Serco FD in climbdown on supplier rebate

(SHARECAST) - Outsourcing group Serco has had a bad PR day after having to retract letters it sent to suppliers asking for a 2.5 percent rebate to cover the cost of coalition spending cuts.

The company, which runs prisons, nuclear facilities, schools and ports for the government, sent a letter to about 200 businesses requesting cash rebates and appearing to warn them that they risked losing future contracts unless they agreed.

The letter was signed and sent by Serco finance director Andrew Jenner. Jenner wrote to Serco's suppliers: “I am asking you to offer us a rebate of 2.5 percent (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,” he added. "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."

But Serco said today that following discussion with government officials it decided "not to seek or accept any contributions from our suppliers".

"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," the company said in a statement, retracting the letter it had sent.

Last month’s Comprehensive Spending Review set out wide-ranging cost-cutting measures that would put pressure on outsourcing companies to find savings themselves – but begging letters is probably not what officials had in mind. Finance directors at this magazine's LinkedIn group were surprised at the climbdown and the strength of government reaction to Serco's letter, but say that it is an opportunity for businesses to look again at terms.

"Serco's practice mirrors that of building contractors generally; look at the defence procurement fiasco over the aircraft carriers," said one. "Builders are notorious for charging extras on a fixed-price contract and are doing the same as Serco upstream. The solution must rest with clear enforeceable contract terms."

Another FD tells Financial Director: "I have come across this before when the client company is in a dominant position. One of the large banks told all its contractors and consultants that their fee rates would be cut by 20 percent to help the bank save costs. However, when the market changes those people will leave as quickly as possible. In this case it seems that the government thinks that Serco can afford to cut its margins rather than demanding an additional rebate from suppliers."