Capita CEO resigns and company drops from the FTSE 100

By Allan Watton on March 7, 2017

Reports suggest that it has not been a good year for global outsourcing giant Capita. What with the company’s first profit warning in September, reported project issues and what seems to be a weakening market across some of its core sectors.

But this month there have been two more announcements of note – Chief Executive Andy Parker’s resignation after just three years in the company’s top job, and Capita’s impending fall from the FTSE 100.

Capita are not alone in this latter misfortune, though, as the BBC announced last week that after 20% had been wiped off Dixons Carphone shares in the last six months, they too should expect to no longer be part of the FTSE 100 club by the end of March. In fact, as the companies included in this index are reviewed each quarter, it probably comes as no surprise that only 30 of the original FTSE 100 class of 1984 remain in the index today.

A recent BBC headline tries to connect the dots: “Capita boss to quit amid profit fall”, but what can we determine has brought them to this point and what does it mean for Capita’s many clients?

Capita is a significant international organisation, reportedly employing 75,000 people on three continents, so while these announcements may cause some discomfort, it should be noted that there does not seem to be any suggestion that ripples from these events will impact ongoing projects that Capita are involved in.

The now outgoing boss of Capita announced: “2016 was a challenging year and Capita delivered a disappointing performance. We are determined to turn this performance around. We have taken quick and decisive action to reduce our cost base, increase management accountability, simplify the business, strengthen the balance sheet, and return the Group to profitable growth.”

In fact, Capita reportedly cut a swath through middle management pre-Christmas in an exercise to make the organisation leaner and more capable of riding out the storm of 2017. It was further noted in the media that this is expected to be a bumpy transition period as Parker has suggested that growth is unlikely to kick in until 2018.

Reported criticism of Capita

Capita is an organisation that has spent years developing and nurturing its reputation, but in recent times the company has faced criticism, in the media and in the ‘halls of government power’. A few reported examples are:

  • Primary Care Support Services. NHS England awarded this seven-year £330m contract to Capita in September 2015, to run a variety of support services for GPs. But reported problems with this contract have resulted in the Health Secretary Jeremy Hunt bringing up the subject in a House of Commons debate on 27 February, saying: “If Capita does not perform what it is contracted to do, we will take all necessary measures, including ending the contract.”
  • Licence Fee Collection for the BBC. On the 26 February 2017, the Daily Mail ran a piece titled ‘BBC’s TV licence bullies are exposed: How ruthless bosses order staff to catch 28 people a week for bonuses of £15,000 a year’. Capita has the £58m a year job of collecting those licence fees, but as a result of revelations recently exposed and reported on in this article, the BBC has launched an investigation into Capita’s methods on the contract and what one BBC report described as an “aggressive incentive scheme”.
  • Vision 4DS Fire Incident Despatch System. Reports suggest that the system created by Capita and implemented in 2015 for an estimated £19.6m “regularly crashes and often fails to dispatch the closest fire engine”, causing delays in fire engine dispatching. As any delays in this vital service can risk lives, this is an important issue.
  • The Co-op Bank. Then there have also been issues over a reported dispute with the Co-op Bank and Capita’s role in its IT system transformation. In addition, the media seems to have a long memory about the electronic tagging incident and the withdrawal of Capita’s gas compliance services scheme – these are a few of the other projects that have impacted on the company’s reputation.

Falling profits

This month it was reported in the media that pre-tax profits had fallen by 33% to £74.8m, described by IT newsfeed The Register as the worst fall in its corporate history, but by Parker as “weaker than we had expected”. This has been explained as being due to project delays, weak trading in technology solutions, IT enterprise services, property, Capita Europe, and a slowdown in core sectors that it states are likely to have been affected by the referendum on the UK’s decision to leave the EU.

So, on the 20 March 2017, Capita, along with Dixons Carphone will exit the FTSE 100 after what has been described as a ‘disappointing’ year. No doubt they will be back, but the year ahead is likely to be challenging until the top job at Capita is in new, safe hands.

The media suggests that Capita is a big enough corporate entity to weather such a storm and that it claims to have already implemented changes to address not only the issues of the day, but also the criticism that has been laid at its door due to the challenged projects highlighted above.

If your organisation is involved with any supplier for mission-critical services who finds themselves in more challenging times, you may want to assure yourself by refreshing some due diligence to make sure your services will not be affected.

