Why Didn’t Capita Invest in Procurement? Maybe There Were Good Reasons …

We mentioned here the rather odd situation Capita finds itself in – telling its investors that it has been useless at procurement while selling procurement outsourcing, technology and consulting services.

So last weekend, I used this as a case study at the University of Birmingham, where I was running a session on procurement strategy on one of their MBA courses. I was competing with both the Royal Wedding and the Cup Final but had a good group ho actually weren’t procurement specialists in the main, but had chosen to take a procurement module as part of their wider MBA. Good choice, people!

I asked the group the following questions:

  • Why has procurement not previously been an area of focus for Capita?
  • What has changed now?
  • What barriers might a new Chief Procurement Officer find in implementing a procurement transformation programme?
  • Where might she/he start? (Suggest three or four initial areas of focus)

Now actually in thinking about the answers to these questions, and after the discussion at Birmingham, I started having a bit more sympathy with Capita than I originally did. Talking to a friend who knows the market and the firm well reinforced this too. So, in terms of Q1, why hasn’t Capita taken procurement seriously, at least at corporate level?

Well, their business model has been all about winning individual contracts, taking cost out of the operation, and hoping they win it again at re-tender. So, each Capita “lead” must act quickly, and act quite entrepreneurially to cut costs (and perhaps improve service, although cost is more often the key driver, we suspect).

There was therefore little incentive for the firm to develop central procurement expertise, and certainly in the early days where the firm had a lot of success, it probably just didn’t seem important. Speed of action was – and still is – key for those senior Capita people with P&L responsibility.  The business model means there would be little time for instance to see if centrally negotiated procurement contracts fit the needs of each contract. And remember every contract is different as well, so it is questionable just how much synergy there would be anyway in procurement terms.

As the Birmingham students also pointed out, many of the contracts were and are pretty labour-intensive too (back-office processing, call centres), so procurement spend, while significant, probably does not get as much attention as it might in some industries where it can account for 70% or more of total cost base. The group also suggested that Capita's own procurement consultancy people were probably too busy earning fees from clients to focus on their own business.

And of course, each Capita contract might disappear in three years (or whatever the contract period is) when the customer goes back out to the market, so that is another reason not to invest too much in “procurement transformation”, which as we all know takes some time.

Finally, in most cases, the staff who are transferred across to Capita when an outsource takes place are mainly operational – it is unlikely that the firm picked up much in the way of senior procurement expertise through the contract wins.

So, if Capita had developed a major procurement capability, which would have inevitably been central, given the churn of operational contracts, it could have become an expensive white elephant, not really used or valued by the front-line operational business units. You can imagine a heavily targeted and incentivised executive, trying to make money on his or her individual contract, seeing procurement as something that would just slow down their efforts and put barriers in the way.

It is therefore less surprising perhaps than it first appears that Capita hasn’t invested too much in building procurement capability. And that leads us onto the other questions, assuming now they will be putting more focus on the subject. We’ll come back to that in part 2.

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  1. Mr Grumpy:

    Depending on your definition of procurement capability Peter, they certainly did well to arm themselves with procurement professionals for the big back office contracts and for their consultancy arm of business. Makes you wonder why on earth they didn’t tap into that resource for themselves! It’s like sitting on a winning lottery ticket and not cashing it in.

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