The Financial Director interview - Working Capita

Capita is one of the biggest UK companies nobody has heard of. Despite boasts in its 2001 annual report that it touches the lives of 33 million UK residents, it is, quite deliberately, one of the most publicity-shy companies in the FTSE-100. “We are not about brand extension,” says Gordon Hurst, Capita’s group finance director, who joined the company as financial controller 12 years ago. He likens Capita to an accounts department: “The only time someone rings them is when they haven’t been paid. That’s the case with Capita.”

Capita’s anonymity is core to its business model. Its customers are mainly local authorities, large corporates and central government, under whose guise it undertakes a variety of outsourced operations management, revenue collection and IT consultancy projects. Every time you pay your council tax or television licence fee you hand the money over to Capita, masquerading as your local authority or the BBC. So the 33 million are not Capita’s customers, but its customers’ customers.

Capita is generally paid to generate more efficient revenue collection processes, mail the red bills and send the bailiffs round, but through organic growth and several medium-size acquisitions it also has an operational portfolio with expertise in emerging technologies, call centre management, share registration, insurance and management consultancy.

So vast is Capita’s operational scope that it is difficult for the uninitiated to classify the company. The media variously refers to the company as a business process outsourcer, management consultant, IT consultant and support services group. Hurst (“I’m not a big fan of semantics”) just adds to the mystery: “We are a professional support services company. Our role is to help large organisations run themselves better,” he says.

CASH IS KING
But the vagaries of Capita’s public persona are juxtaposed with the very tangible amounts of cash it generates. In financial year 2001 Capita’s turnover was £691m, a 52% increase on the previous year, with profit before tax increasing by 25% to £53m over the period.

Future cash streams are secured through large-scale deals that provide revenues over the medium to long term. In January 2001, for example, Capita landed a contract to develop, manage and administer the IT systems of Abbey National’s general insurance business – a deal worth £323m over ten years. More recently it was awarded a £500m BBC contract to collect licence fees for the next ten years, and secured £230m over five years to implement and manage the Transport for London traffic congestion charging scheme.

Deals are split into greenfield contracts, such as congestion charging and Capita’s involvement in the creation of the Home Office’s Criminal Records Bureau, and those, such as the BBC contract (previously held by Consignia), that have ongoing operations and inherited staff, facilities and systems.

While completely new projects offer Capita scope to create the most efficient processes from scratch, existing contracts, especially if Capita inherit staff from the public sector, require dedicated change management. But Hurst says this is not as difficult as might be thought, especially as there has been a noticeable increase in skills and IT awareness in the public sector in the last ten years.

“In the bid process we will already have done a fair bit of defining the financial structures. Often we don’t even take on the legacy financial system. We usually have a six-month period in which we set up our own systems, and after that we push the big red button and start recording transactions,” he says.

STRATEGY SHY
Despite its success, articulating strategy has never been Capita’s cup of tea. In an interview with Financial News in November 2000 Hurst described the esoteric nature of Capita’s business. “A differentiator in how we run Capita is that we make up our own rules … We take the task of running the group incrementally. We never use the word ‘strategic’,” he said.

Two years on, the strategy communicated to the City has become more defined, if not detailed. “We grow three ways. Firstly, through large contracts; then through organic revenue from the individual operating segments; and also through medium-size acquisitions that we can bolt into the operation,” he says.

The company’s operational structure goes some way to explain Hurst’s dislike of semantics. Capita is split into three: a business services division comprising administrative outsourcing operations, such as council tax collection; IT operations including systems management, consultancy and desktop management; and commercial services such as insurance outsourcing.

Hurst prefers to bid for large, multi-discipline contracts that utilise as many of these resources as possible. And, in order to win the biggest Capita must be flexible – the lines drawn between Capita’s three business segments are, to a large extent, artificial.

“The reason you might have a bit of difficulty distinguishing between the three business segments is that large contracts very often span divisions.

So the way we run the group and the way a balance sheet is dissected is not really relevant. Legally we try to collapse as many activities as possible into our main operating subsidiary – Capita Business Services.

We structure the company in the way we want to run it as opposed to its legal structure. The legal structure is either a detail of history or is tagged on afterwards,” he says.

A JOB FOR LIFE
Hurst’s role as finance director has developed to reflect the internal structure he set up. The divisional FDs look after the figures, and specialist managers from operating subsidiaries practice internally what they preach to clients, taking control of Capita’s 200-site strong property portfolio, treasury and insurance. Even external financial advisors are employed sparingly. When Capita acquired share registrant Independent Registrars Group for £100m in early 2000, no corporate financiers were involved.

