(Repeats Friday story without change)
* Mitie and Capita issue profit warnings, Serco struggles
* Margins hit by shorter contracts and rising costs
* International growth seen by some as potential safety net
By Elisabeth O'Leary and Kate Holton
LONDON, March 3 The unexpected departure of the
boss of Capita highlights the challenges facing
Britain's biggest outsourcing companies as the government
tightens the screw on businesses that provide vital public
Capita Chief Executive Andy Parker announced his resignation
on Thursday after the business support services group reported a
bigger than expected drop in 2016 profit, capping a 12-month
period in which its share price has plunged by 50 percent.
Parker's decision to step down later this year comes after
rival Mitie issued three profit warnings in four months
and appointed a new CEO and CFO, having lost a quarter of its
market value over the last year.
Profitability has come under increasing scrutiny in recent
years as rising employment costs and cuts to local council
spending have placed operating margins under intense pressure,
leaving the likes of Capita, Serco and G4S with
little room to make mistakes or absorb any drop in demand.
Serco CEO Rupert Soames, stung by the company's loss of a
fifth of its market value in a single day last month after it
delivered an uninspiring outlook for the next two years, says
that outsourcers now have to be more cautious about the work
they take on.
"(Some years ago) the ambition of companies collided with a
government that is getting ... very, very, very tough on the
terms and conditions," he said. "The result has been, for quite
a few companies, including mine, a very ugly car crash."
"I think the pendulum is swinging back and companies are now
becoming more cautious about what they bid for."
The tightening of government purse strings has already
proved costly for Capita, which earns nearly all its revenue in
the UK, with roughly half coming from the public sector.
DRIVING A HARD BARGAIN
Its exposure was highlighted by a contract to create a
single system to provide training for multiple government
departments and agencies.
The 250 million pound ($306 million) contract was awarded in
2012 but was not renewed in 2015, instead being split into four
components. Barclays estimates that the 60 million pounds in
revenue from the contract in 2015 dropped to 40 million pounds
last year and will virtually disappear this year.
IT and telecoms giant BT has also been hit, saying in
January that it expects underlying fourth-quarter core earnings
at its Business and Public Sector division to fall by a
double-digit percentage year on year.
A source at the company said the government was driving a
hard bargain, drawing up standard contracts that no longer
provided the bigger margins that could be earned from long-term
"Where you have a business where those types of contracts
come to an end, that can be quite a challenging transition to
make, and that's what we are working through," the source said.
Asked if BT would now avoid low-margin work, the source
Britain began outsourcing public services in the late 1980s
under Margaret Thatcher's government and enjoyed a boom period
during Tony Blair's time as Prime Minister at the turn of the
century, with companies winning long-term contracts worth
hundreds of million of pounds.
Private companies now handle everything from parking permits
to immigration control and maintenance of nuclear warheads. But
as the sector has matured and technology developed, clients have
moved to shorter, standard contracts offering lower margins.
Complexity has also been reduced with the advance of
automation and the standardisation of many IT services, while
constraints on government budgets and Britain's vote to leave
the European Union have added to the pressure.
John Keppel of ISG, which tracks the global outsourcing
market, said that shorter-term contracts effectively force
companies to submit more competitive pricing bids because the
increased frequency of tenders require that they take into
account the latest advances in technology.
"There's far more pace in the change in technology, so no
one is willing to jump into a relationship that lasts longer
than the immediate horizon. So now it takes six months to agree
the terms to something that is going to be over in 18."
A spokeswoman for the Cabinet Office, which helps to
coordinate government departments, said it was committed to
ensuring support for small businesses and growth and innovation
through its public procurement.
Keppel said there are enough smaller firms to pick up the
work, but the big players are having to rethink their approach
after the government sought not only to cut costs but also to
keep greater control of services after the outsourcing sector
was the subject of a string of scandals in 2012 and 2013.
G4S, which operates in more than 100 countries and employs
more than 600,000 people, has been heavily criticised for
mishandling sensitive work, including its failure to provide
enough security guards for the 2012 London Olympics.
Together with Serco, G4S was also investigated by the
Serious Fraud Office after it charged the government for putting
monitoring tags on criminals who were either dead or in prison.
G4S says it has "materially strengthened controls over the
approval of major contracts" since then and has increased sales
outside of Britain.
Serco boss Soames said that others could do the same, with
the United States and Australia proving attractive.
"We're not deliberately going to try to tilt our revenues
away from any jurisdiction," he said. "But what we do believe is
in being present in several jurisdiction so that when the
political winds change, we always have a safe harbour."
($1 = 0.8178 pounds)
(Additional reporting by Paul Sandle; Editing by David Goodman)