Capita confident for the next few years. Ovum analysis
Capita gave a confident view of its future prospects at its results briefing yesterday, after having announced strong results for 2006 - revenue up 21% to £1.7bn, with operating margin stable at 12.9%. The UK business-process outsourcing (BPO) giant already has visibility of more than 95% of its 2007 revenue, according to CEO Paul Pindar. And it won't have to re-bid any existing major contracts until 2009, giving it almost two full years to focus entirely on achieving new business growth.

OVUM. Samad Masood

Comment:

So where is this growth going to come from? Well, a lot is expected to come from the life & pensions and local government sectors, which, through deals such as with Zurich Financial Services and Birmingham City Council, have been responsible for much of Capita's growth in 2006. But Capita is also continuing to target more niche markets in the UK such as corporate travel management, or unit trust administration. Capita is also continuing to push into the IFA market with its recent software acquisitions. Pindar also mentioned the opportunity to expand further in the retail sector, using its work with DSG International (providing technical and customer support) as a reference.

As Pindar put it: "The more niche areas we get in to, the more value we can add, and the higher our margins will be." We agree with this view - as long as a BPO business can build scale in each of its niches, or at least run them profitably without distracting other areas of its business. So far, Capita's management has proved that they can do this. And to date, this strategy has helped Capita open up several new markets to BPO and enabled it to build a diverse business that is less and less reliant on the public sector.

But the BPO market is evolving, and Capita has to change the way it does business. Clients increasingly expect more value from their BPO relationships. They want vendors to move beyond providing just cost savings, and into partnerships that can transform and grow core business activities. A key component of this is the delivery of IT services - something that Capita is increasingly getting involved in, for example in its deal with Birmingham.

Another big shift is the emergence of global sourcing, with the benefits of improved flexibility, efficiency, and increasingly, better quality services. Capita is behind the curve on this one, having established its Indian operations much later than most. But this is being ramped up rapidly.

By 2009, Capita plans to employ 10% of its workforce in India, which will mean quadrupling its current Indian workforce of 800. This might be a challenge given the high demand for quality BPO staff across India. But Capita benefits from being the recognised market leader in the UK. Not only because this helps to attract staff in India, but because it still makes it very difficult for Capita's numerous Indian competitors to beat it onshore in the UK. This won't always be the case though. Capita is right to be confident, but its long-term competitiveness relies on it building a sizeable world-class offshore operation rapidly.