G4S, Serco seek redemption for outsourcing sins

Profile picture for user slauchlan By Stuart Lauchlan March 11, 2015
Summary:
Two global outsourcing giants in search of forgiveness as their latest numbers reflect the price they’ve paid for being mired in controversy over high profile public sector contracts

confessional
Confessional

Serco and G4S both found themselves up to their corporate necks in it when it emerged in 2013 that they had been overcharging the British government - and its taxpayers - for electronically tagging criminals.

The firms were banned from UK government contracts for a period after being caught out tagging people who were either dead or in jail. An audit by accountancy firm PricewaterhouseCoopers concluded that G4S and Serco had overcharged the government by "tens of millions of pounds".

This week Serco confirmed a £450 million loss on public sector contracts, with up to £200 million of these losses involving UK government contracts, contributing to an overall loss of £1.35 billion, down from a 2013 profit of £236 million.

G4S did rather better, returning a profit of £148 million for 2014, compared with a loss of £190 million a year earlier. That’s largely attributable to non-European growth. In Europe, G4S's revenue declined 0.8% after the Dutch government "insourced" a contract back to the Department of Justice, while in the UK, the controversial electronic monitoring contract finally came to an end in March.

Paying the price

For its part, Serco’s had to book a £115.3 million charge relating to its Compass contract, which involves providing support for asylum seekers on behalf of the UK government, as well as a further £195.6 million charge on a contract providing maintenance work for the Royal Australian Navy's Armidale Class Patrol Boats.

Meanwhile G4S is writing off £45 million “in provisions for legacy UK Government contracts”, also including Compass. That follows a £136 million provision in 2013, partly made up of a £110 million payment to the government over the tagging deal.


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G4S CEO Ashley Almanza says the firm is having to pay out for :

contracts we have entered historically [that] we would not enter into today.

Serco
Serco

He cites the example of agreeing to Termination For Convenience clauses that were invoked by the Dutch Ministry of Justice when it scaled down a contract with the outsourcer after finding its prison population dropping. Almanza notes:

We spent millions of pounds mobilizing for that contract and we signed the contract which allows the customer to terminate for convenience with no demob or un-amortized mobilization compensation.

We can't do that sort of business.

That’s not the way G4S works now, he adds:

First thing we do is go back to the clients and we say ‘we're really sorry, we can't do this’. So it's not a question of just strong arming the market, we go and we explain, we say ‘We’d love to work with you, but we can't do it and this is why.’

In a number of cases the client has accepted that and modified the contracts. In other cases, the client says ‘That's the contract, take or leave it’ and we leave it.

Forgive our sins

Both firms have played the ‘mea culpa’ card this week, with senior management pitching the line that having taken their punishment, they’re absolved of their sins and can return to the path of purity and righteousness - or something along those lines anyway.

For Rupert Soames, Serco group chief executive, first the ‘forgive us our sins’ bit:

2014 has been an extremely difficult year for Serco, and the magnitude of the provisions, impairments and other charges reflects the scale of the challenges we have had to face. However, there is a real sense that, having confessed our sins and in taking the punishment, we are now ready to start on the path to recovery.

Then on with the ‘here’s the plan’ bit:

We have all we need: a good plan, strong management to execute it, and, following the successful completion of our proposed rights issue and refinancing, a balance sheet that is an appropriate foundation on which to implement our new strategy. We are convinced that our strategy will deliver over time value to our shareholders, customers and colleagues alike.

We will focus on providing public services to government and other bodies across five core sectors - Justice & Immigration, Defence, Transport, Citizen Services and Healthcare - and do so across some of the largest public services markets in the world. By concentrating on these markets, we are playing to our strengths.

A-G4S-security-van-004
G4S

So that's the overall vision thing. More immediately, there’s also the small matter of a £55 million rights issue that had shareholders wincing, as well as refinancing of banking and lending facilities. Throw those into the mix and watch the share price plummet yesterday.

Meanwhile Almanza is talking corporate values:

Given the recent history, the last three years in our corporate history, it was very important that as a leadership team we set about reinforcing the Group’s values. The Group has had for many years' good values, but at times we've perhaps not given them the attention they deserve. So we set about in a structured systematic way to reinforce those values through communication, training, and of course compliance. We added a new value, health and safety.

Health and safety has “a virtue of its own”, he explains, noting that in 2014, 41 G4S employees died, 19 as a result of attacks with traffic accidents accounting for most the remainder. As such, health and safety will become “distinctive part of G4S’ service proposition”, says Almanza:

Firstly a business that has good health and safety performance generally almost unfailingly is a well-managed and commercially successful business. When you see a business that has good health and safety performance, almost invariably that is a commercially high performing business.

Secondly, it’s of growing importance to our customers, and I think our industry ignores this at their peril. It is no question particularly our larger customers, but I have no doubt that it will become a pervasive criteria for our customers. They are interested in our health and safety performance and what we can do to help them with their health and safety performance. I think that gives us a powerful incentive apart from the obvious moral imperative to go after the health and safety.

He concludes:

Everyone in the global leadership team is committed to improving our health and safety performance. This is of growing importance to our customers and I firmly believe it will increasingly become a distinctive part of G4S’ service proposition, particularly to large customers.

My take

What is interesting about the plans for both firms is that Serco is drilling down on the public sector heartland, disposing of its private sector BPO businesses, while G4S is emphasising that while most of its current pipeline is outside of the UK government sector, it is “rebuilding” in that space.

Both are clearly confident that their past sins are now behind them and that government forgiveness has been granted. Or at least, that must be what they hope, surely?

At a time when major legacy outsourcing deals are starting to wind down and there’s a potential Labour-led government in the wings that seems more inclined towards the big ticket ‘oligopoly’ providers than the current Conservative/Liberal Democrat administration, there’s a lot at stake here.