The Bizzle

"Saving your ass since 1999"

The great supplier shakedown

For the first half of the week my Twitter feed was mostly full of Stephen Fry and the government’s plans to extend the qualifying period for unfair dismissal, so I didn’t catch on at first to the Serco story .

It seems that Serco wrote to its top 200 suppliers requesting a 2.5% rebate against the current year’s spend, making not very subtle hints about the effect of not doing so on contract renewal and so on. This didn’t go down well with the Government, who believed that Serco had promised not to pass on any price cuts in public sector contracts to its suppliers. (There is some good comment on this story here and here).

Well, this just looks like a shakedown: give us some cash, or we’ll take our contract back at the first opportunity. But it’s not illegal, and it’s not even unethical (at least by today’s standard of business). In fact, it’s obvious from the story that the Government is doing it as well. The only thing that makes Serco stand out is their lack of sublety.

So what I’m interested in is what this kind of thing says about a company’s (or a Government department’s) contracts with its suppliers. Why would a business like Serco need to risk the PR backlash that they’ve copped from this story?

It should be possible to build commercial flexibility into a contract, using any combination of benchmarking, “most favoured nation” clauses, gain share, or just simple fixed or reducing prices. These all help to protect you from the risk that a price that looks good on day one becomes uncommercial over the course of the contract.

Now, it wouldn’t surprise me to find these clauses absent from any given contract, given that a lot of lawyers won’t engage with “commercial” issues and a lot of procurement teams focus purely on the initial price. 

But it equally wouldn’t surprise me if they were in the contracts, but were ignored in favour of the “show me the money” approach. My guess is that the procurement team were given a price challenge, and went with what they knew – a straight up demand for money with menaces.

And that says something about the limits of lawyering. It doesn’t matter how much time and effort I spend on negotiating all this protection and flexibility – most of it won’t be used, because when finance directors and procurement managers want savings they just ask for the cash. Anything else takes too much time.

By the way, my first instinct when I read this story was to go round to our procurement manager and check that we weren’t doing the same thing. But on second thoughts, I don’t think that I want to know the answer…

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One response to “The great supplier shakedown

  1. Julian Summerhayes November 4, 2010 at 9:47 pm

    SERCO should be ashamed of itself but, in the final analysis, apart from Government intervention, I don’t suspect that it will matter one iota.

    In my experience, lawyers are not very good at negotiating for their own work – their clients is a different story – and tend to fall at the first hurdle when it comes to negotiating on price. They might moan and push back a bit but if their Premier client wants a x % discount then they nearly always get their way. Lawyers and other professional service providers need to get much more comfortable with knowing the sort of work they want and trying to make adequate provision so that if they do have a difficult and usually foreseeable conversation with the client that wants a knock down price they can do so from a position of relative strength. I doubt whether all the clauses in the world would save the day in the current climate. 95% is after all better than 0%.

    Julian

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