Good morning. Apologies for running a little late. As some of you probably experienced, it took some of us a little longer to get through security this morning than we had anticipated. For those of you on the call, my name's Jon Lewis, Chief Executive Officer. A very warm welcome to everyone here at the London Stock Exchange. As always, thank you for your interest in Capita. Firstly, I'd like to draw your attention to the legal text on screen and incorporated in page two of your pack. You'll remember that on the 23rd of April last year, we set out our transformation plan for Capita. I am very pleased with the progress we have made, as evidenced by the highlights on this slide. I'll talk more about these later. Most importantly, we are precisely where we said we would be one year in.
We have a clear plan to continue the transformation of Capita in 2019, including accelerating our cost competitiveness program, embedding our new One Capita operating model, the first time we have a single and consistent way of running this business, and increasing investment to support long-term sustainable growth. That's investment in the digital platforms that will deliver long-term sustainable growth. Very importantly, our 2020 financial targets, including at least GBP 200 million in free cash flow and double-digit margins, remain unchanged.
Let me now hand over to Patrick Butcher, our new CFO, to take us through the 2018 numbers. For those of you who have not yet met Patrick, he has 25 years experience in senior financial roles in PLCs. Joined us in December of last year from the Go-Ahead Group. It is great. I was CFO-less for a period last year. It's great to have someone with Patrick's caliber on the team as we continue with our transformation. Patrick is already making his impact very positively felt. Patrick?
Morning. Thank you, Jon. It's always easy when your competition is CFO-less because you can usually do better than that, at least in the beginning. I'm delighted to be with you today. It was good to meet some of you over coffee. I look forward to engaging with you as I settle in at Capita. Since I joined the board in January, I've spent time meeting clients, shareholders, suppliers, and other stakeholders to gain a better understanding of our businesses. The sheer scale of what we do and the number of people that we help each week, 35 million by some measures, is just extraordinary. What struck me most are two things. Firstly, is the importance to our clients and customers of what it is that we do. Secondly, the commitment of our people to creating better outcomes for our clients and customers.
It is an exciting time, in all senses of the word, but an exciting time to join a nationally significant company. However, you will be pleased to know that I have spent some time getting to grips with our financial results. In particular, I wanted to share some early thoughts with you on the drivers of our revenue. Capita is in the second year of a major three-year transformation. We will increasingly focus, as we move forward, on building a platform for growth. However, there is some key dynamics going on in our markets that I thought it was worth sharing with you. Firstly, there are some structural changes in existing markets, the most significant of which is the local authority market for large scale, long-term multi-activity contracts, which for the foreseeable future is in decline.
In central government, there are some contracts that, for reasons of risk, reputational profitability, we have chosen not to bid for. In addition, while Brexit may well present an opportunity for growth in the medium term, in the short term, it has slowed decision-making. We've also decided that some markets are not going to be the focus of future investment. This has resulted this year in the sale of some businesses, and in parts of our life insurance business, there have been reductions and terminations to contracts. As can be seen from these results, the revenue, profit, and cash flow impact of these terminations can be significant and introduce an element of volatility into the results. It is possible that there will be more terminations or restructurings in the life insurance business in 2019.
In many sectors and markets, organizations are engaged in digital transformation, and they will be investing significant sums of money to stay relevant and competitive. It is this activity that provides a significant growth opportunity for us. How have these factors played into our results and prospects? We've seen revenue declines in 2018 in central and local government and in the run-off areas of our life insurance business, and those will continue into 2019. However, as I said before, we're starting to invest heavily in driving growth in the areas of opportunity created by the wave of digital transformation activity. Just before we get into the results, I just wanted a quick word on adjustments. I've had a couple of questions already this morning about the difference between underlying and adjusted profit.
The purpose of adjusting our reported financial results is to provide a clearer picture of the performance of the company. This is both important and difficult at Capita in 2018. The company has a large and complex set of businesses, has recently implemented IFRS 15, and is soon to implement IFRS 16, and it is at the end of the first year of a major three-year transformation program. Each of these factors create the potential for layered complexity in the reported results. This slide just sets out in one place the adjustments that we have made in 2018 and the adjustments that we will make in 2019. Now let's turn to the results. This first slide highlights the key financial metrics of the group and the first steps that we have taken to try and simplify the way that we report those metrics.
The 2018 results were slightly ahead of our expectations, although as expected and communicated, pre-tax profit is down just over 25%. The reduction in net debt and leverage reflects the action taken towards simplifying and strengthening our balance sheet. We disposed of some businesses that did not fit with our long-term plans and have raised capital. The cash generated has been used to pay down debt and provide funds to support the investment and transformation. I will cover these in more detail during the presentation. Starting with revenue. I spoke earlier about some of the changes going on in our markets. This year, there are three main factors that have influenced our revenues. Contracts that we have lost, totaling an impact of GBP 172 million, as you can see on the second bar. These fell into three main categories.
Either the contract came to an end and we chose not to rebid it, about GBP 30 million. The contract ended and was won by somebody else, about GBP 80 million. The contract was terminated early and insourced by the clients, which is the remainder, about GBP 60 million. The next bar shows the GBP 61 million impact of changes to our clients' volumes and scope. About half of it relates to volumes, particularly in the telecommunications, and that's where if our client has fewer customers, we get less revenue. The other is where clients, mostly in local government, have varied scope of the contract for a variety of different reasons. Finally, about GBP 600 million of our revenue is not committed in contracts, and it just relies on transactional volumes. We've seen reductions in a number of areas, but most significantly in our public sector resourcing business.
That is a total of GBP 62 million on the slide. If we look at that revenue from a different perspective, you can see here by division, the changes in revenue. As we flagged at the H1 results, and as I've hopefully laid the groundwork for, Government Services revenue fell quite significantly. This reflects the end of our home office escorting contract, which we did not rebid, the reshaping of the Defence Infrastructure Organisation contract with the MOD, and losses in the local government market that I was describing of multi-activity long-term contracts. If we turn now to profit. This slide shows the year-on-year change in profit before tax, using the divisional breakdown here. The first impact on the slide is the reversal of GBP 31 million of one-off benefits from 2017.
