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Capita plc - Annual Financial Report 2020

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22 March 2021

Capita plc (the "Company")

Annual Financial Report

In compliance with Rule 4.1 of the Disclosure Guidance and Transparency Rules (“DTRs”), the Company announces the publication of its Annual Financial Report for the year ended 31 December 2020. Pursuant to Listing Rule 9.6.1, a copy of this document has been submitted to the

National Storage Mechanism and will shortly be available for inspection at

https://data.fca.org.uk/#/nsm/nationalstoragemechanism. The document is also available on the Company's website: www.capita.com/investors.

Additional Information

A condensed set of the Company's financial statements and information on important events that have occurred during the financial year and their impact on the financial statements, together with details of related party transactions, were included in the preliminary results announcement released on 17 March 2021. That information, together with the information set out below, which is extracted from the Annual Report and Accounts 2020, is provided in accordance with DTR 6.3.5. This information should be read in conjunction with the Company's preliminary results announcement. This announcement is not a substitute for reading the full Annual Report and Accounts 2020.

Principal risks

  1. Purpose: Failure to live our purpose and to change stakeholder perception so that we are seen to live our purpose.

Potential impact:

  • misalignment between the strategic objectives and the purpose of the business

  • transformation does not change stakeholder perception

  • brand and reputation adversely impacted

  • clients, suppliers, and people don’t want to work with, or for, Capita

  • investors lose confidence in the transformation.

How we manage the risk:

The pandemic put our clients, customers and our service delivery under huge pressure. While

that presented challenges to our stakeholders and for our people, it did provide us with the opportunity to demonstrate how we live our values and our purpose by creating better outcomes and continuing to deliver for our clients.

Mitigating actions in 2020:

  • implemented the real living wage as a minimum for colleagues in the UK

  • regular proactive open and honest engagement with our clients, customers, and stakeholders to better understand how we can continue to effectively support them during the pandemic

  • employee survey completed to seek feedback on how ‘we live our purpose’ and to identify improvement opportunities.

Future actions:

  • review our strategic objectives and purpose of the business and ensure alignment with the new Capita operating model

  • engage and interact with our stakeholders and rebuild our brand, reputation, and investor confidence by fulfilling our promises.

2. Strategy: Failure to define and resource the right medium-term strategy.

Potential Impact:

  • lack of clear direction driving customer propositions

  • investment decisions with sub-optimal returns

  • difficult to prioritise investment decisions

  • customers, partners, and employees are not clear on priorities

  • difficult to articulate investment case for investors.

How we manage the risk:

The financial pressures from Covid-19 had a significant impact on our transformation programme, our strategic priorities, and our ability to demonstrate that anticipated benefits from the transformation programme were on target to be achieved. Instead of focusing on the delivery of our objectives, we had to focus our attention on the pandemic.

Mitigating actions in 2020:

  • as set out in the CEO review, Capita is undertaking a further reorganisation that will address this risk

  • the future actions all focus on the successful implementation of this organisational change.

3. Innovation: Failure to innovate and develop new value propositions for clients and customers to drive sustainable growth.

Potential Impact:

  • inability to grow and develop into new markets

  • failure to compete with others who are innovative

  • unable to maximise new technology

  • loss of new and existing business to competitors

  • eroded corporate position in the market.

How we manage the risk:

The pandemic has thrown up myriad challenges, as well as opportunities for new propositions

for clients. Some clients are under financial pressure and will want to spend less. In addition,

we have had to scale back the resource and investment in this area, which has resulted in

reduced innovation initiatives.

Mitigating actions in 2020:

  • improved agility in delivering to clients, maintaining market confidence

  • growth and consulting teams worked hard to accelerate the development of new propositions and explored more than 100 potential Covid-19 related opportunities.

Future actions:

  • the reorganisation of Capita is specifically designed to enable sufficient investment to be

made to capture the growth opportunities in the areas we are focusing on. See CEO report.

4. People attraction: Failure to attract, develop, engage and retain the right people for current and future client propositions.

Potential impact:

  • inability to deliver Capita strategy

  • loss of key personnel/lack of succession

  • increased staff turnover and increase in costs from buying in short-term contractors

  • lack of in-house skills and inability to attract the right people with the right skills

  • reputational damage.

How we manage the risk:

The financial position and drop in our share price have had an impact on our brand and reputation. As a result of internal cost-reduction measures, i.e. the freeze in bonus payout and pay rise freezes, we have had some staff attrition. However, we have continued to attract and recruit staff in our operational areas and recruit senior roles including replacing senior staff who have left. Our employee survey results have shown three consecutive annual improvements in our employee net performance score (eNPS). The successful implementation of the reorganisation should attract and retain staff.

Mitigating actions in 2020:

  • leadership development moved to digital delivery

  • performance review process launched

  • resourcing capability and systems improved to attract new staff virtually

  • employee value proposition launched

  • retained staff and expertise by redeployment, e.g. from consulting business into other parts of the business.

