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| Capita: beginning of the end for public service contracting | |
| (3 days later) | |
| It’s not the end for Capita. Its new boss, Jonathan Lewis, may manage to do what Rupert Soames seems to have accomplished at Serco and chop a loose, baggy outsourcing monster into something the markets might once again fancy. | It’s not the end for Capita. Its new boss, Jonathan Lewis, may manage to do what Rupert Soames seems to have accomplished at Serco and chop a loose, baggy outsourcing monster into something the markets might once again fancy. |
| But the markets, never a fount of wisdom, must soon realise it’s the beginning of the end for public service contracting by companies such as Capita – and Atos, Amey, G4S and the other giants. No sensible public authority, whether council, NHS trust, or Whitehall department, would let a contract to a company over which hang as many question marks as hang over Capita. After Carillion, it has simply become too unreliable, too risky and – once you have factored in the necessary insurance in case of failure – too costly. | But the markets, never a fount of wisdom, must soon realise it’s the beginning of the end for public service contracting by companies such as Capita – and Atos, Amey, G4S and the other giants. No sensible public authority, whether council, NHS trust, or Whitehall department, would let a contract to a company over which hang as many question marks as hang over Capita. After Carillion, it has simply become too unreliable, too risky and – once you have factored in the necessary insurance in case of failure – too costly. |
| Procurement chiefs and permanent secretaries should now be poring over their contracts with Capita | Procurement chiefs and permanent secretaries should now be poring over their contracts with Capita |
| Contracting is not bust because firms like Capita do a bad job, though Capita does have disasters to live down in GP payments, army recruitment, individual learning accounts, criminal records, court translation and so on. No, contracting is over because public bodies can never know enough about their partners’ business. | Contracting is not bust because firms like Capita do a bad job, though Capita does have disasters to live down in GP payments, army recruitment, individual learning accounts, criminal records, court translation and so on. No, contracting is over because public bodies can never know enough about their partners’ business. |
| Capita has simply grown too big and too complicated, as Lewis has sheepishly admitted. Who, outside the firm, understood the consequences on its cash flow of failing to keep its big private sector contract with Prudential, let alone the interplay between the Capita tentacles reaching into school administration, disability benefit assessment, car parking, licence fee collection, planning and teachers’ pensions? | Capita has simply grown too big and too complicated, as Lewis has sheepishly admitted. Who, outside the firm, understood the consequences on its cash flow of failing to keep its big private sector contract with Prudential, let alone the interplay between the Capita tentacles reaching into school administration, disability benefit assessment, car parking, licence fee collection, planning and teachers’ pensions? |
| Council chief executives have day jobs; they can’t spend hours reading the Financial Times and consulting analysts. Even if they did, City wide boys were tipping Capita’s shares as a “buy” as late as this Tuesday, which just shows how little outsiders know about the minutiae of company finance. | Council chief executives have day jobs; they can’t spend hours reading the Financial Times and consulting analysts. Even if they did, City wide boys were tipping Capita’s shares as a “buy” as late as this Tuesday, which just shows how little outsiders know about the minutiae of company finance. |
| Procurement chiefs and permanent secretaries should now be poring over their contracts with Capita and making contingency plans. Capita runs payroll in many councils and staff have to be paid, so immediate alternative arrangements should be in place. That costs money, which needs to be factored into the cost of this and future contracts. | Procurement chiefs and permanent secretaries should now be poring over their contracts with Capita and making contingency plans. Capita runs payroll in many councils and staff have to be paid, so immediate alternative arrangements should be in place. That costs money, which needs to be factored into the cost of this and future contracts. |
| A lot of people are saying “told you so”. Capita has long been, like Serco and Atos, a company without character, a firm that rose without trace, leaving disgruntlement in its wake. It needed to win new contracts in order to keep cash coming in and underbid to secure them, then cut staff and staff pay, resulting in service deterioration. Like an octopus Capita has gobbled up smaller firms, extending away from its original core business in local back office and “transactional” services. Capita’s growth since its foundation by Rod Aldridge in the 1980s has been extraordinary but, as we now see, unsustainable. | A lot of people are saying “told you so”. Capita has long been, like Serco and Atos, a company without character, a firm that rose without trace, leaving disgruntlement in its wake. It needed to win new contracts in order to keep cash coming in and underbid to secure them, then cut staff and staff pay, resulting in service deterioration. Like an octopus Capita has gobbled up smaller firms, extending away from its original core business in local back office and “transactional” services. Capita’s growth since its foundation by Rod Aldridge in the 1980s has been extraordinary but, as we now see, unsustainable. |
