The New Economics Foundation report, A False Economy, published yesterday, said worthwhile services were being stripped out of the children's social care market in the name of efficiency. "Staff are being pressurised to slim down their offerings to compete on price," the report says. "Smaller scale, niche providers are finding themselves at a pronounced costs disadvantage."
The report picks out the Catholic Children's Society, which was forced to close in 2006 because it could not compete, despite its good reputation.
It also calls for a mixed funding approach to support third sector providers.
John Kemmis, chief executive of children's charity Voice, said: "We have hardly got a voluntary sector provider of residential services left because they are all being squeezed out."