Serco boss warns of tough times ahead

The boss of Serco has warned the scandal-hit outsourcing firm is facing two more difficult years as it battles to rectify the mistakes of the past.

Presenting an update on his strategy, Rupert Soames slashed the company’s profits guidance for this year and next and wrote down the value of the business by £1.5bn. He highlighted the impact of several contracts where Serco is making large losses and areas where the company is sub-scale.

Mr Soames wants to re-focus the company as a provider of services to governments in areas such as justice and immigration, defence and transport, while looking to sell the majority of its business outsourcing operations.

The plan will be financed by a £550m cash call to investors early next year, on top of the £165m raised in a share placing in the summer.

Shares slumped by a third following the update as Mr Soames warned Serco will have “to get smaller and more focused” in order to get back on track.

He added: “Whilst it is a bitter pill, it is better for all concerned that we swallow it now and establish a really solid foundation on which to build Serco’s future.”

Mr Soames took the helm in May after a scandal-hit 2013 in which Serco was forced to refund the Government £68.5m for overcharging on criminal tagging contracts, as well as repay £2m of past profits from a prisoner escorting contract.

In the latest downgrade to profits guidance, Serco now expects a figure of between £130m and £140m this year, against a previous forecast of not less than £155m. It also lowered estimates for next year.

Confronted by slowing growth rates and increased competition in core markets, Mr Soames said Serco had concentrated too much on winning new business and lost focus by diversifying into areas that required different skills.

Mr Soames, who is the former boss of temporary power firm Aggreko, said: “We now have a number of contracts which are making large losses, and others which are in sectors where we are sub-scale.”

He added that Serco’s infrastructure has not kept pace with its growing scale and complexity, leading to the recent issues on Government contracts.

Hampshire-based Serco employs 100,000 people worldwide and provides services as diverse as hospital services, the running of prisons and support for the armed forces.

Mr Soames said: “This transformation will take time, but will be worthwhile. The next two years are going to be difficult, and we expect our revenue to reduce over this period through disposals and exiting loss-making contracts, following which we expect to be able to start growing again.”