Overall, across all the divisions, the revenue reduction is the biggest driver of the profit, offset to some extent by the cost savings that Jon is going to describe a bit later. In addition, profit in all divisions has been affected by the investment in professionalizing our corporate functions, investments in financial systems, building up our people capability, the cost of GDPR, and investment across most divisions in addressing service delivery challenges. Jon's going to talk later about the three most significant ones, but they're at a lower level. There are a number of other contracts where we've been putting money in to make sure that we're meeting our client commitments. Finally, the other piece of investment is in building the capability to drive growth into the future.
This slide, which is more for reference, I won't talk too much, it just provides a breakdown of the results by division. What it does highlight is the wide spread of profitability between divisions. As we think about revenue changes, it's important to remember that a GBP of revenue is not quite the same in each division. A GBP of Software is different than a GBP of Customer Management or Government Services. Right. Another slightly complex slide on cash flow, it's more complex than I would like because it is really important that we have a good, clear presentation of our cash flow, because that is essential to a good understanding of our business. There are a few key points I want to bring out on this slide.
Firstly, as part of our commitment to simplifying and strengthening our balance sheet, we've paid off the non-recourse receivables financing of GBP 110 million. We've normalized our year-end cash management, which resulted in an outflow of GBP 126 million. These two items will not recur in 2019, provide some confidence as we build towards 2020. The other main working capital outflow is the release of deferred income, that's worthy of a little bit of explanation. As part of the implementation of IFRS 15, a significant deferred income balance was created. This year, it fell from GBP 1.6 billion to GBP 1.3 billion, reflecting the fact that a number of our contracts are moving towards steady state. A significant element of this remaining balance will be released over the next two years.
The timing and impact of that is going to be affected by the quantum timing and shape of any new business wins that we have, which of course will increase deferred income. Any changes in business models, for example, the rise of software as a service rather than selling software licenses, or if there are early terminations, and we saw the examples this year of the Prudential and Marsh. The positive movement of GBP 83 million in other working capital relates to a reduction in receivables as some businesses have reduced in size. Cash interest costs have reduced down to GBP 40 million following the repayment of debt, while CapEx continues to rise as we invest in the business.
Turning to capital expenditure. Last year, net capital expenditure was GBP 140 million. The major items of spend included progress in upgrading of our financial systems to improve financial reporting processes and controls. The fit-out of our new head office in Berners Street, which provides a modern environment for client-facing colleagues to work smarter and more collaboratively, allowed us to exit a number of other buildings across London. We've also made big investments in our data centers to improve resilience and customer experience.
Looking forward, we still expect to invest up to GBP 500 million from 2018 to 2020. We expect this year we're going to drive more of that investment towards activities that will generate growth. In this regard, there are 30 projects, each with a value of more than GBP 1 million, totally focused on growth, already approved and in flight. Turning to the other bit of the cash flow statement. This slide shows all the cash flows that are not in the adjusted free cash flow. These include some known and expected commitments, such as the GBP 100 million investment in business restructuring, and the first of three significant payments under the pension deficit recovery plan, on which I will say a bit more later.
It also highlights the actions that we've taken this year to strengthen our balance sheet, namely the disposal of some businesses and the rights issue, together with the consequent reduction in net debt. Which brings us to gearing. This slide clearly highlights the scale and impact of the de-gearing of the balance sheet that took place in 2018. A third of the private placement debt has been repaid and the business has more cash. Total liquidity of GBP 1.2 billion, including cash of GBP 643 million and the revolving credit facility of GBP 600 million, provides the business with the financial resources it needs to support the next two years of transformational change and investment.
I said I would return to pensions. A common theme of this presentation has been the need to invest in addressing the challenges of the past. Pensions is another area. The main defined benefit schemes were largely closed to future accrual in 2016. As this slide shows, there's been a reduction of nearly GBP 200 million in the year of the accounting deficit down to GBP 219 million. As you would expect from a responsible business, the company continues to invest in helping employees save for their retirement and in our defined benefit schemes. During the year, the actuarial valuation of the defined benefit schemes for March 2017 was completed, and it has been agreed that the company will contribute GBP 176 million to that deficit by 2021. In late 2018, we made the first payment of some GBP 40 million.
It remains our long-held joint objective with the trustees to continue to lower the level of investment risk in the schemes, benefiting both the pension schemes, the pensioners, and the company. Finally, a word on what all of this means for the coming year. The group is entering the second year of a major transformation. The successful delivery of this program of change, and in particular the cost savings initiatives, is critical to the future performance of the group. The first two months have been in line with our expectations. What do we see happening over the year? Net finance costs we expect to decrease to around GBP 40 million. Profit before tax we expect to be within a range of GBP 265 million-GBP 295 million.
As usual, the key variables in that range are the delivery of the cost savings and the timing and impact of any contract wins, restructurings, or terminations. We expect our net debt to EBITDA ratio to remain within our target range of one to 2x . As a result of the pension deficit contribution, we're going to be in the top half of the range. All of these exclude the impact of IFRS 16. There's an appendix in the slide pack which details that. Thank you very much for your time and attention. I look forward to your questions, and I will hand you back to Jon.
Thank you, Patrick. The key to our three-year transformation to simplify, strengthen, succeed, is to turn Capita into a more predictable, consistent business with better cash flow generation. We've been very consistent in that message. We've also been consistent in stating that this turnaround is largely driven by things we control. Fixing the basics, where we made great progress in 2018. Being more competitive on cost. Turning around three challenging contracts, which I'll come back to later on. Reducing interest costs from a stronger balance sheet with less debt. Additionally, of course, the GBP 1.1 billion raised in 2018 through the rights issue and the proceeds from disposals allows us now to thoughtfully increase investment in two broad areas. Our management systems, which is absolutely core to creating a more predictable business. Secondly, the market propositions that seed growth that Patrick has already talked about.
