The challenges are clear, but what’s the solution? Responding to the NAO’s report on children’s residential care

The National Audit Office’s (NAO) most recent report joins a growing number that have sounded the alarm on the crisis in children’s residential care. While the report confirms the scale of the problem, it may leave local leaders asking, ‘what can we do now?’. In this blog, Ross reflects on the NAO's findings as well as our own report, 'Forecasting, Commissioning and Market Shaping', to explore some of the practical steps local authorities can take to navigate this crisis and improve outcomes for children and young people.

Last week’s National Audit Office’s report on children’s residential care confirms what many

in the sector already know. It is the latest in a long line of reports from the likes of the Competition and Markets Authority, the Independent Review of Children's Social Care, and our report from last year. All of these point to the same conclusion – the current system is financially unsustainable and is failing to provide the stability and care our most vulnerable children need.

It's time to shift from identifying the problem to taking action. This blog aims to do that by recognising the challenges local authorities experience and sharing research-based insights to provide approaches to move forward.

The NAO highlights some well-known challenges

The NAO report verifies that the residential care system is under massive strain and experiencing multiple challenges:

• Soaring costs: Spending on children’s residential care has nearly doubled over just five years, reaching £3.1 billion in 2023-24, at a time when local authority budgets are already stretched to the limit.

• A dysfunctional market: The sharp rise in costs is driven by increased demand, especially from children with complex needs, and a market dominated by private providers (who now operate 84% of children’s homes). The largest providers report average profit margins of 22.6%, which indicates strong market power and limited competition.

• Poor outcomes for children: The human impact behind these figures is alarming. Almost half of the children in residential care are placed more than 20 miles from their homes, severing connections to families, communities, healthcare and education. There is also a continuing rise in children being placed in unregistered homes, reflecting systemic failings that leave some of the most vulnerable without appropriate care.

  
  

Insights from our research: What can local authorities do now?

Our own research, based on deep-dive engagement with nearly 50 local authorities, observed these realities across England. While there are no silver bullets, we identified several opportunities for local authorities that can help ease pressures and improve outcomes for children and young people.

1. Improve data collection and analysis

A key finding was that many local authorities lack reliable and comprehensive data about placement supply and demand. Poor data collection approaches and unclear typologies of need result in inaccurate forecasting activity and difficulties developing clear plans. Without this, councils find themselves competing for scarce placements at premium prices due to last-minute spot purchasing.

Some local authorities and regions have addressed data quality issues effectively and are using data analysis to support commissioning decisions. For example, the Pan-London Placement Commissioning Programme has been developing a shared data set across London boroughs to create a clearer picture of regional needs and placement availability. By pooling their data, the London boroughs can achieve a more sophisticated, region-wide understanding of future demand and it is anticipated that this will enables them to commission more proactively and strategically.

This example and others provide important models from which others can learn and illustrate the untapped potential in improving data use.

1. Adopt a more active market-shaping approach

Another way of countering the rise in expensive spot purchasing is by moving towards more active market-shaping. Market shaping involves local authorities working strategically with providers to communicate expectations, build relationships, and create a stable, effective care services market. This requires moving away from outdated, budget-driven sufficiency plans toward genuine dialogue with providers about their ambitions and constraints. This helps to build a more responsive and sustainable local market.

The White Rose consortium engages in extensive joint work with providers. This includes holding regular market engagement events to communicate their collective long-term commissioning intentions. This level of communication and collaboration gives providers the market intelligence and confidence they need to invest in developing new, high-quality local provision. This helps to create a more stable and responsive market that is better aligned with the actual needs of children.

1. Shift towards relational commissioning

A promising trend is the shift towards relational commissioning, which prioritises the establishment of strong, collaborative relationships with providers. We identified instances where local authorities actively engaged providers early in the procurement process and employed co-production methods for service design. There are also multiple examples of authorities moving away from transactional relationships towards longer-term contracts and risk sharing agreements. This includes strategic partnerships which include a deeper level of collaboration and alignment of resources.

One example is the Homes and Horizons programme. This is a partnership in Somerset between the Council, the local NHS Foundation Trust, and the charity Homes2Inspire. It provides holistic, wrap-around care for children with complex needs by integrating health and education services into its residential and foster care provision. The initiative is underpinned by a 10-year contract designed to create a long-term partnership. The Council took the initial financial risk by purchasing properties and providing a mobilisation fund, and the ongoing arrangements include a transparent ‘cost-plus’ financial model that enables the provider to cover their costs and generate a reasonable surplus.

By building trust and transparency with providers, local authorities can encourage investment in the types of specialist, local homes that are desperately needed, ultimately securing better care and better value.

Ensuring longer-term and meaningful change

Local action is part of the solution. However, the scale of the challenges also necessitates a coordinated national response.

The NAO report noted that the Department for Education has implemented reforms under both the previous government's Stable Homes, Built on Love strategy and Labour's Keeping Children Safe, helping Families Thrive program. The Children's Wellbeing and Schools Bill, for instance, is progressing and promises to increase the financial transparency of large providers, with a "backstop provision" to cap profits if excessive profiteering continues.

The government has also funded the development of two Regional Care Co-operatives (RCCs) to encourage local authorities to work together. The RCCs are groups of councils working together to better plan for the children in their region and shape the market collectively. As implementation partners for the pathfinders in both Greater Manchester and the South East, we’ve seen first-hand the potential of this model. Greater Manchester became operational in March 2025, with the South East set to go live later this year (you can read more about their implementation here).

The NAO is right to point out that the full impact of these measures is yet to be felt, as the development of RCCs is currently limited to the Pathfinder areas. However, the early signs from the two RCCs is incredibly promising and shows what can be achieved when local authorities are empowered to work together to shape their local systems.

The challenge now is to build on this success. Instead of a slow, incremental rollout, we need a clear national commitment to expand this model with the pace and investment required to make a difference for children everywhere.

The NAO has provided the latest wake-up call. Local authorities should leverage every possible tool to mitigate the challenges. However, lasting change depends on national leadership backed by adequate funding and legislative reform.

For more insights, case studies, and opportunities to improve practice, read our full report here.

If you would like to discuss any of the themes discussed in this blog, please get in touch with Ross at ross.murray@mutualventures.co.uk