REG-Capita PLC: Annual Financial Report 2020

CapitaAnnouncement

22/03/2021 15:15

22 March 2021

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 2020. 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

https://data.fca.org.uk/#/nsm/nationalstoragemechanism. 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 17 March 2021. That information, together with the information set out
below, which is extracted from the Annual Report and Accounts 2020, 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 2020.

Principal risks
1. Purpose: Failure to live our purpose and to change stakeholder perception
so that we are seen to live our purpose.
Potential impact:
* misalignment between the strategic objectives and 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:

The pandemic put our clients, customers and our service delivery under huge
pressure. While

that presented challenges to our stakeholders and for our people, it did
provide us with the opportunity to demonstrate how we live our values and our
purpose by creating better outcomes and continuing to deliver for our clients.

Mitigating actions in 2020:
* implemented the real living wage as a minimum for colleagues in the UK
* regular proactive open and honest engagement with our clients, customers,
and stakeholders to better understand how we can continue to effectively
support them during the pandemic
* employee survey completed to seek feedback on how ‘we live our purpose’
and to identify improvement opportunities.
Future actions:
* review our strategic objectives and purpose of the business and ensure
alignment with the new Capita operating model
* engage and interact with our stakeholders and rebuild our brand, reputation,
and investor   confidence by fulfilling our promises.
2. Strategy: Failure to define and resource the right medium-term strategy.

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:

The financial pressures from Covid-19 had a significant impact on our
transformation programme, our strategic priorities, and our ability to
demonstrate that anticipated benefits from the transformation programme were
on target to be achieved. Instead of focusing on the delivery of our
objectives, we had to focus our attention on the pandemic.

Mitigating actions in 2020:
* as set out in the CEO review, Capita is undertaking a further reorganisation
that will address this risk
* the future actions all focus on the successful implementation of this
organisational change.
3. Innovation: Failure to innovate and develop new value propositions for
clients and customers to drive sustainable growth.

Potential Impact:
* inability to grow and develop into new markets
* failure to compete with others who are innovative
* unable to maximise new technology
* loss of new and existing business to competitors
* eroded corporate position in the market.
How we manage the risk:

The pandemic has thrown up myriad challenges, as well as opportunities for new
propositions

for clients. Some clients are under financial pressure and will want to spend
less. In addition,

we have had to scale back the resource and investment in this area, which has
resulted in

reduced innovation initiatives.

Mitigating actions in 2020:
* improved agility in delivering to clients, maintaining market confidence
* growth and consulting teams worked hard to accelerate the development of new
propositions and explored more than 100 potential Covid-19 related
opportunities.
Future actions:
* the reorganisation of Capita is specifically designed to enable sufficient
investment to be
made to capture the growth opportunities in the areas we are focusing on. See
CEO report.

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

Potential impact:
* inability to deliver Capita strategy
* loss of key personnel/lack of succession
* increased staff turnover and increase in costs from buying in short-term
contractors
* lack of in-house skills and inability to attract the right people with the
right skills
* reputational damage.
How we manage the risk:

The financial position and drop in our share price have had an impact on our
brand and reputation. As a result of internal cost-reduction measures, i.e.
the freeze in bonus payout and pay rise freezes, we have had some staff
attrition. However, we have continued to attract and recruit staff in our
operational areas and recruit senior roles including replacing senior staff
who have left. Our employee survey results have shown three consecutive annual
improvements in our employee net performance score (eNPS). The successful
implementation of the reorganisation should attract and retain staff.

Mitigating actions in 2020:
* leadership development moved to digital delivery
* performance review process launched
* resourcing capability and systems improved to attract new staff virtually
* employee value proposition launched
* retained staff and expertise by redeployment, e.g. from consulting business
into other parts of the business.
Future actions:
* change to more flexible future ways of working
* use of levy funding to develop over 1,000 people through modern
apprenticeships
* introduction of bespoke MBA and diploma programme
* changes to 2021 short-term incentive plan design
* continue to invest in staff development.
5.  Culture: Failure to change the culture and practices of Capita in line
with our responsible business agenda.

