Capita back in profit after first year of turnaround

Outsourcing firm Capita has returned to growth in the UK, a year after signalling the need to restructure its finances in the wake of a profits warning and a £680 million rights issue. Following one year’s worth of organisational overhauls, the firm hopes further positive results are on the horizon, with further changes in the pipeline. 

In the wake of Carillion’s collapse at the start of last year, the outsourcing sector as a whole endured a troubled FY17. Serco saw a share slide of 3.9%; alongside Kier (-1.3%), G4S (-1.1%) and Interserve (-1.9%). Capita also slumped by 43%, and the company issued a profit warning before reporting a £513.1 million loss in its annual financial results in early 2018.

Beyond its financial results, Capita also suffered a succession of controversies in 2018, relating to its public sector contracts. When, alongside Atos’ Independent Assessment Services wing, Capita was said to be paid more than £700 million for a five-year contract assessing if disability claimants should receive Personal Independence Payments, MPs argued the DWP was “rewarding failure". Atos and Capita had a shared target for 3% or fewer of their reports to be ranked “unacceptable”, but 6% of Capita’s alone were found to be unacceptable.

Elsewhere, the professional services firm was further stricken by a scandal involving its mishandling of almost 50,000 letters relating to cancer screening information across England. The company, which has worked as an administrative support outsourcer for the NHS since 2015, failed to send the letters to patients, which had crucial information – including hundreds of abnormal test results – in their contents.

Despite this succession of issues, the company still managed to win a number of new contracts, including an NHS connectivity contract worth more than £5 million to help the Essex NHS Trust over the following five years. As a result, it was able to return to growth in 2018, and Capita reported a pre-tax profit of £272.6 million up to 31 December 2018. Adjusted profit has meanwhile been put at £282.1 million, slightly ahead of target, and Capita’s balance sheet has been strengthened with £1.1 billion raised through rights issues and disposals.

Jon Lewis, Capita’s CEO, said of the results, “We’ve successfully completed year one of our multi-year transformation, fixed the basics and are firmly on track. We’ve strengthened our balance sheet, achieved cost savings, and invested in our people. On top of that, we’ve improved our governance, introduced a “One Capita” operating model, and started turning around challenging contracts.”

Looking ahead, Capita is keen to accelerate cost competitiveness to realise cumulative savings of £175 million by the end of the year, with expectations that profit before tax will be between £265 million and £295 million in 2019. According to Lewis, key to this will be fixing three ‘problem’ contracts, in order to deliver on key performance indicators.

One of these is Capita’s recruiting partnering project (RPP) contract with the British Army, which was roundly criticised in a recent National Audit Office report. According to Lewis, the relationship here is already well on the way to being mended, thanks largely to the controversial ‘Snowflake’ campaign. Applications for the British Army are at a five-year high, and the ad campaign led to a 78% rise in website visits, though it was criticised in the media for its provocative approach to recruits.

At the same time, Lewis said action had been taken towards the end of 2018 over issues relating to the Primary Care Support England (PCSE) contract with NHS England. He also cited the transformation of Capita’s seven-year customer services contract with mobilcom-debitel – one of Germany’s largest mobile, internet services and telecoms products providers.

Lewis concluded, “The aggregate financial loss from these challenging contracts reduced from over £50 million in 2017 to around £30 million in 2018. We plan to generate an aggregate profit on the contracts in 2020, including reaching break-even on the PCSE and mobilcom-debitel contracts by the end of 2020. Our transformation still has some way to go. But I am very pleased with our progress. Our targets remain on track, and I’m excited about the prospects for a simplified and strengthened Capita.”