Annual Financial Report 2019

9 March 2020

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 2019. 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 http://www.morningstar.co.uk/uk/NSM. 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 5 March 2020. That information, together with the information set out below, which is extracted from the Annual Report and Accounts 2019, 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 2019.

Principal risks

A revised assessment has been undertaken by the executive and the Board to assess the principal risks facing the Group and consideration given to those that threaten the business model and could impact on future performance and strategic objectives. As described in the CEO and CFO reviews, while much work has been carried out to improve controls across the business, there is more to be done. As the transformation of Capita has progressed, it has become clearer that continued focus on people, culture, systems, processes and controls is required – to drive greater awareness and more consistency in risk identification, management and mitigation. In addition, there is more work to do to update our service and product offerings, as well as our capability to engage effectively with our clients to drive revenue growth. We are having to invest more than we initially thought to fully transform and grow Capita.

The Board has assessed the emerging and principal risks and receives regular updates. This remains a key focus area for the Board, its committees and the executive.

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

Assessment at year-end: Uncomfortable – the risk in this area is uncomfortable because Capita is part way through a multi-year transformation which is progressing well but taking longer than expected.

Potential impact:

• the strategic objectives and initiatives are not aligned to 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:

Mitigating actions in 2019:

• responsible business agenda implemented including more proactive communications, tracking shareholder sentiment and fixing contracts

• Capita corporate brand refreshed, alongside an advertising campaign

• reputation has risen among external stakeholders

• accredited member of the Good Business Charter

• employee engagement programme rolled out to drive the new values and behaviours.

Future actions:

• continue to embed responsible business agenda

• monitor stakeholder perceptions.

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

Assessment at year-end: Uncomfortable – the risk in this area is deemed uncomfortable as a result of difficulties in funding and implementing strategies for a business operating in many diverse sectors.

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:

Mitigating actions in 2019:

• quarterly strategy review meetings put in place

• committees that determine allocation of investment funds were aligned with strategic imperatives.

Future actions:

• further business simplification

• monitor progress on implementation

• align investment decision-making process more clearly to strategy.

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

Assessment at year-end: Critical – the risk in this area is at critical due to the complexity of the product legacy at Capita and the speed of innovation in many of its markets.

Potential Impact:

• unable to compete with others who are innovative

• unable to maximise new technology

• unable to grow and develop into new markets

• loss of new and existing business to competitors

• eroded corporate position in the market

• unable to attract and retain the best people.

How we manage the risk:

Mitigating actions in 2019:

• innovation driven by client facing consulting team

• development of an automation hub to lead thought leadership in this area

• develop partner strategy and access innovation from ecosystem

• client value proposition (CVP) team established which tests innovation and marketing competitiveness for all CVPs.

Future actions:

• continue to monitor technology changes for potential use

• embed the CVP team

• proactively building innovation early into renewal discussions

• rolling out a programme to capture innovation from within Capita

• partnering with a leading innovation company to institutionalize innovation as a means for better business and social good

• plans for further investment.

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

Assessment at year-end: Uncomfortable – the risk in this area is rated as uncomfortable because there is continued attrition and as the revised culture is embedded, more employees may decide that they don’t fit within the culture.

Potential impact:

• loss of key employees

• unable to attract the right people with the right skills

• lack of skilled, competent resource

• increased cost of recruitment due to high attrition rates

• unable to deliver Capita’s strategy.

How we manage the risk:

Mitigating actions in 2019:

• focused on succession planning and development of employees

• developed talent reviews, enabling employees to identify new opportunities and to move new roles within Capita

• implemented new HR system

• Capita Academy set up to train new and existing staff

• amended benefits package to try to retain staff.

Future actions:

• embed the new HR system

• ensure an effective and transformed approach to employee engagement and communications.

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

Assessment at year-end: Uncomfortable – the risk in this area is deemed uncomfortable because the existing culture is deeply embedded and significant changes is required. While early signs of change are positive, we expect a lengthy process to deliver the change required.

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:

Mitigating actions in 2019:

• principles and code of conduct for staff set out

• responsible business strategy published

• two employees appointed to the Board

• committed to real living wage as a minimum for all UK employees

• committed to supplier charter and signatories of UK Government’s Prompt Payment Code

• Capita values rolled out across the business

• enhanced maternity, paternity and shared parental leave benefits.

  Future actions:

• continued to focus on the elements of being a responsible business

• employee networks to be rolled out

• alignment to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

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

Assessment at year-end: Critical – the risk in this area is critical because there are new threats which need to be managed as well as programmes of work to be completed to enhance the controls around data and IT systems.

