Serco – what goes around comes around
Today’s newspapers are full of the humbling of Serco, but should the government actually be getting the blame? On Sunday, the Telegraph reported that the outsourcing company had written to its suppliers, demanding a 2.5 per cent rebate so that Serco in turn could meet a similar demand from the government. The note of menace was unmistakable:
Like the Government, we are looking to determine who our real partners are that we can rely upon. Your response will no doubt indicate your commitment to our partnership but will also be something I will seriously consider in our working relationship as Serco continues to grow.
The Telegraph reported that Cabinet Office Minister Francis Maude was furious and quoted a spokesperson as saying:
“It is simply unacceptable that they are asking from all their supply chain, many of whom are small businesses, to provide them with cash gifts in order to address a deal with the Government,” the supplier said. “For a lot of firms that 2.5pc could be the margin on the job they have done for Serco.”
When the Stock Exchange opened, Serco shares immediately fell from just under 620p on Friday to 570p as the market took into account the impact on Serco’s reputation and their relationship with their most important customer. Very quickly, the company was forced into what the Financial Times called “a screeching u-turn.” The outsourcers issued a press release “reaffirming” that their commitment to giving cash back to the government “will not result in any of the Government’s cost saving programme being passed on to our suppliers.” The company “apologised unreservedly” and contacted its suppliers to withdraw the letters.
It’s nice to see the mighty humbled, but what did the government expect? In July, Mr Maude met 19 of their largest suppliers, including Serco, starting a process of renegotiating large contracts “to release savings.” Mr Maude was quoted as saying:
We will say we want to have something off your margins; we will expect you to tell us how we can pay you less, sometimes for doing less.
Despite the recession, companies are still under terrific pressure to deliver earnings, and Serco has set itself a target of achieving a 6.3 per cent margin by 2012 – a target that will be very hard to achieve, given the government’s demands.
Serco’s offending letter to suppliers mentioned their need to contribute to the government’s plans to save £800 million on procurement and the threat to cut contracts looks like a copy from the government’s communications with them.
In July, leaning on contractors looked like a clever idea. What should be worrying the government is the possibility that Serco’s main mistake was to get caught. What are the other contractors doing to get the same results from their suppliers – but in ways that don’t lead to a PR disaster?