Scandal-Splattered UK Outsourcing Giant, Serco, Sets Sights on the Ultimate Gravy Train: U.S. Defense Contracting

 

The company has been repeatedly caught falsifying records, at times on a gargantuan scale. Now it is seeking opportunities in an industry where money routinely disappears in the trillions. What could possibly go wrong?

UK outsourcing giant Serco has a long history of failing to deliver. But every time it does, it has a knack of picking up even more lucrative projects once the dust has settled from the ensuing scandal. It has been repeatedly accused — and occasionally found guilty — of falsifying records on a huge scale. Yet it keeps winning government contracts, including for some of the most sensitive public services, such as maintaining the UK’s air defence radar and ballistic warning system.

Since going public in 1988, Serco has grown into a sprawling behemoth. Its tentacles reach into just about every crevice of government, from health to defense, to education and incarceration. Its operations span the globe, from Australia to Dubai, to the UK and Hong Kong.

In recent years the company has been forced into semi-retreat, in no small part due to the scandals it’s generated. Its shares have moved sideways over the past few years, after nose-diving in the preceding ones. The reputation of the wider support services industry in the UK also took a battering after the 2018 collapse of Carillion. But the good times appear to be returning. The Covid-19 pandemic has already given Serco a new lease of life, as the UK government loosens the purse strings, at least for well-connected private contractors. Now, the firm has set its sights on the ultimate gravy train: US defense contracting.

America Calling

Last week, Serco announced plans to acquire the Vriginia-based military consultancy Whitney, Bradley & Brown, Inc. (WBB) from an affiliate of H.I.G. Capital for $295 million. The acquisition, which is expected to close in the second quarter of 2021, will bolster Serco’s existing capabilities in advanced areas, including Artificial Intelligence, machine learning, data analytics, and cyber consulting, while also providing new expertise in disciplines such as wargaming, modeling, and simulation. The FT says the proposed deal represents a big bet on military tech and will increase Serco’s North American defence revenues by a fifth to $1.1 billion:

The move marks a step deeper into what is a $700bn US market, building on the 2019 acquisition of Alion’s naval services business. That deal took Serco, which had been providing shorefront services such as wiring and ship overhaul, into the realm of naval architecture. WBB adds higher-margin areas such as wargaming and precision navigation across the broader military.

Defence spending pledges are generally accepted fundamentals of electoral credibility, making the sector a low-risk bet. “The defence of the realm must come first,” said Boris Johnson in November, as he promised the Ministry of Defence an extra £16.5bn over four years. The outlook for the US is less clear, with leftwing lawmakers holding greater sway in Congress. But defence experts think a continuation of the status quo is likely. And on both sides of the pond analysts see a trend towards spending on sophisticated technologies such as cyber security, suiting the likes of WBB.

Headquartered in Herndon, Virginia, Serco’s U.S. subsidiary, Serco Inc., already has approximately 8000 employees. It generates annual revenue of around $1.4 billion. Its big break came in 2013 when the Obama Administration decided to award Serco a contract worth $1.24 billion to manage the Patient Protection and Affordable Care Act. The Obama Administration’s decision to award the contract, which came after intense lobbying by Serco, was controversial given the company’s already tarnished image.

In 2011, a data breach at the U.S. Thrift Savings Plan for federal employees – managed by Serco — jeopardized the Social Security numbers and confidential information of more than 120,000 participants. It raised serious concerns about giving Serco yet more control of sensitive public data. In 2013, Serco and rival firm G4S were caught systematically overbilling the UK government tens millions of pounds on contracts to tag and monitor criminal offenders. As many as one in six of the criminals they were supposedly monitoring were reportedly either dead, back behind bars, no longer under supervision, or no longer living in the U.K. In his sentence, the presiding judge in the case said:

“SGL (Serco Geografix Ltd) engaged in quite deliberate fraud against the Ministry of Justice in relation to the provision of services vital to the criminal justice system.”