I too will touch on those later. As I've stated, the world is only going to be spending more on digitally enabled transformations of business processes, and for years to come. The majority of our business, about 70% by revenue, is already delivering digitally enabled services today. Not just in our digital BPO business, but in the software space as well, of course. As the H2 of this graphic illustrates. These markets have attractive margins and good long-term secular growth trends. Our domain knowledge in segments such as telco, financial services, education, and utilities means that we're actually very well placed to help clients with their digital transformation journeys. We have deep understanding of many of the business processes in these segments.
By way of example, we have just transformed the end customer experience for a large financial services business by reducing the processing times for insurance claims from more than 35 days to under three, and very importantly for the client, also improved their customer satisfaction score by nearly 40 points. Their customer is getting a better service, and of course, it also represents a material productivity gain for our client. We're able to do this because we do three things. Firstly, we understand the client and their existing business processes. Secondly, our colleagues know how to apply concepts such as lean to drive productivity and efficiency gains. Thirdly, we know how to combine third-party and our own proprietary technology platforms to digitalize these processes and increasingly apply robotic process automation or automation more generally to those business processes.
Supported by ongoing investment, our digitally enabled services business is increasingly focused on implementing these types of value propositions. We generate value in doing so by improving productivity, reducing risk, providing data insight through our data analytics capabilities, and delivering improved experience for our clients' customers. This essentially is Capita's USP. When I joined Capita in December of 2017, I found a business facing some significant challenges. You'll also remember that I also stated I found a business with huge potential. I talked about the smarts of our colleagues in particular, and the quality of the client base we have, not just here in the U.K., but into Europe as well. Our transformation plan is focused on simplifying and strengthening Capita to build on these capabilities and generate sustainable free cash flow growth.
These are grouped into a number of work streams, as shown on this slide, along with a description of our starting point on the left, and what success looks like on the right. This is a summary representation of a much more detailed plan that our chief transformation officer manages, that measures and tracks progress against each of these work streams. The slide now shows where we are after the first year. Again, I want to emphasize that we are precisely where we felt we would be at this stage of the transformation. We have a defined strategy. Our financial leverage has reduced significantly. We have strengthened leadership and governance. Stakeholder relationships are in just a completely different place today to a year ago. We're making informed investment decisions on how to better run the business and seed growth.
We have delivered on the first year cost competitiveness target of GBP 70 million. The team have achieved a considerable amount for which I want to thank them. It has been, for all of us, I think, a very demanding year. While there is still some fixing to do, I do feel we have broken the back of this, and we are now focusing much more energy on creating the platforms for sustainable long-term growth. By the end of 2019, we expect to have made further strong progress, as represented on the slide currently. I will spend the majority of the remainder of this presentation taking you through the initiatives already underway to deliver these. I hope it goes without saying that the transformation plan, essentially our 2020 objectives, are not the sum total of our long-term ambition.
While we have delivered on these, I believe Capita will be in a much better shape and well-positioned to deliver on long-term sustainable growth in our chosen markets. I will start with governance. Patrick's already talked about the balance sheet. In January 2019, we launched Capita's new purpose, We Create Better Outcomes. This is not a purpose statement defined by myself or the leadership team, but a cross-section of colleagues from across the organization. That's important because we wanted our colleagues to own it. I like it because it speaks to all our stakeholders and defines unambiguously what it is we do. It defines why Capita exists. Alongside my leadership team, we have spent a significant amount of time since the early part of this year engaging with over 11,000 of our Capita colleagues globally in more than 50 locations.
Engaging with colleagues was a first for Capita at this scale, I'm very encouraged by the very positive reaction it has engendered, given cultural change is such an important part of our transformation. Our purpose, allied to a refreshed set of values and behaviors and a new code of conduct, defines how we act as a responsible business. Our purpose shapes all that we do. It is our North Star, I'm determined that over my tenure as CEO, our brand becomes synonymous with creating better outcomes. Embedding this across all 63,000 employees will take time. I am confident that when we do so, we will have a highly engaged colleague base who consistently delight customers and clients alike, and deliver value for all our stakeholders. Again, cultural change is core to the transformation of this business.
We also launched in January of this year a new and comprehensive operating model. This is the blueprint for how we now run the business for the first time as a single integrated business with strong operational and functional lines. It allows for a standardized and efficient way of working, defining accountabilities for business lines and functions, decision processes and decision forums, a contract review committee, for example, and delegations of authority. Most importantly, it removes the ambiguity of old. We now operate Capita one way and one way only. During 2018, as part of our operating model planning, we also significantly strengthened the executive team, blending the existing talent with seven externally sourced executives with proven track records in their respective areas. We have also made changes at the CO-2 level.
The board and I are very pleased with the evolution of the leadership team. It is a team that has the capabilities and competencies to execute on our transformation plan. Our new operating model is also driving improvements in oversight to ensure that across our operations, we only take on work that, A, fully aligns with our strategic goals, B, has an acceptable balance between risk and reward, C, is able to meet clients' expectations, and therefore, D, consistently delivers appropriate returns. We are not chasing revenue. We are fundamentally improving the contract portfolio of the business. In summary, our new operating model is the single biggest transformation lever we're implementing. Don't think of it as a rule book. It is an antidote to Capita's legacy complexity, and is core to becoming a disciplined, predictable, and responsible business.
It also enables us to better leverage our existing strengths and scale, deliver One Capita to our blue-chip client base. Let me now turn to people. We are a people-centric business. Highly-engaged, purpose-led colleagues are fundamental to our long-term success. In 2018, under the direction of our first ever chief people officer, we made a substantive start on Capita's people strategy, one focused on ensuring we continue to be able to attract, engage, reward meritocratically, develop, and retain the talent we need to ensure successful execution, not just of purpose, but of strategy as well. It's very clear from the quality of talent that has joined us this past year that we have an improving employee value proposition. This is supported, for example, by ongoing improvements in such things as our Glassdoor ratings, but also our employee net promoter score.
