Serco Group plc

Dolphin House, Windmill Road
Sunbury-on-Thames, Middlesex TW18 7HT
United Kingdom
Telephone: +44 (0) 1932 755900
Fax: +44(0)1932 755 854
Web site: http://www.serco.com

Public Company
Incorporated: 1929 as RCA Ltd.
Employees: 32,500
Sales: $1.15 billion (2000)
Stock Exchanges: London
Ticker Symbol: SRP
NAIC: 488111 Air Traffic Control; 488119 Other Airport Operations; 488190 Other Support Activities for Air Transportation; 488210 Support Activities for Rail Transportation; 488310 Port and Harbor Operations; 488330 Navigational Services to Shipping; 488390 Other Support Activities for Water Transportation; 488490 Other Support Activities for Road Transportation; 488991 Packing and Crating; 525910 Open-End Investment Funds; 541330 Engineering Services; 541611 Administrative Management and General Management Consulting; 541614 Process, Physical Distribution, and Logistics Consulting Services; 561110 Office Administrative Services; 561210 Facilities Support Services; 561320 Temporary Help Services; 561330 Employee Leasing Services

Serco Group plc provides facilities management and other engineering services for a variety of governmental and industrial clients in Great Britain and 34 other countries around the world. Unlike traditional support services companies, which typically limit themselves to areas such as catering or cleaning, Serco undertakes the management of complex tasks. Its interests range from testing nuclear weapons to managing parking meters to operating tourist attractions. About 60 percent of turnover comes from within the United Kingdom. Serco has grown as government agencies have privatized more and more services. Despite numerous diversified acquisitions since the 1990s, facilities management accounts for nearly 90 percent of business.

Origins

Serco’s history begins in 1929, when the Radio Corporation of America (RCA) established a U.K. subsidiary, RCA Ltd., to service the growing film industry in Britain. In the late 1950s, RCA supplied radomes (a dome structure for protecting radar antennas) for the Ballistic Missile Early Warning System (BMEWS) at RAF Flyingdale in Yorkshire. RCA Ltd. supplied most of the workers needed during its construction and won a contract to maintain the facility. The company would maintain this relationship into the new millennium.

In the 1980s, the U.K. Ministry of Defence used this program as a model for its privatization of operation and maintenance functions at defense facilities. The cost-cutting of Prime Minister Margaret Thatcher’s administration in the 1980s provided many other opportunities for RCA Ltd. By the early 1980s, the company also was managing traffic light systems. The European Space Agency (ESA), formed in 1975, provided another area of expansion. RCA Ltd. contracted to maintain ESA’s computer networks and satellites.

1987 Management Buyout

General Electric (GE) acquired RCA in 1986. RCA Ltd.’s managers bought their unit from GE for $24 million in 1987. The newly independent company was named Serco Limited. Serco, led by Chairman George Gray, who had been with the company since 1964, listed on the London Stock Exchange as Serco Group plc in 1988.

Revenues during Serco’s first full year as a public company were about £47 million, producing profits of £3.6 million. Although Serco provided support services to private sector clients such as British Aerospace and Marks and Spencer, the U.K. Ministry of Defence accounted for nearly half of the group’s turnover.

In 1989, Serco began branching out to Asia and the Pacific Rim and launched an expansion into civil government and commercial markets. Several small acquisitions, together worth £1.4 million, in 1990 brought Serco into the management of central government facilities in Australia and New Zealand and bolstered the company’s business with local governments inside the United Kingdom.

The Times observed that Serco was unique in not limiting itself to one or two discrete areas of support, such as catering or cleaning. The company began running hospitals for Britain’s National Health Service (NHS). Total revenues approached $200 million by 1991. In May of that year, Serco entered a new market by acquiring Community Leisure Management. A couple of months later, the company and European Handling Management formed the Serair joint venture to provide an array of support services for airlines.

