Wednesday 16 October 2019

Capita rehabilitation slow as outsourcing tarnished

John Lynch

We don't hear much these days about 'outsourcing' which may be no bad thing. The great Bill Gates summed up my idea of what outsourcing meant when he said that if you rely too much on other people and other countries you risk outsourcing your brain. An American novelist Tom Robbins caught the mood when he cynically quipped that he intended to outsource his next book to a couple of blokes in Bangalore.

Nevertheless, 30 and more years ago, especially in Britain, it was all the go and it has taken until now to see the chickens coming home to roost, as Public-Private Partnerships (PPP) have begun to creak.

The collapse of British government contractor Carillion has been a particularly spectacular failure.

It has forced Mrs May's government to unwillingly involve itself in the provision of school meals, hospital cleaning, the mothballing of hospital buildings and the call for the breakup for the big four accounting concerns. The group we are examining this week, Capita, has also been in the thick of it.

Capita was formed in 1987, quickly backed by venture capitalists and within four years was floated on the stock exchange.

It was once the largest outsourcing group in the UK and employed a significant number of people in Ireland, mainly on Nama projects.

It embraced a broad portfolio of activities from army recruitment, to collecting the BBC licence fee, electronic tagging of offenders and administering teachers' pensions.

After the Carillion collapse, Capita issued a profit warning and its shares plunged.

The group immediately scrapped its dividend payments and rushed to repair its balance sheet with a major rights issue.

The after-effect has badly shaken the outsourcing business model, which was based on a short-term focus on winning contracts, regardless of profitability, and lining up lots of acquisitions to provide a 'growth illusion'.

This fuelled shareholders returns as well as executives' pay and bonuses, even if cash flow was problematic and pension deficits soared. Outsourcers, meanwhile, lavished criticism on any hike in the minimum wage and on local authority cuts.

To survive and shore up its balance sheet Capita had to launch a £700m (€799m) fundraising after its pre-tax losses ballooned from £90m (€102m) in 2016 to £513m (€586m) last year.

The new funds issued at 70p a share will be used to tackle its £1.2bn debt, fund a turnaround plan and invest in new technology. Its reorganisation plans include cutting £175m in costs and generating £300m by selling its non-core businesses.

The plan will focus on building the business as a specialist in new technology, robotics and artificial intelligence.

This will shift the company further away from the blue-collar business end of outsourcing, and see it shift to directly compete with companies like Accenture, Cap Gemini, Blue Prism and Cognizant. Some analysts are of the opinion that this is very challenging.

Investors who held Capita shares have suffered. The group's market value has declined by 80pc to £2.3bn. Its shares are trading around £1.40 a share, a fall of more than three-quarters in the last year. Interestingly, five years ago they were trading above £10. Capita's rehabilitation will be slow and a dividend is unlikely in the near future.

The shares even at today's prices should be avoided.

Capita's problem has raised fundamental questions as to the extent to which public services should be handed over to private interests.

The UK Labour Party has promised to reverse the trend. After the Carillion collapse the Capita problems are worrying and the debacle shows the obsession with the idea that private is always best.

Recently the National Audit Office in the UK released a report raising questions about the benefits and costs of PPP and private finance initiatives. We in Ireland should examine our 'outsourcing' consciences before we too have a major problem to deal with.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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