Future actions:

  • change to more flexible future ways of working

  • use of levy funding to develop over 1,000 people through modern apprenticeships

  • introduction of bespoke MBA and diploma programme

  • changes to 2021 short-term incentive plan design

  • continue to invest in staff development.

5. Culture: Failure to change the culture and practices of Capita in line with our responsible business agenda.

Potential impact:

  • potential for new clients not to want to contract with Capita

  • unable to attract and retain talent

  • negative corporate reputation hampers ability to deliver sustainable growth

  • climate change impact not considered in operations.

How we manage the risk:

Collaboration and teamwork improved during pandemic period. With a continued need to take

tough decisions to bridge to the future and the change in work styles, with reduced focus, engagement, and direct interaction with our people, likely to impact our culture, value, and behaviours around openness and collaborative working. We have described earlier in this section, how Capita responded to the Covid-19 crisis which allowed us to demonstrate how we prioritised living our values in line with our responsible business agenda.

Mitigating actions in 2020:

  • initiated review of our operating model to identify opportunities that will enable us to further improve our culture and develop better working practices in line with our responsible business agenda and focus on our client commitments to deliver better outcomes.

Future actions:

  • continue to embed the reorganisation of Capita to accelerate our journey on culture, values

and behaviours.

6. Data Protection: Failure to protect data, information and IT systems.

Potential impact:

  • loss or theft of confidential client or customer data due to cyber attack

  • disruption to business operations to Capita and/or its customers due to cyber attack

  • loss of one of Capita’s data centres

  • reputational damage leading to loss of existing contracts and bidding for new business.

How we manage the risk:

The global pandemic involving the spread of Covid-19 presented our IT business with several

different challenges, primarily around how we manage our IT infrastructure to accommodate our people who were asked to work from home and to maintain our IT systems and security controls.

Mitigating actions in 2020:

  • created the office of the Chief Information Security Officer to identify opportunities to strengthen IT security controls

  • within weeks of the lockdown in March 2020, we made a provision for around 85% of staff to be able to continue to work from home

  • IT system, cyber and end user security controls improved to ensure colleagues had the capability to work from home during the pandemic, while minimising security, unauthorised access, and data leakage risks.

Future actions:

  • improve IT security structure, process and procedures

  • monitor and improve information security controls to reduce the risk of data leakage or unauthorised access to Capita systems

  • implement new tooling to help increase data security and reduce the possibility of data leakage

  • implement additional security controls for the end user computing devices to reduce the possibility of ransomware or virus attacks

  • enhance security over corporate domains and cloud governance, to reduce risk of unauthorised access and data loss

  • explore opportunities for further funding to upgrade IT estate and enhance Group IT infrastructure, platforms and systems.

7. Contracts: Inability to secure contracts with an acceptable risk and reward balance and that are aligned to Capita’s agreed purpose, values and responsible business strategy.

Potential impact:

  • loss of contracts

  • lack of ability to acquire new business

  • contract terms and service commitments are not met or understood

  • exposure to unexpected costs/cost overruns or onerous terms

  • brand and reputational damage if not managed effectively

  • risk of financial claims/penalties and other disputes with clients

  • adverse impact on contract profitability.

How we manage the risk:

The pandemic has financially impacted potential clients and customers leading to a reduced appetite to spend money and wish to pay less for services. There is a risk that Capita enters contractual arrangements with new clients that result in unacceptable commercial, regulatory, financial, or reputational exposure, or which are not aligned to Capita’s agreed purpose, values, and responsible business strategy.

Mitigating actions in 2020:

  • the contract review committee (CRC) controls streamlined including a fast-commercial governance process

  • contract remediation committee in place to review delivery on existing contracts

  • transactions committee established to review acquisitions and mergers to ensure alignment with growth strategy.

Future actions:

  • refresh the CRC policy and deal review template, including incorporation of new H&S/safeguarding risk assessment

  • further refresh and roll out CRC post-deal review process

  • develop fraud risk assessment

  • develop and roll out standard form contracts and playbooks.

8. Delighting clients: Failure to delight clients and customers with software performance or project and service delivery.

Potential impact:

  • loss of existing contracts

  • brand and reputation damage

  • limited or no new business.

How we manage the risk:

As a result of Covid-19, most projects are either continuing or have been change controlled, but this did not affect our ability to deliver our client commitments. The reorganisation of Capita’s operating model should enhance our ability to fulfil customer requirements.

Mitigating actions in 2020:

  • programme and investment committee reviewed significant projects using project governance methodology

  • implemented the weekly SLA/KPI CEO reporting

  • implemented a new software support service on ServiceNow that enabled us to improve our service standards.

Future actions:

  • reorganisation of our current structure into a more focused, client-centric Group to deliver better outcomes for our clients and their customers

  • have the right technological capability available to the divisions to deliver for customer needs, which is a fundamental part of the reorganisation to continue to build and develop client confidence in Capita and our ability to meet customer needs.

