From the editor: Serco's cashback letter

Serco finance director Andy Jenner was blasted this week for a letter he sent to 200 of his suppliers asking them to “offer” him a credit note worth 2.5 percent of the value of its full-year 2010 spend with them – but other finance directors speaking with Financial Director about it seem divided on whether it was a good or a bad idea.

Jenner and Serco were forced to retract the letter after discussion with government suits who allegedly delivered a scalping when they got wind of the move.

It was his choice of wording that for me gave what initially sounded like an ill-advised begging letter an altogether darker dimension. “Like the government, we are looking to determine who our real partners are that we can rely upon,” he said. “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.” An offer I can’t refuse, eh? If I don’t, can I expect to be sleeping with the fishes sometime soon?

If my employer asked me to pay back 2.5 percent of my wages as an indication of my commitment to our partnership, I’d be wondering if that was the kind of partnership I could enjoy. But I’m surprised to see finance directors on our LinkedIn group taking the opposite tack – maybe because they have a far more acute sense of the sort of pressure Jenner might be under to find savings right now.

In the one camp there were those as outraged as I. “I perhaps have the luxury of having too many customers, but my response would be ‘get lost’ – especially as my margins are less than 3 percent,” says one member. “My first insight into this was when the dominant local employer contacted me out of the blue wanting to be able to tell its staff it had negotiated a 10 percent discount with a selection of local suppliers in order to ‘sweeten’ their relocation. The employer wasn’t actually offering the suppliers anything, just the ‘cheek’ of asking for an indefinite but substantial discount. I told them where to go.”

A former FD who now runs a business supplying interim FDs to businesses noted the social impact of the letter and saw it as an indictment of a lack of skill from the accounting industry. “This is not just about costs and associated financing but it is about values – that is the values we want from our society,” he said. “It is right to expect savings to come from process improvement. That is not spin. The savings should not come from the bullying behaviour of a larger company. Sadly the Serco FD’s actions have only confirmed the left-brained, negative inter-personal skills of accountants.”

But those views were outweighed by FDs who saw no issue with Jenner’s approach and had worked with companies on those terms themselves. “A couple of years Boots did something similar – extending payment terms to 90 days plus a 2.5 percent discount – on a “like it or lump it” basis….” said another member, the director of operations for finance at a pharmaceutical company. “Outrageous might be too strong a word here – negotiating terms with your suppliers is normal, and if you have a strong position, imposing those terms is normal behaviour. Why would a commercial enterprise not do that?”

“I have come across this before when the client company is in a dominant position. One of the large banks told all their contractors and consultants that their fee rates would be cut by 20 percent to help the bank save costs,” another member recalled. “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.”

The FD of a well-known tech company said that he had seen retailers call the rebate a ‘marketing contribution’ – “but the small suppliers still have no choice,” he added. “If you are a big enough player and can force their hand, then you can get away with refusing…but it is very difficult.”

My favourite nuggets of this very active discussion came from a healthcare CFO and an aerospace company FD, who thought Serco had been unfairly treated by the reaction. “This feels like Government spin. Is it reasonable for Serco to take all the pain and not share some of it with suppliers?” said the healthcare CFO.

“Why should Serco and therefore its shareholders take all the pain? Surely the FD was just doing his job by trying to protect his company’s financial position,” added the aerospace FD.

Our healthcare man revealed that his organisation receives weekly letters from local authorities and PCTs either demanding 15-20 percent reductions in its fees or inviting him to discuss ways he could achieve that. He was pragmatic. “The retrospective element is harsh I agree, but these are difficult times,” he said.

It’s that pragmatism that is probably one of the most vital skills for FDs today. And our LinkedIn group seems less worried about the Mafia-esque wording of Jenner’s letter than the business sense behind it.

If you are an FD or similar, you can join our LinkedIn group at www.financialdirector.co.uk/linkedin