Friday, 3 July 2009

Capita aims to double government business in 5 years

(By Anthony Miller – Friday 3rd July 2009 9:45am). A most interesting article in today’s FT (see here) voicing the expectation that the government will drive outsourcing even harder as the squeeze tightens on public sector finances. Top outsourcing players such as Capita, Serco, G4S (nee Group 4 Security), Care UK and of course BT Global Services, all seemed to agree that (in the words of Serco government business head, Tom Riall), “the boundaries (between the state and private sector) will get pushed back further”.

Capita CEO, Paul Pindar, went as far to say he would be “deeply disappointed” if he didn’t double the size of his government business within five years. Last year, Capita drove 48% of its £2.44b revenues from the public sector, down from 52% the year prior. Around 20% of Capita’s total revenues derived from Local Government (flat yoy) and 10% from Central Government, down from 12%. Doubling public sector revenues in five years, in effect 15% cagr, would add over £1b to Capita’s revenues by 2013, though at their recent growth rates, usually well above 15% p.a., this could still result in a lower mix of public sector business than today. According to the FT article, Pindar appeared to favour Capita's chances better under the Tories (a point we also made in our recent AnalystViews notes on the Effect of a Conservative government on the UK SITS sector), and was critical of the current government’s shilly-shallying on outsourcing. However, his comment that “It shouldn’t be a political debate, it should be common sense” seems a little naive coming from one of the sharpest and most politically astute CEOs I have had the pleasure to meet.

There’s a huge difference, of course, between local government and central government outsourcing. The latter tends to be unique, huge contracts rarely replicable. Local government outsourcing, though often smaller deals, has a much greater opportunity for ‘repeatability’ as has been well demonstrated in services such as revenue collection and benefits payments (“R&B”) which many players, including Capita, can make quite a good living from when they get it right. Of course, local government shared services can, in theory at least, greatly increase deal size, but we have warned many times that the economic ‘theory’ is likely to be smothered by the ‘political’ practice (as in “we’re all for shared services so long as it us that does the sharing”). Then, of course, you can really spice up the debate by adding a touch of offshoring to the mix – a topic conspicuously side-stepped in the Treasury’s recent Operational Efficiency Review.

Nonetheless, I think increased government outsourcing to the private sector is inevitable. My personal ‘problem’ is over which government activities should be outsourced. Generally I am behind ‘back office’ outsourcing. But I feel so uncomfortable about outsourcing activities that relate to civil liberty and, dare I say it, basic human rights, for example in the Prison Service. Our liberty is about the most precious right we have in society. I do not want mine ‘managed’ by P&L.

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