Due Diligence Pack

With any supplier, if you are unsure whether your levels of service are likely to be maintained, or whether they are already starting to reduce, here are a few points to look out for and how to address them if you determine that they will have a negative impact on your relationship.

Potential indicators of challenges ahead

Remember that indicators do not make an issue, so, while awareness is key, so is an investigation into the underlying causes behind an issue to determine its relevance and impact in the grand scheme of things:

  • Staff churn. Have you seen a lot of new faces recently? As people leave an organisation they need to be replaced and the resulting impact on your relationship depends on the quality of the replacements and the time it takes for them to get up to speed. Some churn is to be expected, however, when it becomes a regular occurrence you should consider why it’s happening.
  • Innovation falls off a cliff. Innovation is the life-blood of value within an outsourcing relationship. You are, after all, working with experts to benefit from their expertise. And part of this is accessing their knowledge on more efficient ways of achieving your stated goals or even to better them. When innovation is not forthcoming, it is essential to ask why.
  • Quality workforce deficit. If you recognise that not only have you started to see new faces, but when the supplier’s best people, those you rely most on for their expertise and project knowledge, become more difficult to access or disappear from the relationship, then it’s important to uncover whether this is a symptom of a larger problem with your supplier that could impact on your project.
  • Motivation starts to wane. Stressed and disincentivised staff tend to work to rule, doing the minimum possible to get by. If a service-wide malaise descends on your relationship, then start to ask questions – the right ones may reveal issues or alleviate worries.

How to address such challenges

The way in which you act when you perceive the possibility of an issue with reducing service levels or capabilities from your supplier will determine either peace of mind or damage limitation:

  • Check your contract. A well-drafted agreement provides for such an event, explaining what both parties are responsible for doing in these circumstances. If this is the case, it is important to follow its guidance to the letter so as not to jeopardise your legal position should things get to a stage when legal positions are most relevant. Contract knowledge is also important when it comes to the use of escalation processes and motivators to attempt to turn things around.
  • Document anything material. While you are sure to already have an in-house team managing your relationship with your supplier, it’s vital that efforts are redoubled in the area of information documentation as soon as you recognise a probable issue on the horizon. Should things escalate to a point where a face-to-face with your supplier is required – to put things back on track or renegotiate the terms of your agreement – it will be vital for you to be able to evidence your observations or issues of reduced service levels with them. If matters go still further, then you will need strong evidence of those issues having impacted on the supplier’s obligations to you and the ultimate recipients of the services they provide. And finally, if matters get very serious, your case will be strengthened or weakened by the detail of your documentation of the events that led you to that point.
  • Do not let productivity or quality slide. If you notice that quality or productivity levels are slipping against the background of suspected issues with your supplier, it is all the more important to ensure that you make it known that, not only are you fully aware of them, but that you are prepared to act accordingly. A show of measured strength is called for to ensure that one incident does not become a litany of contractual abuse.
  • Have a service delivery disaster recovery plan (not just a DR plan from the same supplier). Do you have a real service delivery backup plan if your supplier completely fails in its duties and is unable to remedy the position over a reasonable time? For those of you in the public sector, there are emergency procurement rules that, provided they are operated in the appropriate way, can assure you have a replacement service implemented quickly from an alternative supplier. In addition, there are legal tools available to ensure that if your legacy supplier attempts to ‘frustrate’ the process of moving to a different ‘emergency supplier’, they can be held accountable to remedy the situation and be forced to cooperate sensibly. From a general perspective, it also makes sense to regularly benchmark your legacy supplier’s costs against those of the market at large to ensure that you are getting true value. You can supplement this by staying in regular contact with others in the supplier market, should there a come a time when you need more than simply pricing information from them. To have such a service delivery backup plan will embolden a client to do what is most appropriate for the good of their service delivery relationship should the need arise.

Conclusion

No doubt the reported challenges that Capita, Serco, G4S and others have all experienced over the last year or so will hopefully help them in coming out of the other side in providing value-based services, strong service levels and good client relationships.

If your supplier starts to show the signs of the challenges identified above, it is important that you rapidly respond with intelligence gathering, contract clarity, rock-solid governance and a backup plan. It’s always best to plan for the worst while hoping for the best.

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