Outsourcers and the age of austerity

With the Age of Austerity now well underway and the first twinges of cutback pain being felt, how are the ICT providers to the public sector faring?

The Coalition has made much of the efforts by Francis Maude and the Cabinet Office to rein in existing contracts and the 'put up or shut up' approach to securing better deals for the taxpayer.

But are the boom times really over for the public sector providers who have made hay for so long? Or is it a case that the economic imperatives have changed, but there is still money to be made for the canny provider that's ready to adapt to the changes enforced upon it? 

Well, Capita for one seems to be doing quite nicely. Last week the group, which earns around half its revenues from the public sector, said since the start of the year it has won contracts worth £244 million - nearly a third of the total value of orders booked in 2010 - and is bidding for £4.7 billion of new contracts, compared to £3.7 billion a year ago. 

CEO Paul Pindar called the last twelve months "challenging" as decisions went on hold while the Coalition decided how to tackle the deficit. But this has led to a pent-up demand for outsourcing services that is now being released, he argued. 

"We enter 2011 with a record bid pipeline, increasing activity across the public and private sectors and some encouraging new contract wins,' said Pindar. "The need for our public sector clients to achieve substantial cost savings and for private sector clients to increase their efficiency to remain competitive offers significant opportunities for the group going forward. 

"There is much more interest in how outsourcing can help save money in central government. What we're now looking for is implementation. What we're expecting is a flow of contracts. We've given ideas of areas where savings can be made. One of those is travel administration. It's a great opportunity for the government to save literally hundreds of millions of pounds through procurement."

Of course, wider macro-economic changes will also take their toll. "Capita is exhibiting the same kind of pain that many of its peers in the BPO industry are facing today. For instance major contract wins and renewals in 2010 were down 20% to £795m, and although the company claims a record pipeline of £4.7bn today vs. £3.7bn in February 2010, we wonder how much of this is delayed decision making, and which has yet to become active again," commented John O'Brien of research firm TechMarketView. "We think the BPO market is fundamentally changing and this will have big implications for the likes of Capita over the next few years."

Logica has held relatively stable year on year. At £3,697 million, full year revenue inched up one per cent on an adjusted 2009 total, but revenue in the fourth quarter was up 4%. While outsourcing services revenue was up 10% in 2010, it registered a decline of 5% in Consulting and Professional Services revenue. There is however a 2010 Outsourcing book to bill of 110%, suggesting a strong outsourcing backlog. 

This left CEO Andy Green upbeat about prospects. "The contract wins of recent weeks with the Serious Organised Crime Agency (SOCA) in the UK, an important client in the Netherlands and Shell for commercial fleet fuel cards demonstrate our ability to compete successfully on some of the largest deals awarded so far in 2011," he argued, while Craig Boundy, UK CEO at Logica, said: "It was a very difficult year in the public sector with the build-up to the election and the change of government. But I think the present government is committed to use technology to drive some of the savings."

That said, Logica may need to ease its reliance on the public sector. "CEO Andy Green is still expecting UK growth to be 'second half weighted' and dependent on public sector spending decisions. Logica still relies on the public sector for 62% of its UK revenues, but Green is hoping that a rebound in Financial Services and Energy & Utilities will more than take up the slack," noted Anthony Miller of TechMarketView.

"Of course it's not just in the UK that cuts in public sector ICT spending have been underway. While CSC has particular issues to be resolved in relation to its role in the NHS National Programme for IT, the wider public sector globally has been impacted by a slowdown in decision making. 

"I think what we're seeing is an impact of the continuing resolution and some of the constipation in the government procurement process," said CEO Mike Laphen early this month. "Really the procurement shop announces that it's going to slip out and we move that out accordingly into whatever new timeframe, or new quarter they have adjusted for. That's just not something we have any control over; we just have to roll with that."

He added: "I think our biggest question, I think, again, is going to be around the stability of the [North American Public Sector] business unit and whether we can expect reasonable growth on that. We are seeing a pretty good uptick on the Commercial side, so that leads us to lean forward a little bit on that side. So I think the real question mark is on the federal side, and I think we share that with most others in the industry. I don't think that's a big surprise. I think there's a lot of clamouring to get the [US] Defense Bill signed. Without that, it's difficult to move forward. I think it's causing these almost unprecedented funding shortages on existing contracts, and this work needs to get done. And so I think we'll get more visibility in that."

The jury remains out on the long term impact of public sector cuts on ICT industry revenues - both in the UK and globally - but it's always been the case that ICT spending was unlikely to go away. That, to be fair, is not the stated objective of the Coalition - it's about spending better as much as spending less. The success of that endeavour is some way off being proven just yet...