Given the importance of our people strategy, we track the effectiveness of this through such things as the employee net promoter score. This is also an important metric in long-term incentive plans for senior leaders. We're also placing more emphasis on diversity in all its forms and addressing our gender pay gap. I'm very proud that our ranking in the Hampton-Alexander Review gender diversity has improved by more than 100 places in the last year. Though still much to do. We should be, for our business model, top quarter. We're currently interviewing a shortlist of candidates from the over 400 applications received from across our global operations for our first two employee board directors. We will be the first British FTSE 250 company to put employee directors on the board in three decades.
On the basis of my experience on other boards where I've experienced employee directors, and the ideas and thoughts articulated in our own employees' applications, I am confident that our employee directors will make a substantive contribution, not just to board discussions, but the overall success of the business. Let me now turn to the three challenging contracts we've spoken of previously. These have driven significant operational, reputational, and financial challenges to us in the last few years. We are therefore extremely focused on getting these right, and we are making encouraging progress. Firstly, Army Recruitment. If you live in the U.K., you will almost certainly have read about this contract, and it's why I met with the head of the British Army a full month ahead of joining as CEO, in 2017.
I wanted to be clear that under my watch, we would deliver against our obligations on this contract. I also wanted to convey that we needed to fundamentally reset the relationship we had with the British Army. It needs to be a true partnership, one in which both parties were committed to delivering their respective parts of the solution. The National Audit Office report released late last year, by its very nature, of course, looks backwards, and is largely based on evidence prior to the reset of the partnership. I'm pleased to report that we are now starting to see very significant signs of improvement in the metrics on this contract. We've filled Sandhurst for six intakes running. On the back of our Your Army advertising campaign, we had 1.5 million hits to the Army Recruitment page in January alone.
Applications to join the Army recently hit a five-year high. We've significantly reduced the amount of time between application and job offer. It looks like the most recent three months data will be the best for recruitment since the contract started in 2012, with an expected increase of over 1,000 soldiers. That's two battalions, compared to the Q1 of 2018. We are turning a corner on this contract. This is echoed by the Ministry of Defence, who have made public statements to this end. In fact, General Sir Nick Carter, the Chief of Defence Staff, recently told the Defence Select Committee that Capita's, quote, "Partnership is a model for how you can get the two sides of the relationship, public-private, to work together in a strategic way." I feel was instrumental also in influencing the Cabinet Office's new Outsourcing Playbook.
The second challenging engagement was Primary Care Support England, better known as PCSE. In Q4 last year, we took decisive action over poor execution on one aspect, one important aspect of that contract. We also instigated a root-and-branch independent review of our operations. This was completed the very early part of this year, and we are now implementing the recommendations from that review. There remains much to do, but I am confident that we will continue to turn that contract to a profit at the end of 2020, as previously stated. The third contract was mobilcom-debitel. I'm pleased to say that we have now delivered on the transformation milestones, including the launch of the iOS and Android mobile customer service apps and a new digital telephony platform. Again, as previously stated, we expect this contract to reach break even at the end of 2020.
As this chart shows, we have already seen improvement in the financial performance of these contracts year-over-year. Again, we expect a further reduction in losses in 2019, becoming profitable in 2020. Before I leave this slide, I would also like to make a few broad remarks about government contracting. I am very encouraged by the Cabinet Office's recent publication on guidance on contracting, "The Outsourcing Playbook," as it's called. We proactively contributed to and support this undertaking. It makes clear that government understands the need to work in partnership with the private sector and that needs to be a better balance between risk and reward. It also, of course, commits to a set of higher responsible business standards, an area where we have already demonstrated strong credentials.
The example I will cite is our supplier payment performance, where we are exceeding the requirements today, two quarters in a row, of the Prompt Payment Code, and are one of the most prompt payers contracted with government today. Let me now turn to cost competitiveness. In April, we laid out a bottom-up plan to improve our cost competitiveness, to make us more efficient and productive, and to realize more than GBP 175 million in cumulative savings by 2020. In 2018, we made a strong start on executing against these, delivering in-year savings of GBP 70 million.
These include, for example, more than a 500,000 sq ft reduction in our property footprint, organizational delayering associated with the implementation of our new operating model, the offshoring of a number of roles to India and South Africa, both for operations and shared services, and driving value from the in excess of GBP 1 billion we spend with suppliers today. As a result of the learnings we gained in 2018, we are now today accelerating our original cost competitiveness plan and now expect GBP 175 million of benefits by the end of 2019, significantly ahead of the schedule we shared last year. I should emphasize that the overall cost to deliver this aspect of our transformation remains GBP 150 million. This new phasing reflects our increased confidence one year in.
We've learned a lot the past year and will be made possible through increased adoption of automation, further offshoring, and being more efficient in our technology spend. Our automation ambition, in particular, continues to evolve, especially the adoption of robotic process solutions, and I will be in a position to talk more about that later in the year. As we have stated consistently through our transformation, we intend to invest some of these savings in building capabilities to drive sustainable growth, which is where I'd like to take us next. In 2018, the majority of our CapEx and OpEx investment was in fixing the basics and professionalizing the way we run this business.
On the next three slides, I want to give you more color on what we are doing to increase investment in catalysts for growth, namely, what we are doing around our professional capabilities, what we are doing with respect to software products and digitally enabled services, and what we are doing by way of investment in our growth function, our sales and marketing capability. In the past, Capita's software development was undertaken in product company silos and almost entirely in the U.K. One of the most strategic investments in capability this past year has been the establishment of our digital delivery center, what we call our DDC, in India. We have grown our capability from less than 100 to nearly 1,200 developers in the past 12 months or so.