For a company that specialises in undertaking non-core operations for other people, Capita does not seem to like other people returning the favour. The more Hurst can outsource internally to his finance team, the more time he can spend creating shareholder value through negotiating new contracts with clients. “One of my objectives is to constantly make myself redundant, so the next thing that comes along I can spend proper time on. If you make yourself redundant you have a strong team that can cope with the growing business,” he says.

Hurst is also Capita’s company secretary, and as the detail of the company’s business is making sure contracts with clients are watertight, this role is vital. If you enter a ten-year outsourcing deal with the public sector, especially in a sensitive area such as benefits or congestion charging, you better make sure that when IT systems fail or government policy changes you are not in the firing line.

“We are control freaks and paranoid about doing something wrong,” Hurst says. “That is why group level executives get heavily involved in contract negotiations. We all have face-to-face meetings with potential clients.

If you would call paranoia a company secretary mentality then yes, that’s part of my job.”

PRESS POWER
Hurst’s paranoia is well founded. If a large, public sector outsourcing project were to hit problems, Capita’s anonymity would go out of the window as the media sharpened its knives. Just how badly a deal can go wrong is known only too well by two of Capita’s competitors, Siemens Business Services and ITNET. In the past few years, Siemens has bungled a £100m immigration system for the Home Office, as well as installing a £230m IT infrastructure for issuing UK passports that resulted in mammoth delays for applicants. In 1997 ITNET was awarded a £70m contract by Hackney Council to administer benefits payments and systems failures resulted in sustained, negative press.

This is the stuff that FDs’ nightmares are made of – public interest is aroused by accusations of private sector exploitation of taxpayers’ money, and shareholders run for cover.

Capita has not been immune to criticism and in the past few weeks it had its wrists slapped by an all-party select committee investigating a £70m fraud of a government training grants scheme administered by Capita – Individual Learning Accounts (ILA). Unscrupulous members of the public exploited a loophole in the reporting structure between Capita, local authorities and the project adjudicator, opening accounts and claiming benefits using false names and addresses.

On paper Capita was not to blame. There was nothing in its contract that stated it should be responsible for closing the loophole or monitoring the validity of names and addresses. But the select committee said it should have taken a more proactive stance.

Hurst refers us to the contract. “Our role was primarily to provide the services that we were asked to provide,” he says. But he acknowledges that unforeseen problems are part and parcel of undertaking contracts. “As a result of ILA we are trying now to agree in advance with clients how to mitigate such problems,” he says. “It’s about getting the contract right.”

Getting it right means detailed risk analysis. And, unlike inherited contracts where most of the risks are known, new projects in the public eye, such as congestion charging, require a fee structure related to the potential risks and the amount of capital invested by Capita.

“All the components (of congestion charging) are tried and tested technologies. Most of the functions are already within our capabilities, so we have confidence about the pricing in those areas. But there are some new elements – it is the first traffic congestion charging scheme in the UK and it is a big project. So we are pricing accordingly through doing an extremely detailed risk assessment,” he says.

Capita’s fees are divided between a standard set fee that covers implementation and ongoing costs, and a variable fee depending on throughput and efficiency.

If Capita does the job well (and it has a 95% renewal rate on contracts), it is paid accordingly. But even if projects hit the rocks, Capita gets paid. And recently Hurst and his fellow directors were lambasted in the press for “excessive” pay rises in the light of ILA. Hurst picked up £2.2m in bonuses and exercised share options in 2001.

While there is nothing wrong with being rewarded for creating shareholder value, some members of the press, especially Private Eye – which claims ironically that Capita (known to the Eye as Crapita) is its “favourite private finance initiative firm” – have criticised the company’s involvement in the Criminal Records Bureau and the way the company earns fees from the public sector.

Hurst refuses to comment on Private Eye?s claims. “They have never been in here for a chat,” he says. “I suggest you ask them.” So we did. “We are constantly discovering specific instances of shortcomings in the services provided by Capita and see it as our duty to make our readers aware of these problems. Our regular updates on the company are set against the wider question of whether the government is right to outsource so much of its work to the private sector,” Private Eye said.

This is a coy statement in the light of the harsh criticism the Eye prints. Perhaps Capita is an easy target. As Hurst says: “If you are successful you are always there to be shot at.”