Outsourcing boom sees Capita win £1.4bn work

Capita has continued to benefit from the booming outsourcing market in the UK after reporting that it has signed contracts worth a combined £1.4bn over the course of the year.

Since it last reported results in July, Capita has bagged large contracts with the likes of Prudential, BT and Transport for London. Although the company provides services as diverse as collecting licence fee payments for the BBC to running London's congestion charge scheme, it is predominantly targeting growth in the insurance and pensions sectors to increase its volume of work.

A multitude of companies target business process outsourcing, or BPO, contracts whereby organisations outsource a particular business function such as human resources or finance and accounting to a specialist company. Some like Capita and Vertex approach the sector from the outsourcing sector whilst companies like Xansa, LogicaCMG and Accenture take a more technological approach, often selling services on top of software.

Companies including Northgate Information Solutions and Sage also have ambitions to win outsourcing work to bolster software revenue. Meanwhile Indian companies with large offshore capability such as Tata Group's TCS, Wipro and Infosys compete aggressively for work. However the Indian companies have had relatively modest progress thus far with TCS's contract with Pearl the largest success to date.

Phil Codling, principal analyst at Ovum, said that Capita is "the UK's undisputed BPO market leader"; that the more contracts the company wins the more profitable it will become. "It's simply the nature of BPO that success breeds more success," he said.

Mr Codling said the BPO market is forecast to be worth £4.5bn this year, rising to £5bn next year. He said that growth is slowing but that it is also maturing as outsourcing companies become more selective in bidding for contracts. "The competition needs to take a leaf out of Capita's book and pick its battles and its investments very carefully," he said.

George O'Connor, an analyst with Shore Capital, said: "BPO is alive and well. It falls into the broad structural shift in favour of third-party outsourcing for reasons like non-core operations, cost and skills shortage."

Mr Codling said the BPO market is still dominated by government deals particularly in local government.

Paul Pindar, Capita's chief executive, said the company is keen to win further work in the mortgage and legal administration sectors in 2007 as well as pursuing further growth in the insurance and pensions sector.

Alistair Cox, chief executive of Xansa, called for more government departments to outsource non-core functions. "Ministers have to take difficult and bold decisions in the interest of the tax-payer. Government - both central and local - needs to exploit what is out there," he said.

Mr Cox said the market for outsourcing government services is massively under-penetrated with only about 20 per cent of the potential business currently contracted.

Outsourcing competitors

Capita

"The UK's undisputed BPO market leader", according to Ovum. This FTSE 100 outsourcing giant has won contracts to handle a wide variety of projects from document processing to insurance claim processing to local government software. Operates London's congestion charge.

Xansa

This IT services provider was one of the first Western companies to invest offshore after buying its Indian unit in 1997. It won a major BPO deal with the BBC and operates a joint venture with the NHS for finance and accounting work from hospital trusts.

TCS

Part of the giant Indian conglomerate Tata. It is one of a handful of competitive offshore players including Wipro and Infosys that can compete aggressively on price due to the majority of the workforce being employed in India. TCS's £486m contract with Pearl is the biggest offshore deal in the UK thus far.

LogicaCMG

One of a clutch of large systems integrators including Accenture and EDS that offer offshore and near-shore capability to clients. Tends to compete for work rooted in IT services and hopes that outsourcing its own finance and accounting functions will convince clients to do the same.