Capita posted a big fall in profits on Wednesday as the outsourcer faced a decline in work from local authorities, underscoring the challenge of overhauling the business.
Capita, which has contracts ranging from the electronic tagging of offenders to running call centres for Tesco Mobile, is trying to rebuild after a string of profit warnings and an emergency £700m rescue rights issue last year.
Pre-tax profits fell 26 per cent to £282.1m last year, while revenues dropped 5 per cent to £3.87bn.
Its order book also shrank to £7.1bn in 2018, as it was hit by the loss of a contract for life insurer Prudential and a decline in local government work where councils have been choosing to take work back in house.
However, the numbers beat analyst expectations, while the company managed to halve its net debt from £1.1bn to £467m, helped by the rights issue and asset disposals.
Shares in Capita rose 3 per cent to 123p by lunchtime in London trade.
Chief executive Jon Lewis, the turnround specialist brought in just over a year ago, said he was pleased to “have fixed the basics” and the transformation plan was “firmly on track”.
But he added that it “still has some way to go” after the plunge in profits, forcing the company to suspend its dividend and set a flat profit target for this year.
Capita has long skewed its business towards the back-office processing end of the outsourcing market, but Mr Lewis has pledged to shift it even further away from “mop-and-bucket” rivals such as Serco, Mitie and Interserve.
This would enable it to compete more with IT consultancies such as Accenture, Cognizant and Atos.
To this end, it has made a number of strategic hires, increased its number of software developers to 1,100 in India and agreed a partnership with McKinsey to improve its digital capabilities.
Nevertheless, it has not been plain sailing with three key “problem contracts” costing Capita £30m, down from £50m the previous year.
The company said it had made “encouraging progress” on these problem contracts with the British Army, the NHS and German telecoms group Mobilcom-debitel.
Mr Lewis acknowledged that the business had under previous management become “overly complex and inefficient, focused on short-term performance, characterised by a lack of long-term planning and investment and challenged by execution issues on major contracts”.
Its problems have been replicated throughout the industry, including at Carillion, which collapsed in January last year, as well as Mitie, Serco and G4S, which are all trying to rebuild after equally catastrophic profits warnings, caused in part by botched contracts.
Interserve, which is already in effect in the hands of banks, needs to win over shareholders on Friday or it will fall into administration.
The industry’s problems have raised questions about whether key public services should be outsourced to the private sector, with the opposition Labour party promising to reverse the trend.