Outsourcer Serco apologises over rebate demand

Outsourcing giant Serco today apologised for writing a letter to its suppliers demanding rebates in the face of Government spending cuts.

Serco, which runs prisons, schools and nuclear facilities for the Government, wrote to its biggest 193 suppliers to ask for a 2.5% retrospective cash rebate on contracts in the first half of the 2010 calendar year in an attempt to help it deliver the Government's cost savings.

Serco today issued a statement retracting the letter and apologising following reports that the Government - Serco's main customer - is furious about Serco's suppliers being squeezed.

Serco's statement said: "As a company that values our relationship with all our supply chain partners large and small we deeply regret this action and apologise unreservedly to them for their concern that this has caused.

"Serco yesterday reaffirmed to the Cabinet Office that Serco's most recent offer to the UK Government will not result in any of the Government's cost saving programme being passed on to our suppliers."

Serco has 15,000 suppliers and only wrote to its biggest customers rather than small businesses, a Serco spokesman added.

Other Government contractors, such as contract caterer Compass Group and support services and construction group Carillion, have said they will not be making similar demands of their suppliers.

The letter from Serco finance director Andrew Jenner, which was sent out earlier this month, said: "I am asking you to offer us a rebate of 2.5% (exclusive of VAT) on Serco's full-year spend with you for the 2010 calendar year in the form of a credit note.

"Like the Government, we are looking to determine who our real partners are that we can rely upon.

"Your response will no doubt indicate your commitment to our partnership but will also be something I will seriously consider in our working relationship as Serco continues to grow."

According to press reports, the letter is understood to have angered Cabinet Office Minister Francis Maude because the Government had agreed with Serco that the cuts would come from its own profit margins, rather than those of its suppliers and sub-contractors.

The Government plans to save £800 million from central procurement contracts this year.

The timing of the story is unfortunate for Serco, coming on the day that the Government launched a new initiative to help small and medium-sized businesses and appointed former trade and industry secretary Lord Young of Graffham as enterprise adviser to champion their cause.

However, Serco said the letter had only been sent to its largest suppliers.

Serco's share price fell 6% today, making it the biggest loser in the FTSE 100 Index, as its profit margin was expected to be eroded.