The interim healthcare market in 2017: Key statistics (2/2)In January 2017 we arranged a semi social team lunch between Kathryn, Mel and I. Unfortunately the tone turned quite gloomy. Our pipeline was thin, the IR35 legislation change had been confirmed a month previously and all NHS organisations were enduring the same pressure from the centre to reduce their use of all forms of temporary staffing. I found myself reassuring Mel and Kathryn – there was enough cash in the business to cover costs for a good 6 months, if not longer. We could weather a pretty prolonged storm. Had you told me then that in 2017 we would better our 2016 performance I would have delighted and surprised. But that is what we have achieved, despite some heavy turbulence along the way.
Our number of placements in 2017 was 2 shy of the total in 2016, but the context is everything, we can be far prouder of the 2017 number than the 2016 number. 2016 was the first full calendar year for Melber Flinn, having started in August 2015. There were 3 good reasons for our success in 2016. We started in the January with a higher than expected number of interims out, this always assures some financial comfort and you can see the revenue dropping in from that book of interims over the following 1-9 months. We also had one big client who gave us a lot of repeat business, which ultimately amounted to 40% of our total sales in the year. Finally, the market was relatively unregulated by current standards by HMRC and NHSI, IR35 was as was, yes we had price caps from April 2016 but compliance was patchy, and NHSI and NHSE business case processes didn’t hit until December 2016.
In January 2017 we started the year with a lower number of interims out, and a smaller pipeline. IR35 legislation change was due in April, but the anticipation of it was stalling the market even before it arrived. There was also a step change in interventional activity from NHSI, as they sought to have greater control over the interim exec market, and closely performance manage trusts on interim usage, aswell as regulate through the business case approval processes. Against those stronger headwinds we expected a deterioration in financial performance.
So why did we fair so well? I think through a combination of reasons, naturally the age of the business helps, as does a growing awareness of our brand which comes with the passing of time. We developed a stronger more proactive business development approach, with Mel and I working in tandem in terms of how we targeted new business and maintained current relationships. Kathryn’s role has grown, as she has taken on more accounting and finance duties, which has allowed Mel and I to focus on the recruitment. We work very well as a combined team. We have also diversified the client base, which means we will over time get more repeat business from more clients, which creates a healthy multiplier effect.
Interestingly though whilst we made 4% less placements in 2017 compared to 2016, we made 10% more in gross profit. So you might conclude we were making more revenue per placement in 2017, but this isn’t strictly true. You can’t directly correlate number of placements to financial revenue, as placements have different values in financial terms – dependent on the percentage margin, the candidate rate, and crucially, how long the interim works for. Those first two, average candidate rate and percentage margin, stayed remarkably constant. The average day rate for our placed candidates in 2017 was on £2 less than it was in 2016. We would have expected a greater drop given the pressures of price caps and the introduction of business cases approval processes for placement rates exceeding 750 / day. Our margin also held up at just under 15%, which again is something I will talk about more in a future blog.
One big new feature of our business in 2017 was revenue through one off fees. In 2016 we charged only one introduction fee, the rest of our placements that year were margin, ie we paid the interim and we charged the client the candidate rate plus margin. Contrast this with 2017, where 28% of our placements were a fee, and the remainder were margin. Charging fees is almost always worth less in revenue terms than charging, for reasons I will fully explain again in a future blog.
So why more one off fees? In 2017 the pressure was on from the centre for NHS organisations to engage interims sparingly, and where it could not be avoided to appoint them on a paye basis, ie on the bank, or fixed term contract. The change in IR35 legislation also indirectly encouraged greater use of paye models, as trusts struggling with new IR35 determination responsibilities felt it safer just not bothering to engage interims through companies. Where we placed interims on paye models, we would charge an introduction fee, usually calculated as a percentage of the salary, or sometimes we would charge a separate margin, ie the margin that we would have earned anyway if we had been hosting the contract. And of the 72% remaining placements which were day rate and margin, 1 third were in scope and 2 thirds were out of scope if IR35.
Encouragingly the fee based placements were all condensed into April, May, June and July, which was to be expected with the reaction to IR35 legislation change. For us they have since slowed right down, and we only had one between August and December. Which might suggest that day rate interim contracts are growing again in number. Sadly, I can’t report any detectable shift in client behaviour around IR35 yet. Starting in August we had a run of 10 placements in a row that were out of scope, we felt that the conservative reaction of comply comply comply might have quickly blown over, but we then finished the year with 8 out of our last 10 placements being in scope. Its tough to speculate on this point, although I still maintain over the long term things will improve. As clients come to understand IR35 better, as they come to market from to time, or get the right advice, awareness and knowledge will grow and a greater proportion of roles will be properly assessed, or structured properly to allow them to be out of scope of IR35. We’re still seeing ignorance drive too many automatic in scope determinations.
So we enter 2018 with significant hope and optimism. Our interim book is good, the pipeline is strong and with the addition or Rachel to the team to lead on commissioning and system wide roles we have the base from which to build further. We might have another team lunch at some point in January, but hopefully the general banter will be far less gloomy than this time last year.