Unfortunately for Serco's management, this week's cash rebate gaff could not have come at a worst time. Negotiations on cost cuts are of course under way at the Cabinet Office, and if investors weren't already worried about Serco's outlook in the near term, loss of kudos with minister Francis Maude will now leave even the most brazenly optimistic feeling anxious. To make matters worse, shares in the outsourcing group are currently the most shorted in the support services sector.
According to research commissioned by KBC Peel Hunt, Serco currently has the largest number of shares shorted in its sector as a percentage of market capitalisation, with rival Capita just behind. Granted, these are two of the most liquid support services shares, but the key difference between the two procurement giants is the shorting trend. The number of Capita shares out on loan has begun to abate since the spending review, while Serco's level has increased this week and by some 50 per cent in the last month.
KBC puts the movement down to Serco's high local government exposure, which was hit particularly hard in the spending review, as well as the group's relatively low margins compared with Capita. Finance director Andrew Jenner's letter to top suppliers demanding their co-operation in paying a 2.5 per cent credit rebate was quickly quashed by Mr Maude. But this has raised further questions over Serco's ability to cut central government costs without cutting its own margin.
The group is not the first to pass on pressure to suppliers - Tesco doubled its creditor days in the recession - and Mr Jenner in fact only asked the largest 193 suppliers for a rebate, out of a possible 15,000.
Mr Maude stepped in to the supply chain process as he aims to have 25 per cent of public sector contracts run by small businesses. But these should be awarded based on merit and not the companies' ability to make the most of a hand-out. Moreover, Mr Maude's intrusion can only dilute private sector efficiency in the long run. The more constraints the government places on chief executive Chris Hyman's ability to cut costs, the less resourceful his business can become.
