Public sector in trouble – but not outsourcer Capita

The UK’s largest public sector outsourcing group  has insisted that its recent talks the government will lead to dilution in the quality of public services rather than denting the company's profit margins.

The coming months are expected to see a host of public services watered down under the terms of the deal with minister FrancisMaude. Capita contracts with central government range from the Criminal Records Bureau screening service and passport issuing to administering teachers' pensions.

"We've had an intelligent conversation about whether there were ways that services could be delivered differently  - albeit to a more appropriate standard than had maybe been procured  - with a view to saving money," said chief executive Paul Pindar. "So that's things like saying: 'Do the turnaround times of services need to be as fast as they've been specified?' Or: 'Is it necessary to have a telephone call answered 95% of the time within 10 seconds?' We've had a very intelligent engagement and looked at a whole raft of contracts that we had with a view to how we could save money in a way that was not going to impact on our profits."

In common with other leading government suppliers, Capita last month signed a memorandum of understanding with Maude's efficiency unit, setting out how existing contracts can be watered down to ease pressure on public finances.
Pindar was speaking after Capita issued a trading update warning shareholders that short-term cuts and delays to public spending decisions are temporarily proving more of a drag on revenues than expected. The group still reiterated its belief that it will ultimately emerge as a winner from the government's swingeing austerity drive — though the benefits are unlikely to be seen in revenue performance until the second half of next year.

With a bid pipeline running at record levels, Pindar was adamant Capita would not be pressured into surrendering margin in future contracts. "We've been doing this for 21 years and we've actually gradually improved operating margins."
"We're not going to be getting involved in business where we are bidding for things at suicidally cheap prices because that's not in anyone's interests. It's not in the shareholders' interest, the company's interest - or the customer's interest, because we have to have enough money to be able to invest in the service."

Analysts at Shore Capital said: "We agree with management that the scope for material growth from efficiency driven outsourcing contracts is high in the public sector, but we believe this is a process that is likely to take longer than has been indicated to date.
"We also believe that Capita's management team are likely to be disappointed by the slowness of this process. The order pipeline may be large, but it has been so for a considerable period of time. We reiterate that the return to growth is likely to impact margins negatively, perhaps materially, given both cost pressures and revised client expectations."