How bad is the situation with Capita?

How bad is the situation with Capita?

N Chadwick at geography.org.uk

Capita's turnover in Government has grown significantly in the last six years. They had been known as a local government specialist, but have made significant gains in both Central Government and NHS. In 2012, they earned £310m from Central Government, but in just three years, this had grown to £700m. Both the DWP and the MOD paid Capita in excess of £100m in 2015

In Local Government, their earnings went from £438m in 2012 to £664m in 2015, with Essex County Council paying out over £190m to the country's largest outsourcing company. Yup, you read that right. A local council spent £190m with Capita in a single year. (That's according to Essex's own data releases, so if someone wants to correct us, please show us where the error is).

We've got 340 public bodies in our database, since 2011 Capita has traded with 295 of them, that's an 86% market penetration. In 2012, they had 236 individual customers in the public sector, by 2015, they had 258 customers, so the number of customers wasn't growing, but their deals were getting bigger, which is borne out by their average transaction values.

In 2011 the average public sector payment to Capita was £11.8k, by 2015 this average had grown by 45% to £17k. With all of these customers and with all of this revenue, why are Capita in trouble?

In 2017 their average payment is back down to their 2011 level at £11.9k and according to the (incomplete) 2017 data they now have fewer customers in 2017 than they did in 2011.

Much of their growth has been funded by acquisition, so to have spent large amounts of money and to come away with fewer customers and falling revenues is going to hurt.

Is their current situation fatal? Absolutely not. This is not Carillion, their recent share sale would always mean a recalibration of their share price and they now have a much better balance sheet.

So where does this leave the Government? Well they're not out of the woods on this. They are heavily reliant on a company that is struggling to make a profit, and who will no doubt want to review its loss-making contracts.

The good news for Government is that this time, everyone has a bit more time on their hands, Capita's inevitable restructuring plus the likelihood that they'll walk away from some contracts can be managed by Government. It would be reasonable to expect Capita to sell some of their profitable operations too, which would further reduce exposure, so it’s not hard to see that if Capita has fewer contracts, exposure for Government will be reduced.

In one way the bullet is dodged, but why are we here in the first place? It’s probably because Capita isn't doing a good enough job in the first place. Having fewer contracts might be an improvement, but there will still be too many and with a much greater pressure to reduce costs and profitability, it seems possible that performance will fall.

Capita's decline won't be a surprise to many of those in procurement. They have a very poor reputation within Government as a firm that frequently fails to deliver. We've heard of many examples where Capita and other outsourcers take a "bid to win, deliver to profit" approach, which is a pretty cynical method of exploiting the public procurement processes. This is where outsourcers bid low to win the contract and then once they're in place, they use their position to grow their revenues to become profitable. They can achieve this because, once they start a large contract it’s so hard for buyers to get rid of them (and other companies like them) once they're in place.

This technique is often called "Land and Expand", which tells you all you need to know about how cynical it is. Moving contracts into profit can be done by either under-serving against the original proposal, or looking for additional pieces of work. Some of this is completed as change controls in the current contract, other times it is picking up new pieces of work. Plenty of Councils and Departments will tell you about "the meeting" where their outsourcer comes to discuss the state of the contract. Typically, they'll say that they can't deliver to the original spec because they've found a discrepancy from the original tender spec and they'll demand changes to the contract, which will cost more.

At this point, the buyer is cornered, if they want to eject the outsourcer, they'll face a legal battle as well as a significant delay to their project, which will include a re-tender, which means a delay of six months or so. When this is all taken into account, finding a couple of million behind the sofa is much more attractive than starting again. The problem is that it will keep happening, little by little the outsourcer will move into profit.

As companies without a consumer facing brand, outsourcers can afford to maintain a shonky reputation, as consumers can't boycott them. Government finds it hard to boycott suppliers, as it can get tricky to maintain a blacklist on the basis of "we don't like the way you behave". Instead they have to prove wilful misdeeds, which can be hard. But if these companies can bid, all they have to do is bid to win. Some buyers are so frustrated with some of these companies that I've heard of procurement staff being instructed to make a tender "so that company X can't win it".

Reducing the exposure to Capita is a good thing, but there's a much more fundamental problem that has to be addressed: how can we get procurement to deliver better public services? Radical transparency on contracts, aligned with a more proactive approach to contract management seems to be the only way to do this.




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