Capita update

(By Anthony Miller – Thursday, 26 Feb 2009 4:10pm). The stark difference in talking to Capita management vs other players in the sector becomes most apparent when you ask about the impact that the economy is having on decision making and pricing pressure. In Capita’s case the answer is “None and None”! Actually, CEO Paul Pindar mooted that in some cases decision making is a little swifter as the urgency to save costs becomes stronger. Frankly, if we got that response from almost any other player we’d be rather incredulous – but, as they say in the classics, the numbers speak for themselves.

And the numbers, as I highlighted earlier, are very good. About 6% of Capita’s 18% revenue growth came from acquisitions and most of the organic growth came from big-ticket wins. ‘True’ underlying growth was about 2%, which indicates a deceleration in 'discretionary' spend, usually the ‘cream’ on outsourcing contracts. Typically, Capita’s growth mix is roughly one-third acquisitive, one-third big-ticket and one-third underlying. So when underlying growth slows, they make it up with big-ticket wins. Indeed, so far in 2009 Capita has (nearly) signed a £500m/15 year Life & Pensions deal with Axa Sun Life (see Capita scores L&P megadeal at Axa) and four other big contracts totalling £110m. That’s about half the value of the all major deals they won in the whole of 2008! And, by the way, they only have one major contract, with DCSF, (£35m p.a.) up for renewal between now and 2012.

What was also quite striking was the distinct change in tone when Pindar talked about central government, now 10% of Capita’s revenues (2007: 12%). Previously Pindar had seemed resigned to a lack of government interest in actively pursuing BPO. Now he sees the mood in Whitehall changing – perhaps not surprisingly in the current economic climate – and expects gathering momentum as a result of HM Treasury’s Operational Efficiency Programme report, part of which is authored by ex-Logica CEO, Dr. Martin Read. The health sector is another area which has been low-key for Capita. However, revenues doubled last year (albeit to 2% of total), and Capita’s win at NHS Choices and the recent CHKS acquisition (see Capita makes 'intelligent' healthcare acquisition) are clear signals that they are now taking this sector seriously.

I asked Capita COO Simon Pilling whether the consolidation in the UK IT services sector was having any impact on their ability to partner with IT services players. In particular, I was curious how their relationship stands at Axon – with whom Capita partners at Service Birmingham, their JV with Birmingham City Council. Capita also partners with Axon to a lesser extent at Sheffield City Council. Pilling said that nothing has changed since Axon was acquired by HCL, but it was pretty clear to me they will be unlikely to partner with them in future deals now that HCL has made its aspirations in the UK L&P BPO market glaringly clear by buying Liberata Financial Services. Not many people realise that Capita has some 3,500 staff working in IT services (almost 10% of total headcount), mainly to support the IT infrastructure for client processing. Capita usually eschews major application development work, preferring to outsource this to the likes of Axon, Mastek, Sopra and Harvey Nash (via their Vietnam-based offshore development centre). Capita has its own offshore BPO centre in India with some 3,200 FTEs, and this is expected to be 4,500 by the end of the year.

I must say, it’s hard to find the ‘soft underbelly’ in Capita’s business – I’m not even sure there is one in practical terms. It’s very simply an extremely well managed company in the right place at the right time – and the right time, by the way, is any time!