Serco entered the air traffic control business by acquiring most of International Aeradio Limited (IAL) (apart from loss-making health operations) from British Telecommunications for £12.25 million ($18 million) in April 1992. IAL, which provided management services for airports, including air traffic control, had 900 employees in Germany, Sweden, Russia, and the Middle East. The buy brought Serco into the civil airport services market.

Mid-1990s Expansion

Serco continued to acquire companies, enter new markets, and form new structures in the mid-1990s. In 1993, the same year it entered the North American market, Serco bought Building Management Scotland; it soon obtained contracts to operate parts of the United Kingdom’s traffic signal system. The Serco Institute was created in 1994. The launch of Serco Investments followed the next year.

Pretax profits grew 21 percent in 1995 to £15.2 million as turnover rose 24 percent to £323.3 million. During the year, Serco announced new contracts worth £600 million, including a £180 million deal to manage ship movements and provide specialist support at three Ministry of Defence ports. Similar profit and turnover increases were reported in 1996, spurred by increased outsourcing demand in Australia.

In the mid-1990s, Serco bid on several projects, particularly defense-related ones, as part of various consortiums. In October 1996, a group including Serco, Cobham plc, and Bristow Helicopter won a £400 million, 15-year contract to establish and operate a training school for the British military’s helicopter pilots. It was the largest contract the Ministry of Defence had yet awarded under the government’s private finance initiative (PFI). In the spring of 1997, a joint venture with Docklands Light Railway took over the operation and maintenance of the ten-year-old automated railway. Serco also had, as did British Telecommunications, a contract to handle railway telephone inquiries.

Serco moved into the U.S. state and local public services market via the acquisition of JL Associates in 1998. In Europe, it bought out the remaining shares of Serco Newsec AB, a Swedish joint venture. It also acquired Tecnodata, a technical services company active in continental Europe, in a deal worth up to £9.3 million.

The company expected the Asian financial crisis to result in increased demand for outsourced services, particularly in Japan, which was seen as ripe for economic reform. The domestic support services industry had grown considerably in the 1990s, reported Britain’s Financial Times,and expanded its range of offerings. Some estimates valued the U.K. market at £10 billion a year.

New Capital in 1999

As Serco’s chief executive, Richard White, searched for new business, he pointed out to skeptical potential clients that the company’s first job had been to provide the country with a four-minute warning in case of nuclear attack. Because of its strong reputation, Serco could choose the most lucrative opportunities, which were usually the most complex as well. White replaced Serco Chairman George Gray upon his retirement in 1999, and was himself succeeded by former CFO Kevin Beeston.

In early 1999, Nomura International, the European division of a Japanese investment bank, established a £1 billion ($1.7 billion) fund along with Serco for the purpose of bidding on and financing large public infrastructure projects. Two major projects coming up for bidding were those for Britain’s National Air Traffic Control System and portions of the London Underground.

Serco bought the support services subsidiary of DASA, DaimlerChrysler’s aerospace division, in August 1999. It paid DM 53 million (£18 million) for Elekluft, which specialized in military and aerospace customers. Its origins were similar to Serco’s—it was formed in 1961 to install and support German air defense radar systems. Elekluft billed about DM 150 million a year and had added payroll, technical documentation, and other services to its repertoire.

After earnings and turnover growth slipped slightly in 1998, Serco was again approaching its by then customary 20 percent returns in 1999. Expansion was coming in the United Kingdom and Australia. “It is a far bigger market than we can possibly address,” said CEO Kevin Beeston. The company continued to renew 90 percent of its contracts. According to one analyst quoted by the Financial Times,Serco’s main constraint was finding enough qualified managers. In December 1999, a consortium of Serco, BNFL, and Lockheed Martin won a ten-year £2.2 billion contract to manage two of Britain’s Atomic Weapons Establishment facilities.

