ‘sole traders’ and have no staff.	Detailed accounts are not produced or filed. Childminders do not have staff to deliver the service and should, therefore, have contingency plans in place.
A Single Setting and Small Chains (2 – 5 establishments)	These types of providers are likely to produce financial information, including accounts, however, these may not be audited.	Accounts will be produced and submitted, however, these are unlikely to be audited accounts. Financial information could be requested for the provider. Service information should be requested for each setting.
Large Chain (5+ establishments)	These types of providers are most likely to produce detailed financial information, including audited accounts.	Accounts will be produced and submitted to Companies House or the Office of the Scottish Charity Regulator (OSCR). These accounts may be audited accounts. Financial information could be requested for the provider. Service information should be requested for each setting.
Charity	Accounts are submitted to the Office of the Scottish Charity Regulator (OSCR). The Charities Accounts (Scotland) Regulations 2006 set out the format and scrutiny requirements for charity accounts, which may be different to the requirements that companies must meet.	A charity’s goals and objectives will influence the revenue streams and income generated. It is likely that profits will be lower.
Private Business (where incorporated as a Company)	Accounts are submitted to Companies House.	Audited accounts are not required for some (often smaller) businesses, however, all accounts must be submitted in line with the Companies Act 2006.

4.2 Identifying Risk

32. For ELC services, there are two distinct areas of risk:

• Risk of financial failure: Where the provider is unable to provide the service due to a change in the financial viability of the business, for example, filing for bankruptcy. This is usually a long-term issue.
• Risk of service failure: Where the provider is unable to continue to provide the service due to the materials, buildings or staff being unavailable, for example, staff absence. This is usually a short-term issue.

33. To identify the risk associated with different providers, the local authority may wish to develop a template to determine what evidence would be appropriate to request, based on the organisational set-up of the provider. It is expected that local authorities will work closely with providers to understand their approach to risk and how this is reflected in their business model. Risk can be identified and ranked based on the likelihood (chance of the risk occurring) and impact (outcomes of the risk occurring) of the risk.

34. Local authorities should carry out a risk analysis based on local factors.

35. Table 3 gives an example risk matrix that could be used to assess the level of risk within an ELC setting.

Table 3: Example risk matrix

	Comments	Low Risk	Medium Risk	High Risk
Number of registered places
Risk of service failure
Risk of financial failure
Other factors
Overall assessment of risk level
Evidence to be requested

Examples of Risk Analysis

36. The impact of different characteristics of a childminder’s business on the risk of ‘service failure’ will vary. For example, a childminder may be deemed as having a low level of risk for ‘service failure’ due to the (relatively) small number of children they provide care for. However, they may have a higher risk of ‘service failure’ due to a lack of alternative staffing arrangements. Therefore, continuity plans could be requested to mitigate this risk. The size and reduced capital requirements (for example, no separate property costs) means ‘financial failure’ is expected to be relatively low. As childminders do not have to produce accounts, other evidence should be requested instead.

37. In contrast, for larger settings, the impact of ‘service failure’ could be deemed high given the number of children being cared for, whilst the risk of overall provider failure is reduced due to the number of staff providing the service, including the potential for cover to deal with absences or loss of staff. As larger settings are exposed to greater cost variables, increased costs may make the risk of ‘financial failure’ greater. For larger settings, therefore, more evidence may be requested relating to financial viability and the same evidence requested for service continuity.

4.3 Analysing and Evaluating Risk

38. It is likely that a combination of different evidence will deliver the most effective and risk aware approach to reviewing provider business sustainability. The evidence requested by a local authority must be clearly defined in the procurement or application documentation.

39. The local authority will seek Business Sustainability evidence at the time of application through one of these methods:

• As part of a European Single Procurement Document (ESPD);
• Within the application form or documentation; or
• By another means that will be clearly stated by the local authority within the ELC provider application documentation.

40. The exact method will be determined locally, by each local authority, based on the process used to contract with funded providers. Further guidance on this can be found in Transition Options Guidance for Contracting which has been published alongside this document.

41. The following pages set out the common types of evidence that could be requested regarding Business Sustainability. A mix of evidence regarding Business Sustainability is likely to give a local authority the information required to understand the risk profile of a setting and assure themselves that the provider meets the criteria.