Capita Rights Issue & Procurement Points To Watch When Suppliers Are In Trouble

Last week, services provider Capita announced a rights issue to shore up the firm’s finances. Investors chipped in £701 million in new money as pre-tax losses for 2017 came in at a whopping £513.1 million.

Some of that was “kitchen sink” accounting, clearing the slate by Jon Lewis, the fairly new CEO, but it follows several years of increasing problems for the giant firm, whose interests cover software, consulting services and a vast range of outsourced service provision, with the UK public sector representing a large percentage of that business.

The rights issue was a success and the share price picked up towards the end of the week, so there is a good chance that this won’t be the “next Carillion” as some commentators have predicted. However, that doesn’t mean customers of the firm can relax. Reading some of the comments made by the top management at Capita in their presentations to investors was a reminder of some issues that can arise when suppliers are in this type of position.

So here is a quick checklist that buyers might want to note and consider in terms of the ongoing contract and supplier management of the firm – or indeed of any other provider whose finances are not in the best shape.

1. Obviously, make sure you are monitoring the supplier’s financial health. It is not enough to do a quick check when the contract is let and then hope for the best; ongoing monitoring is essential. That can pick up, for example, any deterioration in the firm’s payment profile, which can indicate growing problems.

2. Watch out for the supplier’s cost cutting measures which might influence their service to you. Capita talked about making annualised savings of £175 million by 2020 in the statement last week. Now that might be achievable without hurting their customers, but clearly there are steps that could be taken which would be negative. Don’t let a supplier cut their costs at your expense.

3. Similarly, firms in trouble look to increase revenue and profit from existing customers by squeezing more out of contractual terms, increasing prices – or growing business, which could be very legitimate. But look out for unexpected price rises, charges for peripheral services that perhaps were previously included, more rigorous application of the “small print” in contracts and so on.

4. Capita also announced that there will be disposals. That is likely to be the more peripheral parts of their business, but sometimes such corporate events can be disruptive to customers. Watch out for that, and it is worth checking what your contract says about such events -  you may have the right to terminate if the business unit is sold.

5. An inevitable consequence of turmoil in any firm is that staff turnover increases. That can mean people on the supply side who are important to customers disappear. There maybe little you can do about this, but if there are critical people, then ask the supplier whether and how they manage succession planning and risk around key staff.

These are all relatively immediate points to consider with Capita and any firm in this situation. Some are particularly worrying when we consider customers such as Barnet Council*, where Capita perform many essential council services under what already appears to be a badly designed and badly run contract.

But there are longer-term issues too. Capita has said, not surprisingly, that it will be more selective in what it will bid for in the future. That could reduce competition in some markets and for some services, including those where competition is already limited.

In the UK government, it has been a given for many years that Capita would bid for pretty much any large “business services” contract, whatever the nature of the service. If that is no longer the case, and with Carillion no longer on the scene, then the list of potential bidders may start looking very thin. There is Serco of course, who even after their own problems now start looking quite well positioned for the future!

No doubt the “Crown Representative” for Capita will be keeping an eye on this in the UK central government sector. But it may also be another factor which leads to less outsourcing and more internal service delivery in the UK public sector in coming years.

You might also want to read our short briefing paper, produced with risk platform providers riskmethods, and titled The Most Effective Ways to Mitigate Supplier Financial Risk, which you can download here; free of charge of course.

(*Coincidentally, we just found out that a report on the Barnet Capita contract has been published today by the Unite Trade Union - we will take a look at it and let you know if it is worth reading).

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