SERCO & CAPITA: Does Fortune Favour the Brave?

By Allan Watton on

Serco and Capita: Does Fortune Favour the Brave?

2015 was a tumultuous year for the outsourcing industry. Somerset Council finally decided to end the remaining elements of their ten-year contract with strategic partner Southwest One, two years early. Cornwall Council won their case against BT to terminate their ten-year relationship, eight years early. And Serco has announced that its profits are likely to halve in 2016. Not a great year by anyone’s standards.

However, Capita has bucked this trend with unparalleled growth resulting from a string of acquisitions and increases in their bid pipeline – indicating that there is still an appetite for continued and expanding outsourcing deals.

Between Serco and Capita, they seem to have experienced challenges at either end of the outsourcing spectrum.

Kerry Hallard, Chief Executive of the National Outsourcing Association (NOA) says that:
“Disruption in the outsourcing industry over the past 12 months surpasses changes seen during the last 12 years.”

According to a survey conducted by the NOA, 78% of respondents stated that their organisations would be expanding their use of outsourcing over the next five years. In a separate paper, published by PA Consulting in specific reference to IT outsourcing, they found that 40% of respondents would increase their use of outsourcing. It would appear then that there are great opportunities for growth for the right outsourcing partners taking the right approach.

The NOA study examines the reasons for outsourcing. As you might expect ‘cutting costs’ was high on the agenda, but interestingly, respondents also cited “improving the end customer experience” and “utilising new digital technology” as reasons for expanding their outsourcing activity. Similarly, in the PA Consulting report, they found that the wish to “transform new business” and “access new/better resources” were also strong motivators.

Poor innovation and new ways of working

Ironically, what the PA Consulting report also found was that respondents gave poor scores for ‘innovation’, ‘proactivity’ and ‘ability to drive change’ when describing their current partnerships.

With acrimonious partnerships hitting the headlines, yet with research to show that there’s real room to grow, 2015 has been something of a ‘mixed bag’. There appear to be plenty of opportunities out there for suppliers that have the right skills and expertise, but there also appears to be a lot of room for improvement among existing relationships, contracts and the way that strategic partners and outsourcers do business.

These statistics may point to a greater need among client organisations to take more effective precautions during the supplier selection stage of the procurement process. If you’re looking to ‘transform business’, ‘utilise new technology’ and ‘access new/better resources’ – you would do well to clarify how you would undertake more appropriate due diligence on those suppliers guilty of poor innovation, lacklustre proactivity and a history of having difficulty driving change and transformation.

Some of these challenges and opportunities are highlighted in the plight of Serco in recent years, and in Capita’s successes in 2015.

Serco agreed to sell its Indian business processing outsourcing (BPO) in September 2015 to refocus on public sector contracts in the UK and US. The Serco story centres around the challenges that saw it temporarily banned from bidding on UK government contracts. However, from recent reports, Rupert Soames seems to be rebuilding relations with the public sector and it appears that there may be new opportunities on the horizon there. For some stakeholders, this may come as small consolation in the face of news that the absence of the BPO next year will reduce profits by about £20m, and revenues by £300m. When added to other international losses across the US and Australia, it is reported that revenues are expected to be around £700m less in 2016 than the £3.5bn that they were last year.

That said, with Rupert Soames’ repositioning of Serco, they are hoping to be well enough placed to take advantage of the new contract opportunities offered by Michael Gove in building nine new prisons; whilst the Ministry of Defence is looking to outsource more of its civilian operations as a result of their latest spending review. So whilst it hasn’t been plain sailing for Serco, Rupert Soames appears to have a steady hand on the tiller.

It is reported that Capita on the other hand have seen its underlying revenue increase by 10% to £2.28bn. Of this increase, 3% came from organic growth and 7% stemmed from acquisitions. Capita have secured ten major contracts with an aggregate value of £1.6bn; of which 76% is new business, the remaining 24% coming from renewed contracts. Capita states that this represents a win rate of above two in three.

This growth appears to give credence to the survey findings of both the NOA and PA Consulting. However, in specific reference to UK IT outsourcing, the PA Consulting report also highlighted user reviews of supplier performance. When asked to rate ‘general satisfaction with outsourcing contract’, respondents gave Capita an overall score of just 64%, placing it 24th among other IT outsourcing partners – and 5% below the average of 69%. So whilst Capita’s growth and acquisitions are of credit to it, the market is wondering whether this is sustainable.

As findings like these circulate and as experienced outsourcing veterans share their war stories, there seems to be anecdotal evidence that many organisations are beginning to change the way they think about, and approach, strategic outsourcing partnerships.

As part of our work in helping organisations both engage with new strategic outsourcing partners and improve the performance of existing relationships, we’ve talked for some time about the vital difference between how one might go about procuring strategic outsourcing partners and other procured services. In doing so we’ve strongly advocated pre-contractual due diligence, outcome-based relationships and flexible/agile contracts that allow service delivery and relationship dynamics to evolve and reshape in line with changing objectives and circumstances.

Kerry Hallard feels that this will become more commonplace:
“Contract values will be more outcome-based, providers will be contracted as systems integrators sharing risk, procurement will become a more important part of the process and notice periods will become significantly shorter.”

Jos Creese, ex-CIO of Hampshire County Council echoed our sentiments in an interview with
“…my view is that you need to keep your contracts much more flexible. You need to admit that you don’t know what you are going to be using all this stuff for. I’m not saying you shouldn’t have some measures – benchmarking is important – but you need to have enough flexibility in your contracts for you to be able to go back and say, ‘I now want to do something very different’.”

Whilst we’ve had a model for reshaping strategic outsourcing partnerships for many years, the shift to flexible, innovative and outcome-led partnerships now seems to be gaining ground, due to emerging evidence that these partnerships drive much better value. This is a welcome move as the outsourcing industry seems poised to grow further.

It’s just unfortunate that both Somerset County and Cornwall Council have found themselves in relationships that don’t seem able to flex to the revised circumstances they find themselves in. That said, their example has led to the development of more robust client functions and the publication of an anthology of ‘lessons learned’ and research that should help other procurement and relationship management professionals with their own projects, to prevent the same challenges from occurring in future.

So what can organisations do differently in 2016?

1. With a thirst for new technology, better end-user experience and a drive for change and innovation, strategic partnership stakeholders would do well to approach their future projects with even more open minds, aware of the need to adapt to the often changing needs of the project.

2. Risk-sharing and collaboration are becoming more commonplace and represent a great opportunity to deliver greater value. Arguably, the days of outsourcing service delivery in a ‘fire and forget’ fashion are coming to an end.

3. To drive innovation and much better value overall, procurement and project management professionals are finding it necessary to become more involved and to either acquire or bring in new skills to help unlock new value streams and to identify hidden risks and gaps in supplier proposals. Fortunately, many forward-thinking outsourcing partners are embracing this by developing joint ventures and innovative business and partnership models that allow for risk sharing and the cross-pollination of ideas that allow clients to ‘do more, with less’.

If you’re interested in finding out how you can start more effective partnerships, or if you’re looking to improve one you’re already running, you might find our ‘Improving Outsourcing Relationships’ paper helpful. Its 43 pages detail eight fundamental steps to driving maximum value in your strategic outsourcing relationships.