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Own Goal In Supply Management

November 2, 2010

The UK government has committed to wide-ranging cuts in public expenditure. Inevitably, this has meant delay, cut-backs  and – in many cases – termination  of projects.

The government has also called on major suppliers to identify savings and to reduce existing charges. One of these suppliers – Serco, a multi-billion £ ‘international services company’  –  decided to pass the pain to its contractors.

In itself, none of this is surprising – until you discover that Serco wrote to supplers seeking retro-active application of savings. It ‘suggested’ that its suppliers should refund an amount equal to 2.5% of their 2010 invoices. Should they decide not to ‘volunteer’ this payment, Serco words implied that they would be unlikely to benefit from future business.

In the face of universal hostility, Serco felt compelled to withdraw its demands.  The company  succeeded in gaining the wrath of Government (its major customer), opprobrium in the press, the disbelief (and I am sure eroded loyalty) of suppliers and a drop of almost 5% in its share price.  Quite an achievement, especiallywhen set against the $20 – 50m gain that I presume it might have achieved if all suppliers had paid up.

It is great to see bullying behavior appropriately rewarded.  Serco’s unfortunate CFO appears to be responsible for this remarkable own-goal – at least, his name was on the letter. Once again, we have an example where the prospect of short-term financial gain appears to have trumped commercial judgment. I would love to know what position Procurement took during the discussions of this particular initiative. Hopefully they fought for the interests of their supply base and highlighted the reputation risks inherent to such action. But all too often, that is not the case. The fixation on cost-cutting and savings can come to cloud wider analysis and judgment.

Overall, this story offers another excellent risk management case study. I used it at an international conference of senior procurement executives today, outlining the basic facts without revealing their results. No one pervceived that Serco’s action was wrong.

One Comment
  1. Good blog.

    An interesting thought perhaps….

    On Serco’s website they declare “Serco is a values-led company with a culture and ethos that is at the heart of everything we do”

    Maybe they should reflect that now thay are a “valued-les(s)” organisation in the eyes of the suppliers and the procurement community at large?

    🙂

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