Capita (LON: CPI) shares are up 12% today as the company announces that it’s working on reducing backroom headcounts and costs. Which, obviously, it should be doing. Having armies of bureaucrats does nothing to make money for shareholders - therefore armies of bureaucrats should not exist inside a shareholder owned company. But they always do and as C Northcote Parkinson observed there’s an inevitability about their growth. This then means that one constant - and vital - task of management is to be repeatedly firing that bureaucracy. It’s the only way to keep the weeds from strangling the garden.
This is not, to put it mildly, what most managements do and it certainly hasn’t been true of Capita. As they announce today: “In its Half Year Results, Capita outlined that its medium-term target to double its operating margin to 6% was underpinned by cost savings of £40m per annum on an annualised basis by the end of 2024. Based on an extensive organisational review, the Group will shortly commence employee consultation programmes which are expected to deliver cost savings of £60m on an annualised basis from Q1 2024. The organisational changes proposed primarily impact indirect support function and overhead roles which mean that approximately 900 roles are at risk of redundancy.”
Well, it’s nice that it’s £60 million not £40 million. But that these overhead roles even exist is the problem. If the company can do without them - which is what they are saying now - then why did they even exist in the first place? Lazy management that did not pay sufficient attention to pruning that bureaucracy, that’s what.
Capita share price from Google Finance
That these costs are being eliminated is good, that they ever existed in the first place is a black mark against management.
But then as we’ve said before about Capita: “Capita (LON: CPI) shares are down 15% on the first half results. It’s possible to read the CPI results in one of two wildly different ways. One is to look at the current business numbers, the future contracts booked, and see that it’s a large and well functioning outsourcing business. The other is to look at recent performance and note that it’s had to - expensively - dump certain old businesses and contracts. The blend of these two then leads to the question - well, how many of those new contracts will end up like the old ones? How much of the new contract stream will end up producing those capital losses?” We’d not be carrying banners for the efficiency of the management team, let’s put it that way.