Pune is now Capita's main center for software development globally, not just for the Software Division business, but very importantly, for the development of our proprietary software platforms we use in our digital services business. The latter, I should emphasize, was historically often written by third parties but is now being brought in-house. I should also emphasize that we continue to have over 300 developers in the U.K. continuing to support our clients here locally. As we demonstrated to many of you at the Software Division event, the IR event earlier this year, we have also standardized our development best practices and tools. We are speeding up proof of concepts and reducing development cycles, and we are making our hackathons or PoCathons, as we call them, an integral aspect of how we innovate around client-defined use cases.
Leveraging our scale, we are now much better placed to develop innovative ideas quickly and cost effectively, reusing code we already have, as well as taking advantage of open source tools and building on partner cloud platforms such as Microsoft's Azure, with whom we have a strategic relationship. Since April last year, we have kicked off a number of new growth seeding investments, all of which are digital in nature. In software, a new payments facilitation solution for Pay360, a parental engagement app for our SIMS product suite, giving teachers and parents a communication channel for aspects of their children's academic performance, timetables, and attendance. A cloud-based public safety platform for our emergency services products, and the replatforming of our retained resource management software to software as a service.
In our People Solutions division, a next generation automated version of our pre-employment screening system, which is being developed in collaboration with a strategic partner, McKinsey Digital, and will reduce candidate assessment times from three weeks to under two days. Also, the development of a digital product to improve a new employee's experience when they first join an organization, which is an adjacent market solution, we have several, that complements our broader hire to retire suite of services and products.
In Customer Management, a new messaging and artificial intelligence platform, which allows consumers a choice of channel, reducing Capita's and our clients' cost to serve, and also the creation of a scalable customer experience consulting practice, where we are helping clients improve how they deliver superior customer experience. Finally, in Government Services, a data analytics and machine learning solution to help our local government clients identify and prosecute rogue landlords. Patrick talked earlier about our investment in digital. That's a smattering of the investments in digital solutions that we undertook in 2018. You will recall from the transformation scorecard I showed earlier that reigniting growth is in an area where we expect to make significant progress in 2019. We're doing this on the back of three actions. Firstly, we're transforming the Capita sales organization into a more consultative client engagement model.
We're providing better client advocacy through the implementation of a classic account management structure. We're ensuring we have the right competencies more broadly across our growth function, including marketing. This is a crucially important aspect of how we will pivot this business to growth. It's worth me elaborating on these points a little further. Firstly, we need to pivot from being almost wholly dependent on competitive tenders for our revenue growth, it's about 95% of our revenue base today, to adopting a consultative selling approach in which a much higher percent of our revenues is won through non-competitive processes. This, as I've said, represents a very small percentage of revenue. In fact, it is an order of magnitude less than that which other competitor tech services companies achieve.
Such a consultative selling approach is the norm across large professional services firms, which is why under our new chief growth officer, we are putting in place a team of individuals with such backgrounds and a proven track record of doing just this. This team, with its industry segment and technology expertise, will leverage the assets we already have at Capita, together with our technology partners platforms, to deliver differentiated solutions to our client base. The second major change we're making is around account management. Given our existing contract portfolio, we have truly privileged access to an impressive array of blue-chip companies. This is one of the very positive observations I've had in my first year. We have no issue with access.
We also have deep knowledge of their businesses and their customers, in the past have not really applied this insight to proactively proposing innovative solutions that create new opportunities for Capita. We're therefore in the process of implementing an account management structure, initially for our most strategic clients. These are led by experienced partner-level individuals who are engaging with our clients on a much more strategic basis, who understand their challenges and needs. This will build stronger, deeper relationships which, combined with consistent operational delivery, that is key, will be the basis of our long-term sustainable growth.
I want to give an example of that, and probably the best one in the past year is Transport for London, which, frankly underpinned by outstanding operational performance, running the congestion charge, has enabled us to expand our business there to include IT & Networks, which we won last year, and the new ultra-low emission zone levy. We're also investigating how we can export, potentially in partnership with Transport for London, the capabilities developed through congestion and emission services here in London to other clean air zones, both in the U.K. and overseas. Thirdly, we are completing a company-wide review of our sales resources, all 700 to 800 sales resources we have across Capita, and investing in training to assure we have the right talent necessary to execute on our sales reignition plans.
To help our clients through their own digital transformation journeys, our sales talent need to be curious, they need to be content rich, have relevant industry skills, and be able to partner with our clients in understanding their problems and co-developing solutions. As outlined by Patrick, the decline in our order book in 2018 was primarily driven by two things, life insurance, much of which is close-book run-off and includes the loss of Pru, and secondly, a reduction in scope of a number of local government contracts where clients are no longer buying long-term multi-service activities. These operations are, of course, less cash generative than the rest of Capita and are represented in the pale blue part of this chart. In contrast, the order book for our digitally enabled services and software was stable. In some segments, software, Customer Management, it grew last year.
This portfolio comprises the higher value added services around digital services, this is where we are investing going forward to grow. Order intake was GBP 1.8 billion, a vote of confidence in Capita during a period, of course, of some uncertainty. In particular, highlights would include the GBP 300 million extension and expansion of our contract with Germany's largest telco provider, on which Capita displaced an incumbent, winning new automation work, RPA work, too. We were also recognized by the same client as their transformation partner of the year, competing against world-class tech service providers for that accolade. We also won GBP 109 million contract with the Department for Education Standards and Testing Agency to administer curriculum assessment tests. Our proprietary digital solution will provide around 16,000 schools and 4,000 test markers with a new digital portal allowing them to review tests, obtain results, and update records efficiently.
Lastly, a new contract with British Airways to deliver customer services where our team in South Africa is already consistently delivering superior customer experience metrics to the incumbent that we replaced. In summary, we expect the areas of revenue decline mentioned before to continue their trajectory. However, our plan for organic top line growth by 2020 remains, as this chart on the right shows, it is our more cash generative and higher value digitally enabled services and software which operate in structurally growing markets that will drive this growth. As we presented in April, each of our divisions has a very clearly defined strategy, a clearly defined set of actions, strategic imperatives, as we call them, and agreed delivery time frames and associated performance management. Our focus is now on execution.