Potential impact:

• loss of client or customer data

• loss of one of Capita’s data centres and not having disaster recovery and/or business continuity plans in place

• loss of service availability to Capita and/or its customers due to cyber attack

• unauthorised or inappropriate access to data due to cyber attack

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

• potential for significant regulatory fines.

How we manage the risk:

Mitigating actions in 2019:

• completed a programme of work on cyber resilience

• provided a mirror image data centre with a full failover service

• trained and raised awareness of data protection requirements

• updated set of operating procedures in place

• data protection impact assessments carried out

• strengthened management across cyber and data teams

• contract review committee processes updated to ensure data protection is factored in early at contract award or renewal.

Future actions:

• ongoing programme of cyber resilience activities

• ongoing reviews of disaster recovery and business continuity plans

• continued focus on data protection requirements.

7. Contracts : Failure to secure contracts with an acceptable risk and reward balance (including meeting changing societal trends).

Assessment at year-end: At tolerance – The risk is at tolerance because the legacy issues in certain significant contracts have largely been addressed and limited contracts of a similar nature have been taken on.

Potential impact:

• loss of contracts

• lack of ability to acquire new business

• contract terms are not met or understood

• exposure to unexpected costs or onerous terms

• brand and reputation damage if not managed effectively

How we manage the risk:

Mitigating actions in 2019:

• contract review committee embedded and improved, allowing better understanding of contract risks in new or existing arrangements

• contract remediation committee in place to review existing contracts

• transactions committee in place to review acquisitions and disposals

• management committee regularly reviews contract performance.

Future actions:

• contract review committee post deal review process to be put in place

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

Assessment at year-end: Uncomfortable – the risk in this area is uncomfortable because more work is required to embed new processes and governance.

Potential impact:

• loss of existing contracts

• brand and reputation damage

• limited or no new business.

How we manage the risk:

Mitigating actions in 2019:

• new project governance methodology in place

• programme and infrastructure committee put in place to review significant projects

• learning facilities developed to deliver consistent skills for staff.

Future actions:

• embedding of new project governance

• continuing reviews of current and new project and programmes.

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

Assessment at year-end: Uncomfortable – the risk in this area is uncomfortable because the internal controls are not sufficiently consistent and tested across all businesses and functions. However, the controls environment is assessed as sufficient to detect any material misstatement.

Potential Impact:

• increased fraudulent activity

• increased risk of financial malpractice

• greater regulatory or client scrutiny

• increased costs associated with remediation activities

• reputational damage and regulatory fines in financial services sector

• reputational damage in government sector where there are stringent compliance requirements

• services detriment to our clients or end-customers

How we manage the risk:

Mitigating actions in 2019:

• governance, boards and committees put in place

• internal audit programme of work continues

• monitored regulatory requirements

• tracked monthly performance of risk indicators

• CRSA carried out

• financial services risk committee in place

• new and updated policies rolled out.

Future actions:

• continued monitoring and assurance over controls

• assurance work to follow up on findings from the CRSA activity

• continued focus on updating policies and adding new ones as required.

10. Transformation: Failure to deliver the transformation programme.

Assessment at year-end: Uncomfortable – the risk in this area is rated as uncomfortable due to the complexity of the transformation which is anticipated to take longer to fully complete than expected.

Potential Impact:

• a complex business that is unmanageable

• loss of revenues, profits and/or cash flows

• new technologies and ways of working are not embraced

• business is not fit for the future.

How we manage the risk:

Mitigating actions in 2019:

• continued focus by Executive Committee on transformation programme and associated risks

• operating model completed and published

• automated marketing solution in place

• internal guides published to help optimise current delivery model across locations

• project management methodology launched.

Future actions:

• embed and continue to optimise the new model

• further business and operational simplification

• use of new technologies to simplify processes

• continued embedding and applying best practice across all programmes

• further simplification in line with strategy and blue book.

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

Assessment at year-end: At tolerance – the risk in this area is at tolerance following the General Election and Brexit being confirmed on 31 January 2020.

Potential Impact:

• need to navigate change and build engagement with new ministers and parliamentarians following change of government and personnel

• new approach by government to innovation and public service delivery is a potential risk to Capita as it may be perceived as the status quo by a radical or reforming government.

• possibility of additional regulatory changes by new government.

How we manage risks:

Mitigating actions in 2019:

• engaged with government and other parties (eg regulators) to promote and protect reputation

• worked to understand business requirements and prepared for Brexit

• participation in government initiative to put a Living Will in place

• prepared for potential change in government.

