5 November 2014
Outsourcers
strive to rebuild reputations after scandals
The
failure of G4S to provide trained security for the London 2012 Olympics, meant
the Armed Forces were drafted in
The
gleaming new Fiona Stanley hospital in Perth, Western Australia, is a state of
the art facility, with 783 beds, comprehensive clinical services and extensive
research capabilities.
Opened
last month, the hospital will also be a trailblazer for the private sector in
Australia’s largely state-run health system, because Serco, the British
outsourcing company, has a $4.3bn contract to provide non-clinical services at
Fiona Stanley. Serco is charged with ensuring the hospital’s smooth running,
and will even have 18 robots capable of delivering 2,200 freshly cooked meals
each day.
The
increasing involvement of private companies in the provision of health services
across the world is just one example of how outsourcing companies have over the
past 30 years usurped much of the work previously done by local and central
governments. The outsourcing model has enjoyed rapid expansion since Margaret
Thatcher, the former British prime minister, pioneered the idea of getting the
private sector to run public services in the 1980s.
Baroness
Thatcher’s ideas spread across the western world, and in the UK spawned three
outsourcing giants – Serco, G4S and Capita. These companies have planted flags
in more countries than Britain’s former colonial empire, running everything
from defence, health and transport services to prisons and work programmes for
the unemployed.
But
in the past two years, a series of fiascos and scandals – from G4S’s failure to
provide enough security guards for the 2012 Olympic Games in London, to
computer glitches in Serco’s administration of President Barack Obama’s US
healthcare reforms, to Capita’s inadequate supply of interpreter services in UK
courts – have brought the outsourcing model into disrepute. These episodes also
raised far reaching questions about how far the private sector can be used in
the provision of public services.
The
biggest crisis to hit the outsourcers came last year when G4S and Serco were temporarily
barred from winning new British government contracts. This followed their
referral to the Serious Fraud Office, the UK’s main anti-fraud agency, for
overcharging on the electronic monitoring of offenders. It emerged that G4S and
Serco had been billing the British ministry of justice for tracking the
movements of offenders who had moved abroad, returned to prison or even died.
“This
has been an absolute earthquake and a disaster for Serco,” Rupert Soames,
Serco’s chief executive, said in September, when grilled by UK parliamentarians
about how the company had overcharged for the tagging of offenders. “What
happened was totally unacceptable and unethical. Frankly, we are deeply ashamed
of it.”
It
is perhaps fitting that the task of restoring the outsourcing industry’s
reputation rests with Mr Soames – grandson of wartime prime minister Winston
Churchill – who was appointed Serco’s chief executive in May this year.
Of
the big British outsourcers, Serco is suffering the most. It fell to a pre-tax
loss of £7.3m in the first half of 2014, compared with a profit of £106m during
the same period last year, partly because its largest government contract –
running Australia’s immigration detention centres – plummeted in value due to a
policy change that has reduced the number of people using the facilities.
Serco’s costs also rose because of problems with other contracts, and it won
fewer new outsourcing deals than it was hoping.
The
straight-talking, well-connected Mr Soames – who wore a specially made jacket
emblazoned “Serco and proud of it” to the company’s annual meeting – has warned
it will take time to rebuild trust and confidence with the UK government. It
agreed last year to pay £64.3m to the government for overcharging in relation
to the tagging of offenders.
Mr
Soames highlighted the challenges of running a large company operating in more
than 30 countries when he told parliamentarians: “Perhaps I may gently say that
in an organisation of 125,000 people, the one thing I guarantee is that someone
somewhere is doing something very stupid or making a mistake 24/7. We cannot
run a completely error-free organisation.”
In
an organisation of 125,000 people, the one thing I guarantee is that someone
somewhere is doing something very stupid or making a mistake 24/7
-
Rupert Soames, Serco’s chief executive
He
is seeking to stabilise the company through a no-holds barred review of its 700
contracts, because some have low margins or are even lossmaking. Serco has put
in place a more rigorous system for monitoring its contracts, to avoid a repeat
of the overcharging scandal.
Such
a review has already taken place at G4S, which prompted the company to take a
£136m charge against earnings last year, mainly because of its settlement with
the UK government in relation to the electronic tagging affair.
G4S
slumped to a pre-tax loss of £170m in 2013, but it is now showing signs of
recovery. The company, which changed its chief executive last year, reported a
pre-tax profit of £85m in the first six months of 2014, partly because of
increased revenue from emerging markets.
Less
than 10 per cent of G4S’s revenue is derived from the UK government – compared
with about 25 per cent at Serco – so it has been in a better position to bounce
back.
The
smallest and least troubled of the three British outsourcers is Capita. Indeed,
it has benefited from the scandal that engulfed G4S and Serco – this year
Capita won a contract to monitor offenders with the UK government after its
larger rivals lost this work.
However,
Capita’s pre-tax profits fell 3 per cent to £152.3m in the six months to June
30, partly because of higher finance costs.
All
three outsourcers have significant debt loads following acquisitions, and Serco
and G4S have both moved to strengthen their balance sheets by raising capital
from shareholders.
Even
if the outsourcers are correcting their past mistakes, there is a realisation
among some investors that government contracts are not the safe bet they had
imagined.
Industry
insiders say the tendering process, particularly for public sector contracts,
encourages buyers to choose the cheapest offer, rather than focusing on quality
of service.
At
the G4S-run Oakwood prison, near Wolverhampton, – nicknamed “Jokewood” after a
series of riots – the company is paid £13,200 per inmate per year. This amounts
to half the cost per inmate at publicly-run prisons.
Furthermore,
outsourcers are sometimes dealing with badly drawn contracts, which are subject
to constant changes – for example, the UK government increased the number of
security guards required for the 2012 Olympics only a few months before the
games.
The
outsourcers’ mid to high single-digit operating margins are also under pressure
from new entrants, including construction companies. These builders are used to
low single-digit margins in their core businesses.
Still,
few doubt that the outsourcing boom will continue, not least because
governments are seeking to close budget deficits in part through reduced public
spending.
If
politicians have enjoyed beating up the big outsourcers in public, there is an
acknowledgment from some in private that governments need these companies as
much as vice versa. Serco’s robots serving up meals at Fiona Stanley hospital
in Perth should have a busy future.
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