9. Internal Control: Failure to develop and maintain a risk-based system of internal control.

Potential Impact:

  • fraud, misstatement and inaccurate financial reporting

  • greater regulatory or client scrutiny

  • increased costs associated with risk remediation activities

  • breaches of law, statutory and legal reporting leading to regulatory fines in financial services sector and loss of key contracts

  • reputational damage and adverse media interest leading to inability to secure new contracts.

How we manage the risk:

In prior years, this risk primarily focused on financial controls. The executive agreed that a system of internal controls should not be limited to financial controls but should be expanded to pan-Capita internal control frameworks. The impact of Covid-19 has resulted in a delay to the improvement of elements of our risk management and internal control framework.

Mitigating actions in 2020:

  • KCQ self-assessment process was developed and completed against key controls

  • a control questionnaire process was completed where every business leader attested to compliance with a minimum set of financial controls

  • senior management provided an assessment of the control environment following a stabilising of the initial pandemic crisis; specific attention was given to the plans to improve cyber and IT resilience.

Future actions:

  • embed accountability, responsibility and understanding of governance, risk and controls

environment with the new operating model

  • implement a more efficient internal control framework

  • refresh and enhance the enterprise risk management framework including updating the risk

appetite into a more granular tool to develop key risk indicators for monitoring key risks

  • establish risk and assurance committees at Group function and business unit level.

10. Political climate: Failure to plan for, influence and respond to potential changes in the political climate.

Potential Impact:

  • the Government’s response to Covid-19 has generated significant new policy at speed affecting the operational environment for the business

  • the new approach by Government to innovation and public service delivery is a potential risk to Capita

  • possibility of additional regulatory changes by new government.

How we manage the risk:

UK Government’s absolute priority has been Covid-19 and going forward will be recovery.

There may be increased volatility in government spending because of an improved opposition.

Mitigating actions in 2020:

  • engaged with government and other parties (e.g. regulators) to promote and protect reputation

  • worked to understand business requirements and prepared for Brexit.

Future actions:

  • engage with government in response to Covid-19, new policies, and impact on Capita

  • monitor and horizon scan for political, regulatory, and economic developments impacting

political climate.

11. Financial stability: Failure to maintain financial stability and achieve financial targets.

Potential Impact:

  • continued cash outflow reduces liquidity available to invest in transformation

  • loss of shareholder value

  • weakens investor confidence.

How we manage risks:

Covid-19 significantly impacted our ability to maintain financial stability and achieve our financial targets, due to the lockdown travel and workplace restrictions. As a result, for a short time, we were not able to fully deliver on some of our contractual obligations. We incurred loss of revenue in our transactional business and from clients in financial distress.

Mitigating actions in 2020:

  • early decision to reduce costs and conserve cash, supported by enhanced finance controls

  • daily cash forecasting to understand overall Group liquidity and revolving credit facility

  • focus on ensuring minimal disruption to cash collection cycle through remote working

  • monthly reforecasting evolved as our understanding of the financial situation developed,

moving from a V-shaped recovery to business by business recovery curves. Projections

extended to 2021 and the business planning process accelerated

  • took action to address balance sheet concerns through additional asset disposals.

Future actions:

  • further strengthen the balance sheet, by addressing our debt maturities and targeting more

non-core disposals

  • implement the new finance target operating model to improve financial forecasting reliability.

Emerging Risks

Identification of emerging risk

The identification of emerging risks is carried out by both the business, using a bottom-up approach, and the executive, from a top-down perspective. Regular reviews of risks, including emerging risks, are included at risk committees throughout the business.

Health, safety and wellbeing of our people

In 2020 we witnessed the rapid spread of the Covid-19 virus with devastating consequences across the world. We responded by assessing the impact of Covid-19 on our principal risks and by establishing a dedicated team to ensure Capita was as prepared as possible for the global health emergency. However, as the initial phase of the pandemic stabilised, we began to appreciate the longer-term impacts of Covid-19 on the health, safety and wellbeing of our people, some of whom have now been working from home for almost a year, and will continue to do so for a number of months to come. In 2021, we must continue to support our managers and colleagues across the business in recognising that they are empowered to change how they and their teams work. We will achieve this through briefings, workshops, focus groups, pulse surveys, targeted communications and new training collateral. This not only covers the day-to-day work people have to do but will also have a large emphasis on wellbeing and supporting each other through these challenging times.

Responsibility Statement of Directors in respect of the annual financial statements

The Directors confirm that, to the best of their knowledge:

  • the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole.

  • the strategic report includes a fair review of the development and performance of the business and position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

  • The Annual Report and Accounts, taken as a whole, are fair, balanced and understandable, and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.

Cautionary statement

The Directors present the Annual Report for the year ended 31 December 2020, which includes the strategic report, corporate governance, and audited accounts for this year. Pages 1–108 of this Annual Report comprise a report of the directors which has been drawn up and presented in accordance with English company law, and the liabilities of the directors in connection with that report shall be subject to the limitations and restrictions provided by such law. Where the directors’ report refers to other reports or material, such as a website address, this has been done to direct the reader to other sources of Capita plc information which may be of interest. Such additional materials do not form part of this report.

Contact: Francesca Todd, Group Company Secretary, 020 7799 1525