Soames's rights issue and contract exits cut Serco's £153m loss to breakeven
After the tagging scandal, Serco sold its offshore BPO arm, raised new equity, cut net debt by £605m and ended £153.1m of losses by 2016.
What was changed
Serco entered 2015 as the FTSE's most damaged outsourcer. The 2013 electronic-tagging overcharging affair with the UK Ministry of Justice poisoned its most important customer relationship, and a Contract and Balance Sheet Review forced years of charges and onerous-contract provisions. Underlying trading profit had slid from £257m in 2013 to around £96m in 2015, net debt peaked at £745m, and the 2015 statutory loss reached £153.1m with £188m of exceptional operating charges, including £166m of non-cash losses on disposals and impairments.
The decision that turned the company came out of the 2014 strategy review implemented by Rupert Soames, recruited as Group Chief Executive in 2014, with Sir Roy Gardner taking the chair from July 2015. Serco raised new equity through a rights issue and completed its exit from offshore private-sector business process outsourcing, cutting net debt by £605m to £78m during 2015. It cut operating costs by more than £330m, and renewed the pipeline: £1.8bn of contracts were signed in 2015 and larger bid opportunities grew by about £1.5bn to £6.5bn.
Rebuilding government relationships came first: Serco refreshed its values to 'Trust, Care, Innovation and Pride' and treated client confidence as the precondition for every financial target. The figures crossed over in 2016. Serco had guided for only about £50m of underlying trading profit and delivered £82m on £3.0bn of revenue; operating profit before exceptionals reached £98.5m and the statutory loss narrowed to £1.1m from £153.1m. Order intake rose 40% to £2.5bn.
The repair held into a second year. In 2017 the order book stood at £10.7bn, book-to-bill passed 100% for the first time since 2012, and the onerous-contract provision had fallen from £447m in 2014 to £168m, exposing an operating business that was finally self-sustaining.
Why it worked
The scandal destroyed customer trust faster than cash, so repairing relationships with government clients was the precondition for every financial target.
Combining the rights issue with disposal proceeds let Serco cut net debt £605m in a single year without stripping the balance sheet that underwrote its contracts.
Guiding the market to £50m and beating it with £82m rebuilt analyst credibility, which mattered as much as the underlying profit itself.
The one-off cleanup was ring-fenced in a visible provision, from £447m in 2014 to £168m by 2017, so investors could watch the operating business re-emerge underneath.
What can be applied
When a scandal breaks customer trust faster than it burns cash, fix the relationship first, shrink to a contract base that deserves trust, and guide conservatively so every number rebuilds trust.
Aftermath
By 2017 the transformation was complete enough that Serco's agenda shifted from survival to growth: it landed its largest-ever contract win and more than 30 other awards worth over £10m each across the UK, Europe, America and the Middle East, while cumulative overhead savings over three years passed £100m. The company remained a focused public-services provider built on the platform the 2015 review defined, competing on government relationships that had been its biggest liability only four years earlier.