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:

Collaboration and teamwork improved during pandemic period. With a continued
need to take

tough decisions to bridge to the future and the change in work styles, with
reduced focus, engagement, and direct interaction with our people, likely to
impact our culture, value, and behaviours around openness and collaborative
working. We have described earlier in this section, how Capita responded to
the Covid-19 crisis which allowed us to demonstrate how we prioritised living
our values in line with our responsible business agenda.

Mitigating actions in 2020:
* initiated review of our operating model to identify opportunities that will
enable us to further improve our culture and develop better working practices
in line with our responsible business agenda and focus on our client
commitments to deliver better outcomes.
Future actions:
* continue to embed the reorganisation of Capita to accelerate our journey on
culture, values
and behaviours.

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

Potential impact:
* loss or theft of confidential client or customer data due to cyber attack
* disruption to business operations to Capita and/or its customers due to
cyber attack
* loss of one of Capita’s data centres
* reputational damage leading to loss of existing contracts and bidding for
new business.
How we manage the risk:

The global pandemic involving the spread of Covid-19 presented our IT business
with several

different challenges, primarily around how we manage our IT infrastructure to
accommodate our people who were asked to work from home and to maintain our IT
systems and security controls.

Mitigating actions in 2020:
* created the office of the Chief Information Security Officer to identify
opportunities to strengthen IT security controls
* within weeks of the lockdown in March 2020, we made a provision for around
85% of staff to be able to continue to work from home
* IT system, cyber and end user security controls improved to ensure
colleagues had the capability to work from home during the pandemic, while
minimising security, unauthorised access, and data leakage risks.
Future actions:
* improve IT security structure, process and procedures
* monitor and improve information security controls to reduce the risk of data
leakage or unauthorised access to Capita systems
* implement new tooling to help increase data security and reduce the
possibility of data leakage
* implement additional security controls for the end user computing devices to
reduce the possibility of ransomware or virus attacks
* enhance security over corporate domains and cloud governance, to reduce risk
of unauthorised access and data loss
* explore opportunities for further funding to upgrade IT estate and enhance
Group IT infrastructure, platforms and systems.
7. Contracts: Inability to secure contracts with an acceptable risk and
reward balance and that are aligned to Capita’s agreed purpose, values and
responsible business strategy.

Potential impact:
* loss of contracts
* lack of ability to acquire new business
* contract terms and service commitments are not met or understood
* exposure to unexpected costs/cost overruns or onerous terms
* brand and reputational damage if not managed effectively
* risk of financial claims/penalties and other disputes with clients
* adverse impact on contract profitability.
How we manage the risk:

The pandemic has financially impacted potential clients and customers leading
to a reduced appetite to spend money and wish to pay less for services. There
is a risk that Capita enters contractual arrangements with new clients that
result in unacceptable commercial, regulatory, financial, or reputational
exposure, or which are not aligned to Capita’s agreed purpose, values, and
responsible business strategy.

Mitigating actions in 2020:
* the contract review committee (CRC) controls streamlined including a
fast-commercial governance process
* contract remediation committee in place to review delivery on existing
contracts
* transactions committee established to review acquisitions and mergers to
ensure alignment with growth strategy.
Future actions:
* refresh the CRC policy and deal review template, including incorporation of
new H&S/safeguarding risk assessment
* further refresh and roll out CRC post-deal review process
* develop fraud risk assessment
* develop and roll out standard form contracts and playbooks.
8. Delighting clients: Failure to delight clients and customers with software
performance or project and service delivery.

Potential impact:
* loss of existing contracts
* brand and reputation damage
* limited or no new business.
How we manage the risk:

As a result of Covid-19, most projects are either continuing or have been
change controlled, but this did not affect our ability to deliver our client
commitments. The reorganisation of Capita’s operating model should enhance
our ability to fulfil customer requirements.

Mitigating actions in 2020:
* programme and investment committee reviewed significant projects using
project governance methodology
* implemented the weekly SLA/KPI CEO reporting
* implemented a new software support service on ServiceNow that enabled us to
improve our service standards.
Future actions:
* reorganisation of our current structure into a more focused, client-centric
Group to deliver better outcomes for our clients and their customers
* have the right technological capability available to the divisions to
deliver for customer needs, which is a fundamental part of the reorganisation
to continue to build and develop client confidence in Capita and our ability
to meet customer needs.
9. Internal Control: Failure to develop and maintain a risk-based system of
internal control.