Future actions:

• constructive engagement with political stakeholders to demonstrate Capita’s expertise, responsible business initiatives, ability to transform and innovate and to create better outcomes across the UK

• work with political stakeholders to understand and prepare for Brexit transition and implementation

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

12. Financial management: Failure to maintain financial stability and achieve financial targets.

Assessment at year-end: Uncomfortable/Critical – the risk in this area is uncomfortable due to the lack of progress in generating organic revenue growth to provide long-term stability.

Potential Impacts

• continued cash outflow reduces liquidity available to invest in transformation

• loss of shareholder value

• weakens investor confidence

How we manage risks:

Mitigating actions in 2019:

• invested in capability to grow revenue and transform the business

• enhanced monthly performance reviews

• clearer financial and operational KPIs at business, divisional and functional level put in place

• more formal financial control risk self-assessment completed.

Future actions:

• focus on cash flow culture within the business

• further transformation of the Group to enhance financial performance

• debt refinancing and package of business disposals planned to enhance liquidity

• implementation of a new finance target operating model

• expansion of finance shared service centres

• standardisation of finance processes

• review of the design of controls across key financial processes.

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.

1. Managing our cash flow

Adjusted and reported free cash flow are key performance indicators for the Group and our objective is to optimise each element of our working capital cash flow, by ensuring we pay, and in turn are paid, in accordance with our agreed terms and conditions.

Developing and maintaining clear, open and supportive relationships with our clients, customers, suppliers and partners are key tenets of our purpose ‘we create better outcomes’, and ensuring that we have a deep understanding of the implications of these relationships on our working capital management is central to this purpose.

During 2019, we initiated a Group-wide programme to enhance analytical capabilities and process improvements in our working capital cash flow cycles.

Capita values the business relationships it has with suppliers and seeks to build lasting relationships, treating our suppliers and partners fairly and paying promptly. We continue to strive to fully meet the requirements of the Government Prompt Payment Code and we are continuing the development of analytical tools to give us an accurate real-time view of how we are performing against the high standards we set ourselves.

We are undertaking a detailed review of our ‘order-to- cash’ cycle to enhance our understanding of our clients’ and customers’ requirements and behaviours in their payment cycles. We are also taking steps to enhance the capability of our receivables management processes and to improve the efficiency of our cash collection. The importance of our working capital management has been consistently communicated to our internal stakeholders throughout the year.

2. Uncertain trading environment

While there is clarity on the decision to leave the European Union, and the final date has been set to complete the process of departure at the end of an 11-month transition period, the exact nature and terms of the UK’s exit and ongoing trade relationship remain far from certain. Furthermore, while a ‘hard Brexit’ may result in some regulatory liberalisation and fiscal incentives to stimulate the economy, it also risks a period of economic uncertainty and turbulence.

During the next few months we will continue to monitor developments closely, keep our staff advised of any changes that may affect them and ensure that Capita is in a position to respond to change and uncertainty. We will also approach government directly when faced with any specific concerns and engage proactively with trade bodies, as relevant, on matters of wider business interest. At the same time, every effort will be made to ensure that our clients and partners value the benefit of Capita services, while having to manage their own challenges and opportunities.

3. Impact of climate change

Recognition of the dangers imposed by climate change and the demand for action is now universal. The specific business risks faced by Capita are in line with the business sector in general. However, the pressures on government and business to take action seem likely to contribute to a sustained period of change, some of which could be quite rapid and may result in increased regulatory and fiscal demands alongside enhanced tender eligibility.

While Capita will continue to make positive contributions to the sustainability agenda, we will also: closely monitor developments; keep abreast of potential changes that could impact the business; contribute to formal consultations and seek, when relevant, further opportunities to influence the government in the development of its response and action plan – balancing business interests with the need to build a zero-carbon economy.

For more information about our approach to climate change, please refer to the responsible business section on page 37 of the 2019 Annual Report and Accounts.

4. Medical outbreak

In the early months of 2020, we have seen a virus rapidly spreading across China and other Asian countries, and more recently into other parts of the world, including western Europe and the UK. Capita has taken the opportunity to consider its approach to incidents of this nature, which could significantly impact staff. 

A team has been created to ensure that Capita is as prepared as possible for a potential global health emergency. The focus has been to create clear written guidance for managers and team managers, and to be ready to provide on the ground support as required.

Capita has also set up a single point of contact (phone and email), should it be required.

Capita monitors national and international sources of information about relevant global health emergencies continuously, and can provide interim urgent guidance updates to all staff as required.

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 2019, which includes the strategic report, corporate governance, and audited accounts for this year. Pages 1–97 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 7202 0641