Capita’s big new plan

Yesterday afternoon’s Capital Markets Day presentation was the first opportunity for new Capita CEO Adolfo Hernandez to outline to the City how he plans to fix profitability and get the Group expanding in the all right areas. Hernandez has been on board for less six months but has put together a decent assessment of where the problems lie, a coherent approach to focusing the business on core and growing activities, and a credible commitment to drive the technology enablement of Capita’s service delivery. Questions remain – this is yet another multiyear transformation programme – will the Capita staff team suffer from transformation fatigue? Funding the technology enablement and standardisation of Capita’s services could swallow big bucks. Hernandez is proposing to fund this all through £50m freed up through cost savings and efficiencies – is this enough to really shift the dial?

The theme for the event was a Better Capita – “Better Efficiencies, Better Technology, Better Delivery, Better Company” with Hernandez proposing to assign Capita’s services into three main ‘buckets’ – ‘Star Positions, Transformation Potential and Manage for Value’.

The ‘Star positions’ include services such as training modernisation, low emissions zone delivery, and pensions admin, with a view to developing standardised and repeatable propositions that can drive growth and be actively taken to market. Those areas deemed as having ‘Transformation Potential’ are core offerings that currently have a higher cost to service and where efficiencies would benefit from more technology, offshoring, partnering and/or automation. This includes the contact centre businesses, back-office delivery, Revs & Bens and Risk Assessment. Finally, a third bucket includes businesses that are to be ‘Managed for Value” – read divested, run off or radically transformed. This includes the IT networking business, IT managed Services, closed book L&P and standalone software. However, outgoing CFO Tim Weller made keen to make the point that this should not be seen as a “Portfolio Division Mark 2”.

Hernandez brings to Capita a long tech background (most recently AWS) and is rightly placing his faith in leveraging the big tech platforms to digitise service delivery and drive efficiency and effectiveness gains. Specifically, looking to partnerships with Microsoft, AWS, Salesforce and ServiceNow, as well as the potential of GenAI to transform. By way of example, Capita’s contact centre business is currently barely profitable, and lags the competition on margin. The business has partnered with AWS on CapitaContact using the cloud provider’s Amazon Connect cloud ‘contact centre in a box’ solution to pursue “higher-margin repeatable deals with improved cost predictability”. This coupled with much greater off/near shoring could make a big difference.

Growth and margin improvement in Capita Experience will also be aided by “Standardised omni-channel and multi-language offerings”, a push on GenAI and interestingly “expanding the call centre portfolio in adjacent markets in EMEA over time, using existing infrastructure”.

In the larger and better performing Public Service division the focus is also on cost saving, more standardisation and repeatability, and tech partnerships with the hyperscalers. The challenge here is that the services delivered are traditionally big bespoke, complex, multi service deals for government clients. Whilst there is scope for much more standardisation these are not commodity services, and the client base tends to view themselves as unique.

To make all of this happen, Hernandez is putting his faith in further cuts and efficiency savings being able to deliver £160m by Q2 2025, of which some £90m has already been actioned. Capita will then reinvest around £50m of these savings in new technology, propositions and standardisation. The need for digitisation within the group is desperately needed and where Capita is badly lagging much of the competition. This is not going to come cheap, and whilst £50m is unlikely to shift the dial, it is at least a start.

Alongside the strategy and transformation announcements, Capita issued improved medium-term targets for the Group that include low to mid-single digit revenue growth (although 2024 still expected to be flat) and an improved 6%-8% EBIT margin.

Overall, I thought the presentation set out a credible plan for the future of the business, that despite multiple years of transformation still needs fundamental change – most notably around tech enablement and digital transformation. My fear is that the Capita teams, having been through several transformation programmes, will be suffering from “transformation fatigue”. When asked what was different about this programme, Hernandez was keen to point out that the Jon Lewis transformation with more of a restructuring, fixing debt and pensions liabilities and getting the business off ‘life support’. The new programme is much more about developing a platform for growth that should crucially, feed through into the numbers and ultimately shareholder growth. Let’s not forget, the share price is currently still at 14p, at its height it was over £12.

Posted by Marc Hardwick at '09:03' - Tagged: strategy   transformation