Potential Impact:
* fraud, misstatement and inaccurate financial reporting
* greater regulatory or client scrutiny
* increased costs associated with risk remediation activities
* breaches of law, statutory and legal reporting leading to regulatory fines
in financial services sector and loss of key contracts
* reputational damage and adverse media interest leading to inability to
secure new contracts.
How we manage the risk:

In prior years, this risk primarily focused on financial controls. The
executive agreed that a system of internal controls should not be limited to
financial controls but should be expanded to pan-Capita internal control
frameworks. The impact of Covid-19 has resulted in a delay to the improvement
of elements of our risk management and internal control framework.

Mitigating actions in 2020:
* KCQ self-assessment process was developed and completed against key controls
* a control questionnaire process was completed where every business leader
attested to compliance with a minimum set of financial controls
* senior management provided an assessment of the control environment
following a stabilising of the initial pandemic crisis; specific attention was
given to the plans to improve cyber and IT resilience.
Future actions:
* embed accountability, responsibility and understanding of governance, risk
and controls
environment with the new operating model
* implement a more efficient internal control framework
* refresh and enhance the enterprise risk management framework including
updating the risk
appetite into a more granular tool to develop key risk indicators for
monitoring key risks
* establish risk and assurance committees at Group function and business unit
level.
10. Political climate: Failure to plan for, influence and respond to
potential changes in the political climate.

Potential Impact:
* the Government’s response to Covid-19 has generated significant new policy
at speed affecting the operational environment for the business
* the new approach by Government to innovation and public service delivery is
a potential risk to Capita
* possibility of additional regulatory changes by new government.
How we manage the risk:

UK Government’s absolute priority has been Covid-19 and going forward will
be recovery.

There may be increased volatility in government spending because of an
improved opposition.

Mitigating actions in 2020:
* engaged with government and other parties (e.g. regulators) to promote and
protect reputation
* worked to understand business requirements and prepared for Brexit.
Future actions:
* engage with government in response to Covid-19, new policies, and impact on
Capita
* monitor and horizon scan for political, regulatory, and economic
developments impacting
political climate.

11. Financial stability: Failure to maintain financial stability and achieve
financial targets.

Potential Impact:
* continued cash outflow reduces liquidity available to invest in
transformation
* loss of shareholder value
* weakens investor confidence.
How we manage risks:

Covid-19 significantly impacted our ability to maintain financial stability
and achieve our financial targets, due to the lockdown travel and workplace
restrictions. As a result, for a short time, we were not able to fully deliver
on some of our contractual obligations. We incurred loss of revenue in our
transactional business and from clients in financial distress.

Mitigating actions in 2020:
* early decision to reduce costs and conserve cash, supported by enhanced
finance controls
* daily cash forecasting to understand overall Group liquidity and revolving
credit facility
* focus on ensuring minimal disruption to cash collection cycle through remote
working
* monthly reforecasting evolved as our understanding of the financial
situation developed,
moving from a V-shaped recovery to business by business recovery curves.
Projections

extended to 2021 and the business planning process accelerated
* took action to address balance sheet concerns through additional asset
disposals.
Future actions:
* further strengthen the balance sheet, by addressing our debt maturities and
targeting more
non-core disposals
* implement the new finance target operating model to improve financial
forecasting reliability.
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.

Health, safety and wellbeing of our people

In 2020 we witnessed the rapid spread of the Covid-19 virus with devastating
consequences across the world. We responded by assessing the impact of
Covid-19 on our principal risks and by establishing a dedicated team to ensure
Capita was as prepared as possible for the global health emergency. However,
as the initial phase of the pandemic stabilised, we began to appreciate the
longer-term impacts of Covid-19 on the health, safety and wellbeing of our
people, some of whom have now been working from home for almost a year, and
will continue to do so for a number of months to come. In 2021, we must
continue to support our managers and colleagues across the business in
recognising that they are empowered to change how they and their teams work.
We will achieve this through briefings, workshops, focus groups, pulse
surveys, targeted communications and new training collateral. This not only
covers the day-to-day work people have to do but will also have a large
emphasis on wellbeing and supporting each other through these challenging
times.

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 2020,
which includes the strategic report, corporate governance, and audited
accounts for this year. Pages 1–108 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 7799 1525



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