| Capita was founded in 1984 when ex-local government officer Rod Aldridge led a management buyout of the business from the Chartered Institute of Public Finance and Accountancy. At the time it had 33 employees. | Capita was founded in 1984 when ex-local government officer Rod Aldridge led a management buyout of the business from the Chartered Institute of Public Finance and Accountancy. At the time it had 33 employees. |
| The company joined the stock market in 1991 and became a member of the FTSE 100 in 2006. | The company joined the stock market in 1991 and became a member of the FTSE 100 in 2006. |
| In the same year Aldridge resigned as executive chairman after it was revealed he had lent the Labour party £1m. He denied suggestions the loan had any influence on the company winning government contracts but said he would step down to avoid any further controversy. | In the same year Aldridge resigned as executive chairman after it was revealed he had lent the Labour party £1m. He denied suggestions the loan had any influence on the company winning government contracts but said he would step down to avoid any further controversy. |
| He was replaced by Paul Pindar who became one of Britain’s best paid businessmen, earning £2.5m in 2012. He stepped down from the group in 2014 to move into private equity. | He was replaced by Paul Pindar who became one of Britain’s best paid businessmen, earning £2.5m in 2012. He stepped down from the group in 2014 to move into private equity. |
| Capita grew largely through acquisitions, but a series of profit warnings saw it lose its place in the FTSE 100 in March 2017. | Capita grew largely through acquisitions, but a series of profit warnings saw it lose its place in the FTSE 100 in March 2017. |
| • Employees: 67,000 (About 50,000 based in the UK) | • Employees: 67,000 (About 50,000 based in the UK) |
| • Revenue (2016): £4.9bn | • Revenue (2016): £4.9bn |
| • Pre-tax profit (2016): £475m | • Pre-tax profit (2016): £475m |
| • Proportion of business in public sector: 47% | • Proportion of business in public sector: 47% |
| • Dividend payout (2016): £210m | • Dividend payout (2016): £210m |
| • Net debt (expected at end of 2017): £1.15bn | • Net debt (expected at end of 2017): £1.15bn |
| • Pension deficit: £381m | • Pension deficit: £381m |
| • Share price peak: £13.26 July 2015 | • Share price peak: £13.26 July 2015 |
| • Share price now: 196p | • Share price now: 196p |
| • Market capitalisation at peak: £8.8bn | • Market capitalisation at peak: £8.8bn |
| • Market capitalisation now: £1.3bn | • Market capitalisation now: £1.3bn |
| Because of Capita’s stretch, simple formulae don’t apply. Winding it up or even “nationalising” it, as some have suggested, ignores the diversity of its contracts. The Cabinet Office ranks Capita high in its list of 29 strategic suppliers and even pays it to train civil servants. But Capita also has a string of small scale contracts in local government, including the one concluded just the other day with Sheffield to set up pay and display parking machines. | Because of Capita’s stretch, simple formulae don’t apply. Winding it up or even “nationalising” it, as some have suggested, ignores the diversity of its contracts. The Cabinet Office ranks Capita high in its list of 29 strategic suppliers and even pays it to train civil servants. But Capita also has a string of small scale contracts in local government, including the one concluded just the other day with Sheffield to set up pay and display parking machines. |
| The record is patchy. Birmingham council last year opted for a much reduced IT and services deal. But in other councils, Capita is reckoned to be a partner and such councils would struggle, some with reluctance, to substitute either another company, or bring existing work in house by recruiting or transferring staff. | The record is patchy. Birmingham council last year opted for a much reduced IT and services deal. But in other councils, Capita is reckoned to be a partner and such councils would struggle, some with reluctance, to substitute either another company, or bring existing work in house by recruiting or transferring staff. |
| The scandal of outsourcing isn’t the performance of companies but the ignorance of the state. We don’t know the extent of Capita’s public commitments, tangled and concealed as they are. Capita’s Crown Representative – appointed by the Cabinet Office to oversee its contracts with central government – is Meryl Bushell. If she’s wise, she will be putting together an exhaustive list of the company’s public contracts, including local government and the devolved administrations as well as the NHS, where it is controversially involved in paying (or not, as it turns out) GPs and running Nottingham’s sustainability and transformation programme. | The scandal of outsourcing isn’t the performance of companies but the ignorance of the state. We don’t know the extent of Capita’s public commitments, tangled and concealed as they are. Capita’s Crown Representative – appointed by the Cabinet Office to oversee its contracts with central government – is Meryl Bushell. If she’s wise, she will be putting together an exhaustive list of the company’s public contracts, including local government and the devolved administrations as well as the NHS, where it is controversially involved in paying (or not, as it turns out) GPs and running Nottingham’s sustainability and transformation programme. |
| Only once we know the extent of the firm’s commitments can the full risk of a commercial collapse be assessed and contingency plans made. | Only once we know the extent of the firm’s commitments can the full risk of a commercial collapse be assessed and contingency plans made. |
| David Walker’s pamphlet Out of Contract written with John Tizard was recently published by the Smith Institute. | David Walker’s pamphlet Out of Contract written with John Tizard was recently published by the Smith Institute. |
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