Clancy does us great service by ditching costly Capita deal
As I’d repeatedly stressed during the dying days of the Bore supremacy, Service Birmingham was putting an extra bite in the ‘jaws of doom’ facing the council. Sadly Sir Albert never quite got it.
The last set of figures available (for the year ending December 31, 2015 – around the time Sir Albert was finally forced out) showed a gross profit of £15 million on a turnover of £87 million.
That’s down from 2014, which saw gross profits of £18 million on a turnover of just under £100 million but still a pretty hefty profit for Capita of £1.25 million a month.
And, as in previous years, Service Birmingham bought tens of millions of pounds of ‘stuff ’ from other Capita companies, all of which no doubt were making significant profits. So the gross profits figure of £15 million is a significant understatement of the true ‘value extraction’ by Capita Group as a whole in 2015, which was over £20 million on my back-of-a-spreadsheet calculation. Clancy stated that scrapping Service Birmingham will save £11.5 million this year – money that prevents further front line service cuts. This is exactly what many of us have been calling for for years. There will be further savings down the line. It had been argued previously that the council simply couldn’t get out of the Service Birmingham arrangement as cancellation costs were too high. The scale of these costs was censored by council lawyers who raided the marker pen cupboard in scrubbing out the juiciest bits of the contract before a ‘redacted’ version was finally put online after sustained public pressure back in 2014. During the leadership contest to replace the toppled Bore in late 2015, the Service Birmingham chairman, Barry Henley, put those costs in the £20 million – £30 million range. What’s key here is that the council appears to have forced Capita to agree to waive those costs in agreeing to terminate the Service Birmingham arrangement, saving the council significant further money.
Why have Capita agreed to this? It probably realised that the alternative was even worse. Clancy had made it clear he was willing to pull the trigger and terminate the whole contract which would have brought much negative publicity for a firm struggling with a share price which has fallen by 45 per cent since September last year on the back of profits warning.
The firm wrote down some £50 million of contracts in February and has been forced to cut costs and dispose of assets to make its debt more manageable. Last December, it stated that it would sell its asset services division and a number of smaller parts of the business, in order to shore up its balance sheet.
By agreeing to exit from the Service Birmingham contract gracefully, Capita can at least now bid for new business with the council and take some positive publicity from their willingness to be flexible with a council under financial pressure.
A final point to note is that the new arrangement opens up the prospect for other firms – maybe including local firms like SCC – to bid for Council IT contracts.
Capita allude to that in their statement on the Service Birmingham arrangement being dissolved having “commercial restrictions”.
This in turn could save the council more money down the line and effectively ‘market test’ procurement – again something many of us had been calling for. Hats off to the council for pulling this off and saving tens of millions of pounds. Professor David Bailey, Aston Business School
Service Birmingham was putting an extra bite in the ‘jaws of doom’