Mark Leftly: Keep track of criminals? Serco is so big that it can't keep track of itself

Serco needs to slim down. It should sell off big parts of the business and focus on core operations
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The Independent Online

The main reason for Serco's spectacular fall from grace – and, more crucially, suspension from winning lucrative government contracts – can be summed up very simply: the FTSE 100 group, though possibly not for much longer, has 120,000 employees.

That's an empire, not a company. Those at the top may have little or no awareness of, let alone any control over, what those closer to the bottom of the pile get up to.

So it was that Serco ended up referring some of its employees to the police last week over allegations of fraud related to the misreporting of numbers on a £285m contract to run prison vans in London and East Anglia. Serco insisted there was "no evidence" that senior management had any idea what was going on – and that is the root of its problems.

Having a huge, unwieldy empire is exactly what got G4S into trouble at the Olympics last year. Senior managers were shocked to discover that the group didn't have enough security guards to cover the Games, because although this was a high-profile contract, it was also fairly small fry for a company with more than 620,000 employees.

Responsibility was delegated –arguably abdicated – and authority compromised. In such disparate organisations, it is far easier for rogue employees of business units to try and hide their mistakes, and then get away with it until the problems escalate to an unsavoury degree.

The other thing Serco has in common with G4S, of course, is that they were both alleged to have assigned electronic tags to criminals who were in custody, even dead, earlier this summer. A forensic audit found that the taxpayer may have been overcharged by as much as £50m. Like the contract that sparked last week's furore, this was a deal with the Ministry of Justice. As a result, the Justice Secretary Chris Grayling is fuming and the Government is even prepared to ban Serco from future contracts if it fails to put stricter internal controls in place.

Serco's chief executive, Chris Hyman (pictured), says he has "immediately initiated a programme of change and corporate renewal". Tighter internal controls will be a vital part of this in a disparate group that now runs so many parts of our daily lives though its vast number of public sector contracts.

These include operating out-of-hours GP services in Cornwall, helping offenders get back to work, and looking after Ofsted school inspections in the Midlands and East of England.

However, this action plan still won't be enough. Mr Hyman might try and change a business culture almost overnight and it's likely he really is "deeply saddened" that the actions of a small number of his employees have reflected so badly on the "overwhelming majority" of hard-working staff.

But Serco is too big to change.

Its circumstances remind me of a story I was told about one of the biggest oil and gas groups. New executives were sent on a course, from memory, in the Caribbean, which sounds like great work if you can get it. In those sunny climes, though, they were given a gloomy message and trained in how to cope with a depressing reality: whatever their apparent clout, the executives of the oil company could only ever have a minor impact on such a monolithic beast. They might be able to steer it in certain new directions, but they could never reform it nor properly stamp their authority.

That's why investors were right to flee Serco in droves on Thursday. Around £450m was wiped off its value in a single morning, which greatly threatens its place in the blue-chip index of the biggest quoted companies.

What Serco needs to do is slim down by selling off big parts of the business and focusing on core operations. G4S announced last week that it is doing just this, at least up to a point, with the sale of its Canadian cash-security and Colombian data-solutions businesses for £100m. US subsidiaries could soon follow.

Serco works in 30-plus countries. If it is going to monitor its operations properly, management must drastically cut this number. And 120,000 staff is far too many for the company to cope with on its payroll. By stripping back the business, Mr Hyman might just have a chance of taking back control of Serco.

Sometimes there is a plan B

Blame George Osborne. The Chancellor's attempt to evoke the toughness of Margaret Thatcher by saying there is no plan B for curing the nation's economic malaise has spread to the City, as directors of troubled companies want shareholders to believe that only their way of getting them out of trouble could possibly work.

Take the way in which Nick von Schirnding, the boss of the scandal-scarred coalminer Bumi, defended how he is sorting out the group's convoluted ownership structure – a plan that will leave the Indonesian tycoon Samin Tan with nearly half the company's shares. He said it was possibly not the best solution, but it was the "best one on the table".

Co-op's chief executive, Euan Sutherland specifically said "there is no plan B" – only his solution for the woes of the group's bank, which will see angry bondholders stump up £500m.

Dismissing the notion that there are other options is not sensible practice. Mrs Thatcher's intransigence was her undoing, while Mr Osborne's obduracy borders on the narrow minded.

Executives should beware taking lessons from politicians, whose careers nearly always end in failure.

Margareta Pagano is away.