Capita baffles itself with its own complexity, but it’s no Carillion | Nils Pratley

What’s gone wrong at Capita? Just about everything, according to the new chief executive, Jonathan Lewis, making full use of an incomer’s prerogative to tell it as it is. “Capita is too complex, it is driven by a short-term focus and lacks operational discipline and financial flexibility,” he declared, volunteering underinvestment in IT and an addiction to acquisitions for good measure. It was almost a surprise that he didn’t roll out Private Eye’s old “Crapita” gag.

The urgent item on Lewis’s unlovely list is financial flexibility, meaning the need for a stronger balance sheet. The good news (although shareholders, viewing a share price down 47% on Wednesday to a 15-year low, may not see it that way) is that Capita is not in a hole of Carillion-style proportions.

It can ask its investors for fresh funds and make a decent case that they would be silly to refuse. Capita’s profits for 2018 will be far below City forecasts, but the return is still predicted to be a positive £270m-£300m. The company is also a pure outsourcer, concentrated in back-office processing work, whereas Carillion chiefly blew itself up in the riskier business of big construction contracts.

In case shareholders refuse to play ball, a £700m rights issue has been underwritten on a “standby” basis by Citi and Goldman Sachs. That looks to be a reasonably solid emergency package. Lewis at Capita is doing what Rupert Soames, via a £550m cash call, did at Serco in 2015 – addressing a crisis before it becomes life-threatening. If Carillion’s directors had similarly woken up two years ago, their company might still be alive.

The net effect is that Capita should emerge with reduced debt of one to two times operating earnings, and sufficient freedom to throw an extra £21m this year at the pension fund (in deficit by £381m at the last count) and make a pledge to make further reductions “a priority”. Again, that’s a far better position than Carillion’s. Not paying a dividend saves Capita £211m versus last year.

The bad news is that the operational problems plainly run deep. This is a company that has grown from annual turnover of £25m at flotation in 1991 to £5bn today and, the way Lewis tells it, nobody bothered to join the pieces. Capita was too busy chasing juicy contracts and making acquisitions (74 in the last six years) to get its house in order. This, remember, is a company that sells itself as a slick outfit that knows how to run other people’s operations better than they do. Instead, it seems to have baffled itself with its own complexity.

The biggest uncertainty, since it is the hardest to measure from outside, is the scale of underinvestment. A technology arms race is taking place across the business world, especially in the private-sector half of Capita’s territory such as insurance and banking. Once you’ve fallen behind, recovery is hard. Lewis, note, did not attempt to quantify how much it would cost to get the right digital kit for the automation age.

For the time being, Lewis gets the benefit of the doubt – his “shrink to fit” strategy is more credible than the obsessional pursuit of greater size. Half the boardroom has already been cleaned out and the biggest disposal, of the registrar unit for £880m, happened under his predecessor. But his task still represents an entire reinvention of a company that has worked only one way for 30 years. A turnaround will not happen easily. Serco, under Soames’s firmer whip, finds its share price going sideways. For outsourcers in general, contracts aren’t arriving at the old rate.

For its part, the government is right to state that Capita is not in comparable position to Carillion: the underwritten £700m rights issue makes the cases very different. But ministers and local authorities would also be right to put Capita’s claim to offer value for money, and smart business know-how, under the microscope. A company that pays out £1.1bn in dividends over six years, and then confesses to underinvestment, has lost its claim to management brilliance.