Capita's profit alert raises questions over outsourcing sector crisis

Capita's shock profit warning and share price crash have sparked fears it could be "another Carillion" waiting in the wings.

It is the third major outsourcing firm to alert over earnings in the last month, after failed rival Carillion and Interserve, leading to concerns that problems are widespread throughout the sector.

Here we look at some of the key questions on the issue:

- Is Capita the next Carillion?

The Government has sought to assure it is monitoring all its "strategic suppliers", including Capita, and that it does not believe any are in a comparable position to Carillion.

But experts have said there are clear parallels with Carillion - the outsourcing giant that collapsed earlier this month - given the string of profit warnings from Capita and its admission the firm has become too unwieldy.

It is also notable that Capita is audited by KPMG, the same accountancy firm which audited Carillion.

However, the action announced by Capita's new boss Jonathan Lewis signals the group is facing its troubles head-on, rather than fudging the books.

It is calling on investors to stump up as much as £700 million under a rights issue to bolster its balance sheet, while also slashing costs and selling off unwanted businesses.

- What about its pensions deficit?

With Carillion leaving behind a mountain of debts and a pension scheme in the red, there are worries Capita may be heading the same way.

Work and Pensions Committee chairman Frank Field has put Capita on his list of firms to investigate, given that Capita's pension fund deficit stands at a sizeable £381 million.

Capita has stressed, however, that it expects a current review of the pension scheme to show the deficit to be "significantly" narrowed and assured it was continuing with annual payments of £21 million into the fund.

- What is causing the woes in the outsourcing sector?

A string of profit warnings from outsourcing firms over the past year has seen them blame pressures building in the industry, such as soaring staff bills from minimum wage hikes and tighter public sector outsourcing budgets.

But many of these firms also have traits in common, such as rapid growth by acquisition in recent years.

Past failures in the sector have often also revealed overly-aggressive accounting practices - a common trend in outsourcing, given problems with revenue recognition and the temptation to take profits too early on long-term contracts.

These firms can also often win contracts based on bids which turn out to be too low in future.

- What does this outsourcing crisis mean for the Government?

It is now facing calls for a risk assessment of all large outsourcing firms, as well as a root-and-branch review of the outsourcing model in a bid to end the practice of handing contracts to just a few big companies.