*Services revenue and services contract revenue lines. NDIS revenue is unclear due to the Victorian State transfer.

Smaller providers should take some heart from these results. The minor players on this list who were less involved in government transfers have built capacity for individual customer sales. As a result, they are likely to conserve much of their growth going forward. Similarly, these organisations are likely to be able to fill their vacancies, aren’t exposed to state government EBA’s and have identified a sustainable overhead structure.

Profitability

Before discussing profitability, we always note that our figure represents total organisational surplus, and many of these larger providers run major non-NDIS portfolios. However, we can still take some lessons from these figures, as NDIS revenue represents the majority of revenue in these organisations.

 

As you would expect, there is a moderate association between Jobkeeper, donations and operating surplus. From a surplus perspective, the strongest performing organisations almost always have JobKeeper and donations bases. However, the average operating surplus dropped from $19mil to $8mil (excluding Scope from the sample, their surplus is a major outlier).

This decline in profitability is felt heavily across most of the major providers. It is summed up well by one provider in their financial report:

“* An unexpected reduction in revenue for Supported Living services as a result of the NDIS changing SIL claiming criteria”

Many of the financial reports across the major players reflect this sentiment. SIL growth has slowed, plans are being changed (43% of customers had their plans dropped by 5% or more), and margins are becoming thin. Our package size modelling suggests that there will be less than 1000 new customers with packages over 350k seeking services next year, so it is likely providers will continue to experience an average decrease in plan sizes.

How does this look when we take away JobKeeper and donations so we can make comparisons between smaller independent organisations? In this case, the average operating surplus ratio drops to -3.33%. This figure should be treated with caution since organisations do take on additional expenses to generate fundraising and to meet Jobkeeper obligations. However, in our low fundraising, no Jobkeeper sample, the adjusted margin is just 3.35%.

This figure likely explains the pain felt by not for profits as they attempt to grapple with the 2% DSCM margin and the EBA’s they inherited from government transfers.

The next set of financials is going to be extremely interesting. Once Jobkeeper is off the profit and loss, many larger not for profit organisations may start to feel the stress of vacancies and thin margins.

Another interesting perspective is that major providers receive no special treatment when it comes to the cost model. Their adjusted margins suggest that the playing field is equal. With this established, competing for growth still boils down to how well you can build a competitive point of difference. Amongst our major players, it is clear that overhead cost savings can be achieved (differentially), and these savings can potentially be channelled into additional customer value. The impact of state government EBA’s is likely a significant feature in these variations.

Finally, the major decline in growth rates is inconsistent with the work we do with our customers. This disparity suggests that customers are looking for something different, and larger providers don’t dominate the new customer space. We expect that this realisation by major players will drive significant innovation in their offering. Many of our customers report similar experiences in SIL. Plans are changing, and customers are more difficult to find. However, many customers will still seek accommodation next year, and SIL growth is still on the table with the right product.

Individualised Living Options (ILO)

As providers feel the pinch of slowing growth and shrinking margins, they’ll likely start looking for new markets to expand in. As we know, ILO is now in 9000 plans and potentially offers a much more community-oriented approach to supported independent living. In addition, some features of ILO include managing host-participant relationships, which many of the larger providers have experience in through managing their other portfolios, give them an advantage. As a result, Empathia Group expects renewed interest in the practical deployment and marketing of ILO in the coming year.

Now is the time to seriously think about your competitive advantage and value proposition. Developing compelling SIL products and finding the path to market is what we do best. If you would like to have a conversation with us, feel free to drop us a line.