The divisions are at different stages of development in terms of their transformation and transition to growth, and there is a lot of detail on this slide reflecting the level of activity ongoing. As we presented in January at our Software IR event, Software is the most advanced division on this trajectory and is now positioned to grow this year, demonstrated by improved order intake and recent wins such as the Luxon Payments contract. People Solutions has made an encouraging good start in bringing together its separately managed business into one division, and is now positioning to go to market with its suite of hire-to-retire human resource products and digital services. In Customer Management, we're shifting the business model to being much more outcome-based.
Customer experience contracts, we're also working to help our clients serve their customers better through our consulting capability, incorporating more differentiated proprietary digital platforms into our offerings. In Government Services, we have already mentioned the structural changes in the local government market, and Brexit has slowed down decision-making across central government. We continue to see opportunities post-Brexit, and for an improved partnership, as described and as already mentioned in the Cabinet Office's new Outsourcing Playbook.
We're also very pleased, for the first time, to be named a strategic supplier to both the Department for Education and the Ministry of Defence, further evidencing the importance of our relationship and contribution to central government and the evolving relationship between those parties. IT & Networks continues to make good progress consolidating into a strong and consistent service provider with a clearly defined set of market propositions that support both parts of Capita's execution against its strategy and, of course, third-party clients.
Finally, we continue to run the Specialist Services division as a portfolio of businesses to maximize their individual potential and value. Let me recap. I'm very pleased with where we are at the end of our first year of a three-year transformation journey. We're transforming Capita into a more predictable, lower risk growth business. I'll emphasize again, this is a three-year program. I am very pleased with where we are at the end of year one. We've delivered on our commitments for 2018, and we have a clear plan for 2019. We remain on track to deliver our 2020 targets, including at least GBP 200 million of sustainable free cash flow, and double-digit margins. Thank you for your attention, and Patrick and I will be delighted to take your questions. Thank you. [inaudible] Julian.
Good morning. It's Julian Cater from Numis. I've got three interrelated questions, please. Jon, you talked about the acceleration in the cost-cutting initiatives, and you characterize that as because your level of confidence has gone up. I wonder whether it's also partly because the revenue attrition you're seeing in some of your markets has been more extreme than you'd perhaps anticipated back six months ago. The second question is whether you can sort of help us quantify what the known revenue attrition is at this stage of the year from those particular markets.
Then my third question is, given the additional GBP 105 million of cost savings you'll get this year, it looks like a sort of delta on the problem contracts of about sort of GBP 20 million. I just wonder whether there's any more detail you can help us with in terms of the profits bridge year-on-year in terms of the cost buckets that are going back into the business. Otherwise, it looks like the drop-through margin on the lost revenues is at a very high level.
I'll let Patrick deal with the second two. Let me deal with the first. Our focus on cost competitiveness is to ensure we have a sustainable long-term business with the appropriate investment in digital solutions to create offerings that mean we are sustainably successful. As I said in our prepared remarks, and as I think, Julian, we've said very consistently through this journey, we are not going to pass all of the cost savings down to the bottom line. It is inefficient spend today. We want to make some of it more efficient spend.
That's investment in our growth function and the sorts of things we're doing in business development, sales, and marketing I talked about earlier on. It's investment in some of the digital solutions. It's investment in broader capability across the organization. That will position us for long-term sustainable growth and the kind of portfolio of contracts that we want Capita to have longer term, which is a portfolio of contracts which is underpinned by digital solutions. Patrick?
Okay. As we've said, attrition is one of those words that sort of sounds like you're on a battlefield, and sometimes it feels like that. It isn't attrition in the sense that it's lots and lots of attrition across a very wide front. What we tried to show in Jon's slides is that there are two key bits, and those are the bits that are declining significantly. Clearly, there are moving parts across everything else. If you look at revenue consensus for next year, consensus is that revenue will drop by a couple of hundred million. That's probably about the right level of decline.
That takes me on the second part of your question, which is what are the moving parts to get you to profit being broadly flat within a range? Revenue drops by GBP 200 costs come out. Now, of course, the cost savings initiatives are partly standalone from contract losses, but partly in response to anticipated contract losses, so there's a bit of overlap. The third moving part is the reinvestment that Jon has talked about.
I'd add one other thing, Julian. I don't worry about having a slightly smaller business with lower revenues, which is based on a business with a far superior portfolio of contracts and higher margins, than doing what Capita did of old, which was chase revenue. We are being very disciplined in terms of the contracts we do or do not bid on relative to their risk profile. Are they aligned to strategy? Can we delight the client? Are they going to deliver the returns we want? We are halfway through that transition. It's very important to context this against the three-year transformation.
Great. Thank you very much.
Gentleman behind.
Morning. Christopher Bamberry, Peel Hunt. Couple of areas, if I may. With regard to the Outsourcing Playbook, how confident are you actually follow through on the ground by departments? Do you have any examples of contracts that actually reflect the principles within that? Secondly, looking for a bit of help with the cash flow bridge for this year, some of the big key items like deferred income and what your thoughts are on CapEx and cash tax this year. Thank you.
A nice bipartite division will allow Patrick talk the financial, let me talk about the Outsourcing Playbook. I think there's a couple of things I'd say there. Firstly, we've been right in the middle of defining that. I have sat on the advisory board within the Cabinet Office, helping shape it. We seconded a very senior member of our staff to work full time with the Cabinet Office on it. It is, I think, and this is telling of itself, the first time that the Cabinet Office has collaborated to that degree in the formulation of how it wishes to work with the private sector going forward. That'd be my first point. The second point would be that this is being driven by David Lidington and Oliver Dowden, and John Manzoni, the Head of the Cabinet Office.
