Serco chief: government saw it as “badge of pride” to transfer “massive” risk to outsourcers

Written by Matt Foster on 24 January 2017 in News

Boss of major outsourcing company says deliberate moves by government, as well as "foolishness" by suppliers, have put too much risk on shoulders of firms dealing with big public sector contracts

Civil servants have seen it as a “badge of pride” to transfer “massive” risk to government suppliers, the boss of one of Britain’s major outsourcing firms has said, as he cast his verdict on the way departments deal with private sector contractors.

Serco has had a stormy relationship with the government in recent years. In 2013, it was accused of overcharging the Ministry of Justice for the electronic monitoring of offenders, and the firm is set to rack up multi-million pound losses on its "COMPASS" contract with the Home Office to provide accommodation for asylum seekers.

The firm’s chief executive Rupert Soames told MPs on the Public Administration Committee — which is part-way through an inquiry into the way the civil service works — that the firm had been “through the valley of the shadow of death” in the wake of the tagging scandal and had, at one point, been in "severe danger of collapse", prompting bi-weekly meetings with the Cabinet Office and Treasury as Serco sought to shore up its finances.

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While more public services are now being run through private suppliers, ministers have tried to sharpen Whitehall's dealings with contractors over the past six years by setting up the central Crown Commercial Service to oversee procurement from the centre of government.

But Soames said government was partly to blame for Serco’s troubles because of the way it had sought to overload contracts with excessive risk.

“What has happened is two things: the government got into a place where it was advised to do massive transfer of state risk onto suppliers,” he said.

“And it became a badge of pride to go and transfer as much risk onto suppliers as you could. At the same time, suppliers, I think, through foolishness and incompetence — certainly on our part on a couple of things — were foolish enough to say ‘yes’.”

Soames told the committee that his firm stood to lose £120m on the COMPASS contract because it was now providing housing for far more asylum seekers than had been expected when the deal was originally signed, and said government needed to do more to ensure suppliers were properly informed at the bidding stage.

“This was a contract where we were told when we took it on that we should expect broadly flat numbers of people to look after — about 5,000 people in the north west and Scotland for the period of a seven year […] contract,” he said.

Soames added: “The numbers we’re looking after are up 200%. We’re looking after 8,000 more people than we were led to expect at the beginning of the contract. This is costing us getting on for £120m in losses — we’re losing £120m on that contract.”

The Serco chief, who was brought in to run the organisation after the 2013 MoJ tagging scandal, said he believed that the “greater sophistication and toughness of the Cabinet Office” from 2010 had led to “the pendulum on risk transfer swinging too far”, placing a greater strain on suppliers.

And he criticised the practice of putting out some “highly sensitive” government services to online bids, a change initiated by the Crown Commercial Service in an effort to drive down costs and open up bidding to smaller suppliers.

“Now, you had to pre-qualify to get there… But I do not believe that that is a sensible way to procure services for tens of thousands of vulnerable people,” Soames said.

“Serco, along with others, went and got buyer’s fever — we bid too low. Most of the losses on the COMPASS contract have come from two things — one is we bid too low, silly us, and the other thing is that […] all the state risk of that contract moved over on to us.”

The Serco boss welcomed recent changes at the CCS, which has recently come under the leadership of new chief executive Malcolm Harrison and published fresh guidance on contracts.

The central government procurement body had, Soames said, now started stressing the importance of departments “taking some responsibility for the quality of the data in the bidding documents” to ensure that suppliers were better informed about the scale of the contracts they were taking on.

Soames' evidence to MPs was given a frosty reception by the Public and Commercial Services Union, however.

A PCS spokesperson told CSW: “No one will have any sympathy for Serco that has made huge profits from government work and failed time and again. 

“Its performance in recent years provides a textbook case of why the profit motive has no place in the delivery of our public services.”

Correction, 24/1: An earlier version of this article stated that the CCS is being led by government chief commercial officer Gareth Rhys Williams. The CCS is in fact led by its new chief executive Malcolm Harrison. Gareth Rhys Williams serves on the CCS Board as a non-executive director. Apologies for the error.

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Matt Foster
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Matt Foster is CSW's deputy editor. He tweets as @CSWDepEd

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John Whitefoot (not verified)

Submitted on 27 January, 2017 - 10:17
The performance of the PCS union in recent years provides a text book case of why Trotskyist ideology has no place in the delivery of employment security for honest hard working people.

Digby Barker (not verified)

Submitted on 30 January, 2017 - 10:54
One wonders what sort of clarification questions were submitted by Serco around the issue of demand volume and to what degree they received good answers e.g. including the details of how the Authority arrived at its estimate of 5K people and its estimate of the degree of uncertainty in that figure. I wouldn't be surprised - based on my experience - to find that there was a very limited degree of Transparency on this issue. Also Government guidance emphasises the need to undertake sensitivity testing on the key parameters determining the outcome of major projects: did anyone on either side do this ? And I thought it had been accepted by Government for many years now that Risks should lie with the party best placed to manage them: simply trying to get - or even just allowing - the contractor to take on as much risk as possible is short-sighted and not good practice.

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