Serco’s letter – a PR cock-up but not a disaster

You may recall that, back in July, the government called its twenty biggest suppliers into a meeting and asked them to share the pain of the public spending cuts by reducing their prices, even where contracts have been agreed.

Inevitably, these companies then looked for ways to minimise the impact of these price cuts on their profits. Serco, a major outsourcing firm, came up with the idea of passing them on to its own suppliers and so its finance director wrote a letter to them, asking for a cash rebate:

I am asking you to offer us a rebate of 2.5% [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.

Great isn’t it? You can almost imagine it being said in a Marlon Brando Godfather-style accent:

Eh, you know, times are kinda tough right now. The Family is respectfully asking you for a cash rebate. In these troubled times, Mr Corleone needs to know who he can do business with….

Needless to say, this went down like a lead balloon with the suppliers and someone leaked the letter to the press. Rather than applauding the company for trying to reduce its costs, shareholders took fright and began to sell Serco shares.

The government was none too impressed either as Serco’s demand would hit small suppliers, the very organisations that the Coalition wants to see taking on more government contracts. Serco, realising it had made a PR blunderapologised and withdrew its demand request.

But not everyone is convinced that Serco should have backed down. Procurement professionals, especially, seem to have some sympathy for the firm. Steve Hall at the Procurement Blog thinks that Serco’s action made sense and that the government’s response was somewhat hypocritical:

The squeeze on public sector contracts is huge and Serco is a pretty big player. So, why wouldn’t it go to its suppliers to look at recouping some of the savings it needs to make? In one way or another, there’s a good chance that was deemed the smart place to look for short-term savings.

It creates a strange situation where the UK government is asking for quick savings (if you believe the rumours, there’s some pretty ruthless edicts being issued) – yet expecting companies to take this on the chin, at least in the short term. Do as I say, not as I do, almost.

Lindsay Clark at Supply Management takes a similar view:

Although I’m not inclined to feel sorry for international services firms, the government’s position does seem a tad duplicitous. It says that we must protect small UK suppliers, but it’s okay to hammer big international ones.

This is an amusing story but, over the longer-term, as Patrick Butler says, it is unlikely to do Serco lasting harm. It is still bidding to take over an NHS hospital and, along with other large outsourcing companies, is expected to do very well from the fire-sale of public service contracts:

[T]here is little evidence that government departments, local authorities and NHS primary care trusts – all of whom are currently focused on sacking staff and managing vast cuts to their budgets – are thinking seriously about how they might nurture a pluralistic, innovative local supply chain. The fear is that for many councils the imperative to make short term savings trumps medium term strategy, resulting in them rolling up services into mega contracts which only the likes of Serco will have the scale and muscle to compete for.

Despite what the government says it wants, big companies, rather than SMEs, are likely to take the lion’s share of these contracts. Hard-pressed public sector managers will be eager just to get rid of their problems by accepting large-scale bids at seemingly low prices.

As this becomes clear, the share prices of Serco and other outsourcers will creep up again. The story of “that letter” will be an embarrassing anecdote repeated at trade events and corporate dinners. Serco’s bosses will laugh along with the joke and count their profits.

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3 Responses to Serco’s letter – a PR cock-up but not a disaster

  1. thehrd says:

    This is a practice that has long been in existence in private organisations. Most suppliers probably wouldn’t be that surprised to receive it. The only difference is the connection to the Government. Ask suppliers to any of the big retailers…….

  2. Rick says:

    HRD – agreed. The view from the procurement folk and in some of the other reports is that all the other big government suppliers were planning to do the same thing. It’s just that Serco went first, did it in a ham-fisted way and it rebounded on them.

  3. Pingback: Serco’s letter – a PR cock-up but not a disaster - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

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