Can Serco turn its fortunes around?

25 November 2014

It's been another tough year for Serco, Britain's biggest provider of outsourced government services. Here's why competitors shouldn't gloat at its misfortunes.

On 5 November, at the PFM Awards at The Brewery in London, Serco was victorious in the Partners in FM Healthcare category, where its partnership with Norfolk and Norwich University Hospital Foundation Trust saw it sweep past fellow finalists OCS (with Ashford and St Peter’s Hospital Trust) and Vinci Facilities (with Whiston and St Helen’s Hospitals Foundation Trust).

Serco describes the partnership as ‘highly effective’, but added that the success story goes far deeper and far wider than conventional performance targets. “It’s also featured radical, innovative moves to improve service efficiencies and reduce costs that go far beyond contractual obligations,” the company said in its entry. “Such moves have been a direct response to the financial challenges being faced by all NHS operations. Adopting an ambitious benchmarking programme, Serco presented a comprehensive suite of innovations and improved process and service delivery initiatives that would provide cost savings of no less than £5m over the life of the contract.”

The judges’ assessment of Serco can be seen elsewhere in this edition, but – in the interests of the sober objectivity required during the judging process – it probably doesn't indicate just how close Serco came to winning the Overall Award; that elusive prize went instead to Cofely, for the second successive year, but Serco impressed the judges sufficiently enough to make it a close-run thing.

That fact alone makes Serco’s current travails all the more unfortunate. Many in the FM sector – particularly Serco’s direct competitors – may be gloating at the outsourcer’s continued misfortune, culminating in the recent news that chairman Alistair Lyons will step down from the board once a replacement has been announced. But glee on the part of other outsourcers would be short-sighted: Serco may not be a flawless outsourcing operation, but then which service provider is? Its nearest rival, G4S, has had its own controversies to shoulder, for instance.

2013 was bad enough for Serco; it was embroiled in a Serious Fraud Office investigation into after it was said to have overcharged for tagging offenders who were back in prison, in another country or dead. In December last year it was reported to have paid more than £68.5m in order to settle with the Ministry of Justice and was said to have been forced into a 'corporate renewal programme' before being allowed to bid for state contracts. Two profit warnings followed.

But 2014 appears to have been even worse. Everything seemed far rosier in spring this year when Rupert Soames, previously CEO of temporary power supplier Aggreko, was appointed to the top job, triggering a 10% jump in Serco’s share price. Indeed, Soames seemed to have the Midas touch, having overseen a 12-fold increase in Aggreko's value. As Lyons pointed out at the time of Soames’ appointment: "(He) is a highly experienced FTSE100 CEO with a significant track record of success, leading a substantial and complex international support services business. He and his team have driven growth in Aggreko by developing customer-focused strategies and consistently delivering against them. Rupert is a passionate believer in public services, highly respected by customers, governments, employees and investors.”

Soames was up for the challenge, even though he said it hadn’t been easy leaving Aggreko. “It is has been an extremely difficult decision for me to leave Aggreko after eleven enjoyable and successful years. I am hugely excited to be joining Serco as I have always admired the services it delivers and the passion and commitment of its people. I am aware that the company has experienced significant recent difficulties but the work that Serco does is important to the lives of millions of people and I believe that we can find a way through to a bright future.”

In another bold move, Serco appointed three prominent new non-executives including Rachel Lomax, former deputy Bank of England governor, Mike Clasper, ex-BAA chief and chairman of HM Revenue & Customs, and Tamara Ingram, senior executive at WPP.

By August, Soames was working alongside finance director, Angus Cockburn, formerly his right-hand man at Aggreko. At the time, it seemed as if their partnership was a sort of David Cameron-George Osborne double-act, designed to change Serco's fortunes just as Cameron-Osborne led the UK out of recession. Soames didn’t discourage this view by likening himself and Cockburn to the Blues Brothers – the US rhythm & blues band founded in 1978 by comedians Dan Aykroyd and John Belushi. "I know we can make something of it," he said.

But the year hasn’t turned out quite as jazzily as the ‘Blues Brothers’ might have hoped. A week after Serco published its Contract and Balance Sheet Review, and after it reported a pre-tax loss of £7.3m in the first half of 2014, Alistair Lyons announced his decision to step down. “Since the events of last year I have sought to stabilise Serco with strong new management and non-executive directors; a much improved relationship with government; and clarity as to our strategic direction.

“The Contract and Balance Sheet Review, the reassessment of the group's future prospects, and the creation of the right capital structure are all necessary steps in putting Serco back onto an even keel and giving our new management team the basis for taking the company forward again. The initial findings of the Strategy and Balance Sheet Review point to strategic and operational missteps at Serco for which, as chairman of the board since 2010, I take ultimate responsibility. It is also the right thing for Serco to select a new chairman to take the helm for the future. While colleagues have asked me not to resign, it has been my intention to step down once a new strategy and direction for the business were in place."

Soames said: “While I respect Alastair's decision, I want to put on record the fact that he has done an outstanding job stewarding the company through the travails of the last 12 months. Nobody could have worked harder or done more to get us to the point where we can now concentrate on building a solid future for Serco.”

It hasn’t all been bleak for Serco, however. In an article on the outsourcer’s woes, The Economist soberly judged the difficulty of being a service provider to government. “Firms that do tough stuff like depriving people of their liberty and denying them welfare benefits can never expect to be loved, except perhaps by their shareholders.”