New Chancellor’s axe hits outsourcing firms

 Britain's profitable outsourcing industry is in sharp focus as Chancellor George Osborne and his Liberal Democrat deputy David Laws outlined plans to strip £6.2bn in spending from the public purse.

 In its first major financial announcement since taking office the coalition government pledged to scrap the £320m Child Trust Fund and save £1.7bn by cancelling contracts.

 Capita Group, which is the sole vendor of the children's fund and has a ten-year, £400m contract with the Criminal Records Bureau, bore the immediate brunt, shedding almost 2.5pc of its value. Payments to the Child Trust Fund will be scaled back in August and halted entirely from January 1, 2011.

Capita's shares ended down 19p at 780p, while Serco, which runs the Docklands Light Railway's iT and infrastructure operations, closed 2.5p off at 603.5p. of greater interest is the new government's war on multi-year megadeals.

Future iT outsourcing contracts will be capped at £100m, hurting the likes of Capita but benefiting specialist smaller vendors such as Vertex Group, Agilysys and Northgate, which closed down 1.5p at 175.75p.

 'The days of the £500m single-supplier contract are over,' said John o'Brien, senior analyst at research firm Ovum. That's good news for everyone as we will get best-of-breed suppliers, which isn't always the case when you use one big vendor.'

Yet outsourcers largely shrugged off the news. Markets have long factored in expected cuts by a new administration. Besides, investors are quietly hopeful that Britain's strained finances will be, at least for leading outsourcers, a blessing in disguise.

The coalition government will soon be forced to wield an axe rather than a scalpel, opening the door to outsourcers both big and small.  The Ministry of Defence has long planned to divest back-office services to the private sector, saving nearly £3bn over the next decade. At least £100m a year is expected to be saved by outsourcing the recruitment of soldiers and officers. But the really big fish is Britain's £200bn welfare system, with its inbuilt annual operating cost of £8bn - a godsend for the likes of Capita and Serco.