Government should not escape blame for Serco debacle

Coalition forces its suppliers to reduce prices but condemns those who do the same

The government has forced all its IT suppliers to slash their prices midway through their contracts

The government has acted naively in its dealings with IT supplier Serco, according to analyst Ovum.

Serco, an IT supplier to schools, prisons and ports, has apologised for sending a letter to 200 of its supply chain partners demanding they provide a 2.5 per cent rebate on this year’s work or risk losing their contract.

"Like the government, we are looking to determine who our real partners are, those that we can rely upon,” the company said in the letter. “Your response will no doubt indicate your commitment to our partnership but will also be something I will seriously consider in our working relationship as Serco continues to grow."

Francis Maude, the Cabinet Office minister leading the government's efficiency drive, was said to be furious and demanded that Serco account for its actions. Serco has since apologised and retracted the letters.

Sarah Burnett, senior public sector analyst at Ovum, said: “What the government is doing in renegotiating existing contracts with its suppliers will certainly have a long-term impact on its relationship with all of them.

“My thoughts are that it will definitely filter through to their suppliers, not necessarily in the way that Serco has attempted to do it, but it’s a free market and it’s a very strange scenario where the government is trying to push its own costs down but at the same time saying its suppliers can't do the same. It’s very naive.

“At the end of the day, free market conditions apply. All of the big contractors will be looking to reduce the prices they pay to their own suppliers. Something’s got to give.”

She added that this will affect the prices that government suppliers offer to other sectors and may even force them to reduce their headcounts, as they will have to balance their books somehow. There is also a risk that suppliers will look for public sector deals in other countries, warned Burnett, meaning that they may not respond to contracts from the UK government as and when they begin to come through again.