One of the things I have done as I go around government departments, either talking to permanent secretaries or indeed ministers, is at some point in that conversation, ask them about their views on what was referred to historically as Project Santiago, is now defined as the Outsourcing Playbook. Every one of them knew about it. Every one of them talked about it being fundamental to the future of so-called outsourcing and the nature of the working relationships between government and the private sector. I am very encouraged by what I am seeing across government.
I think the third thing I will say, again, specifically addressing your question, is that we are already seeing impact. We're having conversations that we didn't have historically. People are talking much more about value and quality and not just price. When I first came on board, there was only one conversation. Proof is in the eating. It's early days, we'll see, but I'm certainly encouraged by the trajectory, based on the conversations I'm having.
Talking of trajectories. What we tried to do with the guidance that we've given for next year is essentially put two sticks in the ground. Our net debt to EBITDA ratio is going to be somewhere in the top half, and profit is going to be within a range. To try and help you get to the right number, couple of thoughts. Firstly, we've got the pension deficit payment of GBP 70 million, which is going to go out next year. We've got another GBP 100 million or so of cash that's going to go out on restructuring. What we said about CapEx, we're going to spend GBP 500 million over three years. We've spent GBP 140 million in the first year. We've got GBP 360 million to go over the next two years. As Jon described, most of those are projects that we really want to do.
They deliver value, we're going to get on with that as quickly as we can. We're going to spend at least half, if not more, in the coming year. Then there's a further unwind on the deferred income, which is quite a wide range because, as you've seen this year, it can be volatile. Somewhere between GBP 100 million-GBP 150 million. Then of course, in terms of the bridge, you then don't have the receivables unwind. Working capital, we've done, we think, the normalization, but depending on contracts, there may be some more. The other point worth just mentioning in case you don't get to it, is tax, where clearly this year has been a cash inflow. It's going to be a cash outflow next year. That's another swing.
Thank you.
I think the gentleman to-
Just behind, yes.
The side of you had a question as well. Yeah, gentleman here.
There was behind. Yeah.
Sorry.
Thanks. Morning. Tom Sykes from Deutsche Bank. On the shape of 2019, sorry, could you just help, are you expecting the H1 to be a bit lower than the H2, in terms of the direction of your PBTA? Going into 2020, obviously this year you've taken out the GBP 105 million. Your EBIT margin's going to be flat to slightly down, and your growth is declining. When we're thinking about the bridge into 2020 and getting up to double-digit margin, is that chart that you put up where you put the structurally declining line down and the growth number up, should we think about therefore another decline of revenue in 2020, but you're feeling that that base then is stable, but you're on a double-digit margin then? Is the uplift in margin you think going to come from growth and cost out in 2020, please?
Well, I'll let Patrick give a little bit more color and detail around that, it's a combination of the both in 2020. We've been very consistent in stating that we are planning to get the business back onto a growth trajectory by the back end of 2020. The actions that I talked about in the presentation on what we're doing with regard to proposition solutions offerings and our sales and business development capability are very much aimed at achieving that. Patrick, you might want to add some financial color.
Yeah. That was a long question covering almost as many components as I could think of. Simplistically, if you go from 2019 to 2020, on profit, it's about 50/50 between revenue and cost as it sort of flows through. This year, in terms of H1 and H2 , it is definitely the case that a lot of the cost reduction benefits, which are key to the delivery, are weighted to the H2. Last year we were doing things you could see. This year, we've got to build plans. Let's remember what we're trying to do is accelerate things that we were going to do in 2020 into 2019. They're going to come through in the H2 of 2019, not the H1.
Okay, thank you. Then just specifically on the Software Division. Your revenue was marginally down half- on- half in software, and yet your EBIT was up about GBP 15 million. I wasn't aware that there were a lot of costs coming out of the Software Division. Why would sequentially the EBIT be up by so much in the Software Division, please?
We moved 1,200 people to India.
Okay. We're comfortable that that base there for the EBITA base is clear.
Right.
Thank you.
Gentlemen. Actually, let's go to Paul. I think Paul's had his hand up for a long time, then we'll come back to the fellow.
Great. Thank you. It's Paul Sullivan from Barclays. Just coming back to your light blue, dark blue slide with the structural declining part of the business. I don't know if you can sort of give a bit more color on that in terms of the overall margin or the cash contribution of that business. How should we think about the pace of decline going into 2019 and 2020 for those businesses, and how easy is it for you to contain that decline going forward? Secondly, on disposals, obviously some recent speculation about travel and events. How should we think about disposals going forward and what's the implication of disposals on your targets?
Yeah, I'll let Patrick talk about the first part. On disposals, we have been, again, I think quite consistent in stating that we have about 18 businesses in Capita Specialist Services that we are managing for value. We don't have the need for the capital tied up in the valuations of those businesses today. As we do, as we accelerate our investment in the future, and as we realize opportunity for healthy valuations of those businesses, will we look at potentially disposing of some of those businesses? Yes. Will we respond to unsolicited approaches? Yes, we will. That's probably all I want to say at this stage. Other than to say that over time, you can imagine that we will recycle the capital from that segment into the core business and to effect an acceleration of the growth of our digital platforms.
I think I understood your question. I will have a go at answering it, but if I've missed it, do just clarify. What we're trying to show on that light blue, dark blue side is that the revenue that's declining is in those two markets that we've described. That decline is largely what drives the decline in 2019. There's a bit more of it into 2020. By 2020, the rest of the business is beginning to grow. What we know about that we're going to lose is built into our profit guidance for 2019.
In terms of the profit contribution from those businesses, presumably it's very low. Are they generating any cash on an adjusted basis for the group?
Slightly. They're all a bit different. The life insurance business is generally not making a lot of profit or cash. The local authority businesses are rich and varied in their contributions.
It looks like it's going to halve in about two years. With the restructuring that you've currently got underway, can you manage that pace of revenue attrition in those two areas?
When you say manage, what do I?
Without seeing profits deteriorate further or it going into loss or whatever. Yeah.
