How to lose millions without even trying
Following the latest flurry of statistics than have been squeezed out of the MoJ by FOI requests or parliamentary questions, I thought it was about time I dusted off the old calculator and crunched a few numbers. Let's just look at the period May to August 2012, as the MoJ has yet to publish performance data for the FWA for September onwards. During those 4 months, Capita fulfilled 36,829 assignments, and was paid £3.611 million. That averages out to about £98 per job. Assuming they are charging at a rate of £30/hour, that puts the average length of an assignment at around 3.27 hours.
Naturally, they have to pay the linguist, so if one assumes they are being paid at the tier 2 rate of £20/hour, then out of the £98 Capita receives, £65-40 goes to the linguist, leaving £32-60 for Capita. Out of this, Capita has to cover its costs, such as paying staff, rent, business rates, heating and lighting for its flashy office, etc, etc. Now, I don't know for sure what these are, but in the last published accounts for ALS, the wage bill alone was about £1.49 m for the 7 month period ending 31st Dec 2011. That works out at about £213,000/month, but of course, Capita has supposedly boosted the workforce since then. Anyway, I'll be conservative and estimate Capita's operating costs at £240K/month. Divide that by 9207 (which is the average number of fulfilled assignments) and you end up with a figure of £26-07 per assignment. Deduct that from £32-60, and that leaves £6-53 gross profit for Capita, per assignment.
Oh, hang on, I've forgotten something, haven't I? That's right, those pesky linguists are going to want some travel expenses, aren't they? Even at the miserly new rate of 20p/mile, you can see that £6-53 doesn't pay for many miles. 32 miles, actually. What this means is that as soon as Capita has to fetch a linguist from more than 26 miles away, they start to lose money on every assignment. Put it another way, if a Capita linguist has a round trip of 200 miles to an assignment, and racks up 5 hours of travelling time, Capita will pay a total of £66 in travel expenses. For every booking like that, Capita will have to find another 9 bookings where they pay no travel expenses, just to break even. You don't have to be a forensic accountant to see why Capita is having to bear down on linguist payments and expenses.
At least Capita doesn't have the extra burden of penalty payments for failing to meet the contract targets. The £1,464 of service credits claimed by the MoJ for the period May to August should be considered against the 1,564 instances where Capita failed to fulfil a booking. That's about 94 pence each.
If I was a Capita shareholder I would be spitting feathers at this state of affairs. It is hard to believe that when Capita was thinking of shelling out £7.5m for ALS, there wasn't some bean counter figuring out what the ROI (return on investment) was going to be. They would certainly expect a good ROI within 4 to 5 years, and definitely before the contract came up for renewal. To my mind, to make an acceptable ROI on £7.5m, I'd want to see a return of at least £11m over 5 years.
The reality is that far from making any profit, Capita has had to pump in another £3.5m, making the total investment about £11m, so now I'd expect to have to make about £15m profit, but now I've only got 4 years left in which to do it Where is all that profit going to come from? Hmmm, I wonder. MoJ is adamant it's not going to increase payments, so Capita can only reduce its cost base even further, and that can only come out of the pockets of linguists and staff.
My advice to Capiterps is: don't give up the day job, and buy yourself a bicycle.