Serco’s return to success
From transport to health, Serco touches the lives of millions. The CA Magazine speaks to Angus Cockburn CA, the CFO guiding the company back to success.
If you have ever hired a “Boris bike” in London, travelled overnight on the Caledonian Sleeper or touched down at Baghdad International Airport, you’ve made use of services provided by Serco. With a range of operations from hospital support services through transport and defence contracts to prisons and detention centres, Serco touches the lives of millions of people every day.
Angus Cockburn CA, Group Chief Financial Officer at Serco, said: “Serco's a big international business with a lot of complexity in terms of what it does. We have four geographic divisions: UK and Europe, the Americas, Asia Pacific, and the Middle East. We also run the business across five sectors: defence, justice and immigration, transport, health and citizen services.”
The journey so far
Originally the UK arm of a US company running radar facilities for the British Government, Serco floated on the London Stock Exchange in 1988. At its peak, Serco employed around 125,000 people worldwide and had a turnover of nearly £5bn. Its business model was not to specialise in a given sector or technology, but in the management of people and services.
Serco could once have been described as “the biggest company you’ve never heard of”, but around 2013 it hit the headlines – and not in a good way. The group ran into problems over its billing for the tagging of offenders. At the same time, it had also been facing a general challenge from a tougher approach to procurement on the part of the UK Government which left the balance between risk and reward looking distinctly less attractive for contractors. All this also revealed weaknesses in Serco’s own management and control processes, which had been focused on rapid revenue growth. Profits, and the share price, plummeted.
In October 2013 the Chief Executive, Chris Hyman, stepped down and in February the following year Rupert Soames, formerly Chief Executive of Aggreko, was appointed to replace him. Angus Cockburn, who had been Rupert’s Chief Financial Officer at Aggreko, joined him shortly afterwards.
Aggreko provides mobile power and temperature-control systems for customers around the world, from military bases to aid agencies and major sporting events. Under Rupert and Angus, the business had grown rapidly – reported revenue for 2018 was £1.76bn – and profitably. Could they turn around Serco?
One of Angus’ first challenges was simply to get a clear picture of the group’s financial situation. He said: “The business had over-expanded. It had become almost a £5bn business, but it lacked a number of basic controls, such as monthly management accounts, balance sheet reconciliations or a regular business review process.”
The focus on growing revenue above all else had added to the problem. As Angus explained: “Historically [in outsourcing] if you won the contract you were generally able to generate additional scope and profits, but the pendulum had swung … the procurement process became extremely challenging.”
Outsourcing typically involves a trade-off between risk and reward. A contractor will, for example, guarantee a certain level of service for an agreed fee, taking on the risk that the cost of doing so may be greater than expected. If the fee agreed does not reflect the true risk, the contractor stands to be locked into a loss-making contract. Following a review, it turned out that Serco needed to write off a sizeable portion of its earnings to provide for loss-making contracts and impaired assets. It also needed to raise nearly £1bn in cash.
Angus said: “We carried out an emergency fund-raising, and we sold our private sector business because we were able to exit that quickly and raised the cash we needed to survive.”
The turnaround required a three-pronged approach: stabilisation, transformation and growth, with a £555m rights issue in 2015, a rationalisation of the group’s portfolio and a £1bn reduction in costs due to lost revenue and in excess of £100m of overhead reduction; restoring customer confidence; and restoring the engagement of employees. The latter also entailed an overhaul of the company’s culture.
Alongside all this was a root-and-branch review of the finance function. Serco’s accounting and control functions were in stark contrast to the system Angus had developed at Aggreko. As he puts it: “Aggreko was extremely well disciplined … it's very difficult when you've got a complex business operating in multiple countries and sectors, and you don't have visibility of how the business is performing.”
External audit also was not without its problems; and, earlier this year, the Financial Reporting Council fined Deloitte £6.5m over its audit of Serco Geografix, a Serco subsidiary, for 2011 and 2012.
The finance team created a centralised, single chart of accounts and monthly management accounts, and outsourced many accounting functions, making processes faster, less costly and more accurate. A robust forecasting system was also introduced. Angus said: “It's been a tough process but, now, it allows us to focus on running the business without worrying about the accuracy of the financial information.”
A shift in thinking
Changing the culture was as important as changing the processes. He recalls: “I stood up in front of everybody and said that I'd much rather take a profit warning than start pulling forward profits [from the next period].”
Through these challenging times Serco’s shareholders have been “incredibly supportive and, frankly, incredibly patient” Angus added. It’s a mark of their confidence that a recent fund-raising exercise, to fund the acquisition of the Naval Systems Business Unit from US defence business Alion Science & Technology Corporation, was oversubscribed.
Serco’s revenue for 2018 was £2.84bn, with underlying trading profit (UTP) up 40% to £93.1m. UTP for the full year 2019 is forecast to be around £115m. The turnaround is under way, but as Angus conceded, that does not mean there are not further challenges ahead.
He said: “When you employ 60,000 people, something bad is going to happen somewhere, pretty much every day. Dealing with that, you learn to be very thick-skinned. The Government understands that as well, because delivering sensitive public services is really difficult.”
Values are key to dealing with this. Angus said: “Care, innovation, pride and trust are really important to us… so, for example, we will not involve ourselves with the death penalty in any sense, which restricts the number of prisons we will operate, or the prisoner transport we provide. We also decided we wouldn't tender for the Australian Government’s offshore detention of asylum seekers. That was in conflict with our values.”
His training as a CA is an important part of Angus’ personal values and expertise. He qualified with KPMG and worked with the firm in the UK and US, before moving to PepsiCo, where he eventually became Regional Finance Director for Central Europe.
After PepsiCo, he was Managing Director of Pringle of Scotland, part of Dawson International. Pringle, in common with the whole UK textile sector, was facing major challenges and Angus was tasked with restructuring the business in readiness for a sale, which took place in 2000. Angus then joined Aggreko as Finance Director.
The level of mutual trust between Angus and Rupert has helped them to tackle Serco’s turnaround. As Angus put it: “We've worked with each other for more than 15 years and having that sort of unconscious understanding and trust definitely makes life a lot easier.
“But the good thing is we've now got a management team that operates in a similar way. It's very transparent and very open. In a turnaround, you'll learn and learn quickly. I've learned more in the last few years then I did in the previous 15!
“Life's not just about meeting the next half year’s results or analyst expectations for that year. You've got to be brave, and you've got to remember that you're a steward of a company for what is a brief time in that company's life. You've got to pass it on to the next person in better shape than you got it.”
‘Do the right thing’
His advice to a CA looking to pursue this kind of career route is to seek a variety of different experiences but, he added: “Always pursue your career with a view to the long term and when faced with a difficult situation do the right thing, which is fundamental to the brand of ICAS. Sometimes you need to be brave; sometimes you need to be the person who asks the questions.”
He concluded: “Serco, for all its challenges, is a fascinating business. You know that the things that we do are really important to the service users and it is very challenging, but it's also endlessly interesting. I am enjoying the challenge hugely.”