How do you solve a problem like Capita?

OPINION Capita's share price tanked 9 percent last week after it told investors it was taking a hit on its contract with the UK government's Civil Service Pension Scheme (CSPS), which has left some of its 1.7 million members unpaid following a disastrous launch.

A trading update said operating profit would be down between £25 million and £40 million in 2026 as a result.

Sage voices were soon on hand to calm fears, though. "The scale of the reaction sits oddly with the contract's modest financial weight," said Ian Lyall of Proactive Investors. The hit to revenue was "a sliver of Capita's roughly £2 billion turnover." For the first four months of the year, Capita reported £750 million of total contract value won, up 20 percent on a year earlier. "For now, there is no sign that reputational damage is denting that momentum," Lyall added.

The assessment that Capita's CSPS troubles may barely dent its long-term prospects will be of little comfort to scheme members left struggling to make ends meet. But they do suggest the wider problem.

In the House of Commons last week, Minister for the Cabinet Office Nick Thomas-Symonds said the Capita CSPS contract "could be a prime candidate for insourcing in the future."

However, he also admitted that option would have to wait. "If I were to terminate the contract straightaway, that would clearly cause severe disruption to the payroll. I cannot replace a complex pension operation overnight," Thomas-Symonds said.

So, for now, the government is stuck with Capita, and its performance will be of concern on other contracts. It has a deal to work on CSPS cases to provide the so-called McCloud remedy removing age discrimination from public service pensions. That work is expected to be completed by March next year, through a separate contract at an additional cost of £45 million.

Then there is the promise to take over running finance and HR services for the Department for Work and Pensions (DWP), Ministry of Justice (MoJ), Home Office, and the Department for Environment, Food and Rural Affairs (Defra). Its £370 million contract win is being challenged in court by rival bidder Sopra Steria, which alleges the winning bid was "abnormally low" and based on staffing "significantly below the current levels."

At the time, Capita told The Register it had taken part in a robust procurement process and stood ready to work with the DWP to ensure value for money. A DWP spokesperson said its priority was continuity of service and value for money for the public.

Nonetheless, concerns about staffing levels echo the CSPS contract. In October last year, a report from Parliament's spending watchdog said Capita planned to employ 332 staff on the scheme, 33 less than the previous provider, MyCSP. The Public Accounts Committee (PAC) report said estimated resourcing levels assumed that "more automation and increased functionality of its IT system will require fewer staff."

Speaking to the PAC last week, Government Chief Commercial Officer Andrew Forzani said Capita made a series of commitments about its ability to deploy technology and automate the service as part of the selection process.

Chris Clements, managing director of Capita Pension Solutions, said that Capita employed additional staff in a "surge" before go-live "because we identified that some of the technology was not going to be there on time."

Group CEO Adolfo Hernandez also told the meeting it hired more people because it didn't appreciate the backlog from the previous provider.

Whether the DWP's shared service cluster will encounter similar problems is yet unanswered. However, Sopra Steria's case alleges the Capita bid was 40 percent under the DWP's own cost modeling.

To understand why the government continues to choose Capita, you have to understand its options.

Forzani explained to the PAC last week that "a very lengthy procurement process" for CSPS started with six providers but there were "only two credible final bids, which were Capita and MyCSP."

Civil Service Chief Operating Officer and Cabinet Office Permanent Secretary Cat Little also told the PAC the public sector is one of the last parts of the economy to offer defined benefit pension schemes.

"We are a very large customer for complex schemes in a market that has a very small number of suppliers," she said, adding that the government's ability to "shape the market" for suppliers was limited by the high risk and complex nature of the scheme.

"We are in a very classic make-or-buy decision making process."

That kind of decision will come into focus from April next year, when a government policy announced in June kicks in. All contracts over £1 million in value must be assessed for in-house viability before renewal, and central government departments exceeding £100 million in annual spend must develop five-year insourcing strategies.

"This framework builds the exact long-term capability that we need, shifting our focus from short-term pricing to service quality and operational resilience," Thomas-Symonds promised the House of Commons last week.

While the new policy might seem like a good option given Capita's recent performance on the CSPS, insourcing raises more questions than it answers. Does the government have the management skills to bring contracts in-house, design the services, and build the technology? Can it recruit those skills? Are Civil Service skills, pay, and recruitment systems set up to support such an ambition?

The government has promised "a competitive pay framework, high-impact work and clear pathways for new and existing talent" in tech leadership as part of its Roadmap for Modern Digital Government.

A report from Parliament's Science, Innovation and Technology committee said earlier this year that the government's aim to ensure that those in leadership roles have the necessary digital expertise "will require reforms to recruitment and retention mechanisms, including pay, as well as a broader process of cultural transformation."

Even before its new insourcing rules, the government was struggling to find the technical professionals and leaders it needed. Back in 2023, the PAC reported on barriers to achieving greater efficiency through digital transformation. Dame Meg Hillier MP, chair at the time, said digital ambitions were "hobbled by staff shortages, and a lack of support, accountability and focus from the top."

Recruiting the requisite workforce for significant insourcing will take time. The next general election is due by 2029. Until the government builds that capability, inertia may remain stronger than its insourcing ambitions, leaving departments dependent on the same small pool of suppliers. ®