I'd sort of put it the other way. One of the reasons the profits aren't going up is because we're responding to that decline. With the local authority, with all of those businesses, there is quite a lot of cost that just moves with because the activity doesn't stop. If people are administering life insurance contracts or are digging graves and managing libraries, those activities continue so there's an element of direct cost that just goes. You've got the supporting overhead cost. That is what the cost savings initiatives are partly there to deal with.
They're not adding to value creation. Which is why we're not focused on those segments, why we're not investing in that area. We're investing. When I say local government, I need to be very specific. It's large scale, multi-service strategic relationships. Local government of itself remains an important segment to us and one we serve through a number of the different divisions. It's just the large scale contracts. Okay. Yes, gentleman here.
Morning. It's Rory McKenzie from UBS. Within the new sales structure that you've put in place, can you talk a bit about the incentive schemes that are in there and how you're going to balance the desire for growth with a concept that you're happy to be a business of kind of smaller revenue but higher quality as you manage that maybe risk transfer a bit differently? Secondly, on the balance sheet side, can you talk more about the decision to pay off all of the receivables financing in this year? What your kind of seasonal net debt profile now looks like. What's the gap now between the year end and average, if that makes sense?
Okay. Should I take the second one first?
By all means.
Okay. We're trying to simplify the balance sheet. We have the cash. We sold the businesses that we sold for a bit more than we expected, so the right thing to do was to simplify our debt structure, and the first thing to go was the non-recourse, so we dealt with that. I don't think I've got a great answer to the H2 of your question. It should be a lot closer than it has been in the past. Embedded within some of our much longer-term contracts, there is still revenue that is sort of structured towards the back end, so we've got more revenue in December than in an average month. Sorry, more cash rather than more revenue. As far as possible, we're working towards having a stable balance sheet and working capital position through the year.
On sales incentives, I say this as someone who spent five years of his life as a commission software sales executive. I also spent another five years of my life as a partner-level manager of a very large account. I know the different comp models, and I know the kinds of behaviors they drive. We are putting in place and have put in place the right incentive plans to drive the right behaviors at the right level in the organization. Our head of growth, our Chief Growth Officer, is compensated in the same way as any other executive officer in the business is incentivized. If you're a frontline software sales guy, or gal, you're going to have a quota, and your incentive plan will pay out depending on whether or not you hit your OTE, and there'll be various flavors in between.
At the partner level, it very much needs to be focused around doing what's best for the client, and that doesn't necessarily just mean driving revenue. It's how is value being delivered to that client. Gentleman right at the back. I think we probably need to make this one the last one, right? Because we've got media at the half hour. Do we want to do one online, Andrew?
Yeah.
Hi, it's Ed Steele from Citi. Just a couple, please. First of all, obviously very helpful to give us those two structurally challenged markets that you've split out. Obviously, we knew at the half-year stage about Southampton and Barnet. Before that, we knew about Marsh and Pru. It doesn't seem like you've lost any more contracts since then, in the last six, seven, eight months. Are you building additional losses of contracts into your guidance? Are you actively trying to shed life and pensions revenue at the moment, please? Second question, if you look at the Software Division, obviously great to see the order book up 3% year-on-year. You've got a few contracts in your slide attached to that. Are those contract wins already evidence of some of the investments you've put in, or are they sort of legacy wins? What's the momentum like in the Q1 this year?
Sorry, Ed, I couldn't see you in the darkness of the back of the facility here. We're not going to get into that level of detail on contracts, and I absolutely have no idea what the revenue stream for the particular wins we referenced, and what their contribution is to this year. What I would say about software is the following. It is by far the most advanced in terms of any of the divisions in its evolution from the Capita of old to the Capita of the future. We've consolidated the product lines. They're operating as one division. There are significant synergies that have been achieved.
The order book grew last year, and that division is projecting to get back onto a growth trajectory in 2019. What I would also say about that division is because it is about a year ahead, doing all the things we're doing for the other divisions, it obviously gives us some encouragement that the actions we're taking are actually going to result in the pivot point in revenue in the other divisions as well. Customer Management, for example, is close behind software in terms of its trajectory as well, its tipping point as well.
Thanks. My first question please, which was about there don't seem to be any incremental losses in the last six months in those two structurally challenged markets. What have you built into your assumptions for that chart, please, about future losses?
I think I was reasonably clear that we're expecting revenue to decline by a couple of GBP 100 million, and the majority of that is in those two markets.
That's additional losses on top of the ones we already know about.
Well, some of it's the flow-through because we lost the contract partway through the year. Yeah. If you lose it halfway through the year, you've got the H2 of the loss in the next year. Some of it is contracts that we are expecting to reduce in scale or lose.
Okay. I'll take it offline because I think there's more detail attached to it. Thank you.
Thanks, Ed. Andrew, let's do one online, and then we probably need to wrap.
Yes, of course. We've got one question on the phone lines from Thomas Beevers of StockViews. Thomas, your line's now open.
Hello. Yes, just one question on Government Services, please. I see the margin on Government Services has fallen to about 5%. I suppose, is that kind of indicative of what you might see going forward, or can that actually increase more in line with your double-digit aspiration for or target for 2020? Just trying to understand if you see that as always structurally being a little bit lower than the rest of the business. Thank you.
The central government has been very clear with regard to its margin expectations associated with government contracting. It has consistently said that those margins should be between 6% and 8%. I will tell you, we have contracts that are doing less than that. We actually have a number of contracts that are doing materially more than that. That is not a reason to not be serving that market, however, in the context of our double-digit margin goals or targets. What I like about government is it's annuity-like.
They're long-term contracts. They pay on the nail, and they have scale. In particular, as you go into periods of economic uncertainty, they're not impacted by that economic uncertainty. Having that annuity-like capability, I think, is important to creating a more predictable and stable and consistent financial model, which is obviously what we're trying to achieve here. Good. Thanks very much, everyone, for your interest in Capita. I'm sure we'll catch up with many of you over the next few days.