Serco fined £19m by SFO – 5 steps to prevent reputational failures impacting you

By Allan Watton on July 16, 2019

According to the Financial Times (FT), on Wednesday 3 July Serco announced “it had reached a deal with the Serious Fraud Office in which it was hit with a £19.2m fine plus costs for three offences of fraud and two of false accounting”. Allegedly, the offences these fines related to were committed between 2010 and 2013.

Reputational Failures…

No matter how historic a transgression might be, it’s important to consider whether a reputational failure fallout could come your way. In this article we’ll look into the matters that brought Serco to this point and what you can do to protect your reputation should your supplier find themselves in a similar situation.

Serco circa 2010 – 2013

In July 2013, all major Serco and G4S public sector contracts went under review when it was alleged that the contract they had jointly been responsible for – to provide electronic prisoner tagging services for the Ministry of Justice – had for years included offenders who had never been monitored. These also involved those who had already been sent back to prison and even some prisoners who were no longer alive. ITV reported the figure Serco agreed to repay in December of that year, at £68.5m to reflect the amount they had been overcharging.

It’s this issue that has now come back to haunt the company in 2019. The Serious Fraud Office (SFO) has been investigating Serco’s UK subsidiary, Geografix, for these billing matters and, according to the FT, they have taken responsibility for them. Serco has been asked to pay a £19.2m fine and £3.7m to cover the cost of the SFO investigation. However, the company avoided any criminal charges.

Reputation is Critical

Throughout the latter half of 2013, as news of the electronic tagging saga hit the media and an ever-increasing sum was put on the amount by which both G4S and Serco had overcharged the Ministry of Justice, the company’s reputation was hit hard. Some in the media suggested the company was on the brink of a financial crisis. With its key public sector contracts under review, it was not known whether Serco would be able to recover.

Many of the large outsourcing companies have suffered from legal, financial or reputational issues over the years. Most recover, some do not, but while they are going through tough times, we know from enquiries we receive from a variety of organisations that there are many out there wondering whether their projects will be completed. Most organisations are looking for insights – any signs that they might suffer the knock-on impact of what their suppliers are going through.

5 Steps to Prevent these Reputational Failures Happening to You

After working on the recovery and optimisation of hundreds of complex strategic supplier relationships – some in formation, some on the wrong path and some in freefall – we know that there will be times when you must protect yourself from the aftershock of the reputational failures of those strategic suppliers you’re working with. Here are five key steps to identifying and avoiding the worst of this:

1. Discover your service provider’s level of transparency

One of the factors that you can use to determine the suitability of your strategic suppliers is the level of open book accounting they employ. Set out within your agreement should be a clearly defined explanation of the degree to which the company’s finances are available to you through the relationship’s duration. Please scrutinise this data for yourself at least every six months – preferably, every three months. It will often provide you with the insights you’ll need to identify the real from the fake news, should media or rumour suggest financial issues on the horizon.

2. Forensic financial analysis

Access to financial data means very little without the means and the motivation to look for the subtle signs of hidden issues or potential operational and financial manipulation. An example that highlights this point was the work we carried out for a local authority whose service provider was looking to increase its fees due to their claim that they were losing money on the contract. A more detailed forensic analysis of their finances uncovered that payments to one subcontractor were actually payments to a subsidiary of their own organisation. Therefore they (the subsidiary) were in fact already making 30% profit on the project, contributing to the group’s wider margins. But at the first layer of investigation (purchase invoices being received at the prime contractor level only), it did reflect a loss. Lesson learned – always dig deeper.

3. Trust in your ICF team

At times of increased operational and financial pressure within your organisation, it’s important to know that you have the right people in the right place to help you through it. An Intelligent Client Function (ICF) team’s key purpose is to have built strong, trusting relationships with both internal stakeholders and their supplier counterparts.

The ICF team should, therefore, be your early warning sign of adverse insights on the horizon, both ahead of any public news breaking about your supplier and throughout the aftermath. This unique insight should give you a better perspective of how the supplier is operating. In turn, this should provide you with the ability to plan your actions and reactions with greater certainty in order to keep you on the path to the best outcomes for your relationship.

4. Know when to draw a line

Whether through open book accounting, ICF team insights or by other means, should you identify that an issue will be, or is, a problem to the productivity and/or reputation of your supplier, the viability of your outcomes or the fabric of your relationship, then it’s important to know when and how to draw a line.

The first line that you will need to draw is through use of clear and obvious evidence to highlight the issue at hand so your supplier ‘knows that you know’ and you bring it to their attention. This needs to be done in a collaborative ‘we’re looking to find a solution to this’ tone, as baseless accusations will simply serve to frustrate your relationship and take you further from your goal of obtaining your stated outcomes.

You need to be assertive as opposed to confrontational, to know both your ‘express’ (documented) and ‘implied’ (undocumented) contractual rights and the obligations they may be breaching, but you must also work together to find a way through the issues.

The other line you need to be able to draw is under the whole affair once a solution is found. It’s important to leave this with your relationship intact, if not stronger than before. Any retained animosity is likely to cause further issues down the line.

5. Know when to walk away

We all know that walking away (for express or implied breaches of contract) should always be a last resort. Ending a contractual agreement early can be a very costly experience, and it is often a far more complex process to exit and find a replacement service provider than it might have seemed going into it.

Phrases like ‘clean break’ give the impression of clarity and ease, when it is likely to be anything but. So, first determine whether your own organisation and stakeholders have the appetite to continue to look into every possibility of repairing the relationship or making a change to the factors that brought you to this point.

If this does not work, then look into ways in which those factors could be negated by the removal or just a number of related aspects of the relationship from your service provider’s responsibility. There are times when specific aspects of your service provider’s role will be causing them undue financial, strategic or capacity strains and by simply relieving them of this you could be improving the relationship and their performance.

However, there will of course be times when it is appropriate to walk away, when all your attempts to realign vision and efforts have failed. In these circumstances, it’s helpful to do so in as amicable way as possible. You will be entering a legal, financial and reputational minefield and the amount of disruption you will now face will be determined, at least in part, by the approach you take. We wrote an article on this a while back called Early Outsourcing Termination? Save millions on your exit fees with these six questions, if you’d like a little more guidance on this.

Conclusion

The FT reported that one of the reasons why the SFO had been lenient with Serco was because the company had reported the issues to the fraud office itself and had fully cooperated with the investigation. This probably has to do with the efforts that the company has gone through, since 2014, when the current CEO, Rupert Soames, joined the organisation.

All reports seem to indicate that while a commercially astute individual, Mr Soames is a ‘straight bat’, in that he tells it ‘like it is’. He was rumoured to be incensed by the behaviour of some of the previous individuals within Serco that allowed such transgressions to occur.

A spokesperson for Serco is reported to have said: “Nobody who sat on the board of Serco Group, or who was part of the executive management team at the time these offences were committed, works for Serco today.” Mr Soames himself said that the company had “understated the level of profitability of its electronic monitoring contract in its reports to the Ministry of Justice”, and that “Serco apologised unreservedly at the time, and we do so again”.

Serco will undoubtedly weather this storm. Clear heads and a skilled management team have transformed the organisation since those dark days of 2013. However, the legal issues from that time which still haunt the company offer us a lesson about never being too complacent about your strategic supplier. No organisation is ever too big or too well known not to suffer from an issue that could impact the relationship you have with them.

Photo credit: iStock

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