Soames of Serco and the Plummeting Profits | Sherpas in Blue Shirts

Today is a big day for Serco as Rupert Soames OBE takes the helm as the new CEO of the British outsourcing giant. Soames is coming on-board following a turbulent year for Serco. Found to have overcharged the Ministry of Justice for its offender electronic monitoring services, Serco was barred from new UK government contracts, until the matter was investigated and settled. The settlement cost Serco a charge of £111m. The UK government also demanded a major change of organization and senior management to allow Serco to compete for its tenders again. To add to its woes, a change of government and policy in Australia saw Serco’s revenue from one of its largest customers, the Australian Department of Immigration and Border Protection, decline too.

On Monday, April 28, just days before the new CEO was to take up his post, Serco gave an unexpected profit warning. Unsurprisingly, the next day, shares in the company plummeted by 19%, and there is press speculation about a rights issue. Serco had already set expectations for lower organic revenue growth and profitability in 2014 when the latest profit warning came on April 28. At the end of 2013 the company reported a margin of 5.6%, which was a 68 basis point decrease compared with the prior year. The company is already restructuring, having reported related costs of circa £15m in 2013. Workforce reduction is also on-going. It reduced its workforce by 400 in 2013.

Serco has also disposed of a number of businesses, some at a loss:

  • UK transport maintenance business – net profit of £23.2m
  • Occupational health business – net loss of £3.9m
  • Ascot College – net loss of £0.1m.

It is against this backdrop of strained relationships and declining profits that Soames takes the helm. Another challenge that he faces is to close the gap that has opened up between Serco and its competitors. For example, Capita, its biggest rival, has been winning major contracts as well as making new investments in technology through acquisitions. Neither company has been quick to embrace the latest technology but Capita appears to have changed tack recently to bolster its IT services capabilities. Since March 2014 Capita has acquired:

  • AMT-SYBEX which provides mobile technology and data management capabilities
  • Updata for its network connectivity services
  • Network Technology Solutions, an IT security reseller and managed services provider.

Another competitor, Agilisys, has invested in front-office process automation tools.

The new CEO faces a number of challenges from day one, but it is not all bad news. In 2013 Serco had a revenue of £5.1bn up 7.8% at constant currency. This represented a healthy organic growth of 5.9%. Furthermore, in 2013 it achieved contracts wins to a value of £3.7bn despite the on-going issues with its relationship with UK central government.

After the Ministry of Justice contract debacle, Serco had to go for a CEO who brought more than just good business acumen. As well as a successful track record as CEO of Aggreko, Soames brings with him good connections with the establishment, being the grandson of Winston Churchill, and brother to Nicholas Soames, Conservative MP. While Soames is positioned well to rebuild the company’s relationship with the UK central government, the painful task of restructuring the company will have to continue. We expect more divestments which may include some of its many joint ventures. We also expect Soames to continue Serco’s strategy of diversification by pushing into other sectors such as retail, and other geographies such as the Middle East, where it has won a number of contracts recently.

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