The following year the company issued four profit warnings after being forced to repay £68.5 million to the government for its overcharging on the contract. Over the next three years, its share price collapsed almost 90%. In May 2014, a Survation poll for campaign group We Own It found that 63% of respondents thought Serco should be banned from bidding for any new public contracts. That didn’t happen.

The company is now so embedded in people’s lives in the UK that it’s almost impossible to escape its reach. The so-called “citizens services” it provides to local authorities include ground and street cleaning; IT; the management of leisure and sports facilities; parking enforcement; waste management; finance; and customer service departments. The company also runs transport and education services. As part of its justice services it manages prisons, youth detention centers, courts and rehabilitation programs. It also has a front-line role in the UK’s immigration services, running detention centers and community accommodation.

Healthcare to the Rescue

But it’s in healthcare where much of its recent growth has come, despite its history of falsifying records in the sector. In 2012 Serco admitted giving false data to the NHS 252 times on the performance of its out-of-hours GP service in Cornwall. The former Tory health secretary and chair of the health select committee, Stephen Dorrell, said at the time that the revelation raised wide-ranging concerns about oversight of contracting services and should prompt a full review of the Serco contract period.

“To falsify returns once is once too many – to falsify 252 times represents a pattern of behaviour which should lead to a full review,” Dorrell said.

In the end, the government terminated Serco’s contract to provide out-of-hours GP service in Cornwall 17 months early. But eight years later, in May 2020, another Tory government awarded Serco a whopping £108 million contract to help run England’s contact tracing system. No competitive tender took place, as the government used emergency legislation to bypass normal procurement rules. 

The test-and-trace program was a disaster from day one. In May, Serco accidentally shared the personal email addresses of nearly 300 trainee COVID-19 contact tracers. Both Serco and Sitel, the two main contractors tasked with running the scheme, then came under fire over allegations that call handlers were reaching less than half of the contacts of people who tested positive for COVID-19. By the summer, things were so bad that the government began delegating more and more of the heavy-duty work to under-funded local authorities while continuing to funnel huge sums of money to private contractors like Serco and Sitel. 

When Serco’s contact tracing contract came up for renewal in August, many called for its cancellation. But the government dug in its heals, deciding not only to extend the contract but to award Serco a further £45 million to provide COVID test centres. It later emerged that Serco’s separate £108 million COVID contact tracing contract – the value of which could surge to £432 million if it continues to the end of this year – allows the company to oversee its own monitoring, “refine” its own service level agreements and rules out automatic penalties for underperformance. 

Serco’s CEO, Rupert Soames recently said that the system is now working “really, really well.” He also insisted that Covid-19 related programs are of negligible financial benefit to the company:

“The idea that COVID has been a huge boon to our profits is simply not true. Overall, the benefit to the company of COVID is tiny.”

At first glance, the figures would seem to suggest otherwise. Serco’s reported operating profit (i.e. after exceptional items) increased over 400% in 20H1, thanks to a 24% increase. By its own estimates, Serco expects to report profits of £160 million for the 2020 financial year, on revenue of £3.9 billion. That would represent a 20% increase on the £3.2 billion revenue it posted in 2019, the company’s first year of revenue growth since 2013.

Serco’s revenue for healthcare (worldwide) in 2019 was £428 million, up from £398 million in 2018. In the UK, its growing role in healthcare provision has drawn controversy due to the firm’s cosy ties with senior Conservatives. Health minister Edward Argar was head of public affairs at Serco before entering politics. The company’s chief executive Rupert Soames is the brother of former Tory MP and party grandee Nicholas Soames, not to mention grandson of Winston Churchill.

Now the firm has set its sights on the juicy — some might say unlimited — opportunities available in the U.S. defense sector. A company that is notorious for falsifying records now wants to take a bigger role supplying the US Pentagon, which has famously failed to ever pass an audit and which last year made $35 trillion in accounting adjustments. What could possibly go wrong?   

 

 

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