Martin Flanagan: Tough times in the outsourcing world

Outsourced and out of luck. That seems the current burden of the once spruce outsourcing sector.

'It is difficult to see how profit margins in the industry can be repaired quickly,' writes Martin Flanagan. Picture: Bill Henry

It has been thrown into stark relief by the discrete investigations by the Financial Conduct Authority (FCA) and Financial Reporting Council (FRC) into one of the previously high‑stepping members of the sector, Mitie Group.

• READ MORE: Outsourcing group Mitie faces FCA probe into profit warning

The FCA is looking at the timeliness of Mitie’s profit warning to the market last September, swiftly followed by two others. And the FRC accountancy watchdog is investigating the auditing of the company’s books.

New Mitie chief executive Phil Bentley, who took over in December, has since restated the company’s historical accounts, announced it would appoint a new auditor and sold a loss-making unit.

So even if the company is hit by regulatory fines somewhere down the line if wrongdoing is deemed to have occurred, you could argue that the issues are not pertinent to Mitie’s prospects.

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But it doesn’t dispel concerns about the general challenges facing the outsourcing sector. There was a time when outsourcing was all the rage among businesses and public organisations even if it sometimes led to dumping in-house staff in the process.

The argument was that the likes of cleaning, maintenance and security could be done with more expertise and more cheaply by external operators to allow clients to focus on their main activities.

But they look disappeared halcyon days. Companies such as Mitie, Capita and Carillion have been hit over the past year by rising labour costs and unplanned changes on contracts that were taken on during the financial downturn, often with paper-thin margins.

Some clients have decided not to renew or commission new contracts as financial uncertainty has dogged business sentiment since the Brexit vote and the slowing of the UK economy.

• READ MORE: Housing group Mears says Grenfell disaster to hit profits

Social housing and care profider Mears Group revealed that the Grenfell fire tragegy in west London meant councils UK-wide were now focusing on checking that their housing stock was safe and met regulations rather outsourcing more work. Municipal horns have been pulled in.

It is difficult to see how profit margins in the industry can be repaired quickly. Stock market “buy” ratings are likely to be scarce.

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