How about this for a screeching U-turn?
It’s a Monday press release from FTSE 100 outsourcing company, Serco:
Serco yesterday reaffirmed to the Cabinet Office that Serco’s most recent offer of savings to the UK Government will not result in any of the Government’s cost saving programme being passed on to our suppliers.
Serco has an ongoing procurement process with our supply chain partners, which has been underway for more than five years. This is part of our regular management system.
More recently we have also been working with the Cabinet Office as part of their efficiency programme, which has involved discussions with our leading suppliers. As a result our plans evolved and we decided not to seek or accept any contributions from our suppliers, who had recently received letters asking for rebates.
As a company that values our relationships with all our supply chain partners, large and small, we deeply regret this action and apologise unreservedly to them for the concern that this has caused. We are now communicating this to our supply chain partners and retracting the letters.
The letters in question were sent by Serco’s finance director Andrew Jenner and demanded that the company’s leading suppliers pay a 2.5 per cent “cash rebate” on their work this year or risk losing future contracts, according to the Sunday Telegraph, which has the scoop on the correspondence.
Excerpts from Jenner’s letter:
“Chris Hyman and I have given our personal commitment to the Cabinet Office that Serco and its supply chain will provide our total support” to the plan to save £800m from central government procurement this year.
The letter continues: “I am asking you to offer us a rebate of 2.5pc (exclusive of VAT) on Serco’s full year spend with you for the 2010 calendar year in the form of a credit note. 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 government was not too impressed by Mr Jenner’s brutal language, least of all Francis Maude, the Cabinet Office minister in charge of the government’s cost-cutting drive.
According to the FT, Mr Maude believed he had received an undertaking from Chris Hyman, Serco’s chief executive, that the savings it would put forward would not come from suppliers’ payments!
Serco’s bully boy tactics and mealy-mouthed attempt to make good the damage done by this massive PR blunder have also gone down badly in the City with around £180m wiped off the company’s market value on Monday morning:
Analysts are rightly concerned that Serco has damaged its reputation with the government, which is of course its biggest customer.
From Numis Securities:
The revelations over the weekend of the group’s “brutal” letter to suppliers and its subsequent withdrawal suggests some reputational damage to the group. Reputation is a powerful competitive advantage in any industry and the revelations reflect poorly on Serco. The UK government is the group’s biggest customer and the affair must put some strain on that relationship. Also it appears Serco has promised savings to the government and has sought to put pressure on its own supply chain which is an obvious stance to take. However, if it is not able to get savings through the supply chain then there has to be question marks over the current c6% margin and its 6.3% target for 2012.
More widely, this is another blow to the reputation of the entire outsourcing sector, which isn’t coping at all well with the government’s austerity drive and increased scrutiny of its business practices. Indeed, the more one sees of this sector and companies like Connaught, Mouchel and Rok, the less and less appealing it is.
Related link:
Serco withdraws demand for cash rebates – FT