Company Perspectives:

Culture and Values: While our products and processes make us stand out from our competitors, what makes us really different is our culture. What we believe is central to how we view the business and, consequently, how we run the company. At the heart of our culture is the belief that success is an outcome, not a goal Success comes from focusing on customers, staff and investors and treating them all fairly. Serco is what it is because of what we believe in and how we apply those beliefs.

Serco continued to acquire companies. It bought the consulting firm Quality Assurance Associates in 2000 and the technical consulting division of AEA Technology in 2001. The latter deal, worth £76.8 million, was Serco’s largest yet. AEA Technology focused on science and safety-based services.

Serco aimed to expand its business in the United States. The company already had air traffic control contracts with the Federal Aviation Administration. In 2001 it teamed with Lockheed Martin in bidding to build an astro-biology lab for NASA in California. Serco failed to win a 46 percent share of Britain’s National Air Traffic Services (NATS), though it remained busy with contract renewals and new business such as its first ever contract to operate an immigration detention center.

Principal Subsidiaries

Aeradio Technical Services WLL (Bahrain; 49%); Baker Serco Wright Patterson (U.S.A.; 49%); Defence Management (Holdings) Limited (50%); Serco Docklands Limited; Great Southern Railways Pty Limited (Australia); International Aeradio (Emirates) LLC (United Arab Emirates; 49%); JBS Singapore Pte Limited (20%); Premier Prison Services Limited (50%); Serco Australia Pty Limited; Serco Belgium S.A.; Serco Facilities Management BV (Netherlands); Serco Facilities Management, Inc. (Canada); Serco France Sari; Serco Gardner Merchant NZ (New Zealand; 50%); Serco Guardian (FM) Limited (Hong Kong; 50%); Serco-IAL Limited; Serco Management Services, Inc. (U.S.A.); Serco Research & Development Limited; Serco Systems Limited.

Principal Competitors

Captial Group plc; ISS A/S; Rentokil Initial plc; WS Atkins plc; Hunting plc.

Key Dates:

1929:

RCA Ltd. is formed to service the British movie industry.

1958:

Ballistic Missile Early Warning System (BMEWS) work begins.

1987:

RCA Ltd. is bought out by managers after GE acquires its parent company.

1988:

Renamed Serco, the company lists on the London Stock Exchange.

1997:

Serco joint venture begins running Docklands Light Railway.

1999:

Nomura International and Serco set up a £1 billion infrastructure fund.

Further Reading

Ahmed, Pervaiz K., Glenn Hardaker, and Martin Carpenter, “Integrated Flexibility—Key to Competition in a Turbulent Enviroment,” Long Range Planning (London), August 1996, pp. 562 + .

Barker, Thorold, “Serco Feels the Benefits from Complex Tasks; Support Services Group Highlights Accelerating Growth in UK Outsourcing Market,” Financial Times (London), Companies & Finance, March 3, 2000, p. 28.

Batchelor, Charles, “Keeping Driverless Trains in Line: Operator Faces Stiff Penalties If Docklands Railway Fails to Provide Service,” Financial Times (London), News UK Sec, March 27, 1997, p. 10.

——, “Penalties May Total Millions for Rail Operators,” Financial Times (London), Back Page—First Sec, July 10, 1997, p. 30.

——, “Regulator Warns Rail Operators to Upgrade Systems,” Financial Times (London), News UK Sec, June 19, 1997, p. 8.

Carruthers, Quentin, “Deals Lie Behind the Frontline,” Financial Times (London), Survey—Private Finance Initiative, October 18, 1996, p. 7.

Crooks, Ed, and Juliette Jowit, “Engineering Groups May Bid to Run Railway,” Financial Times (London), National News, November 1, 2001, p. 3.

Donaldson, Liza, “Interim Management: Troubleshooters for Hire in a Buyer’s Market,” Industrial Relations Review and Report (London), May 1993.

Dyer, Geoff, “Serco Lands £180 Million MoD Service Contract,” Financial Times (London), UK Co. News, March 1, 1996, p. 20.

Felsted, Andrea, “Serco Hopes That the World Will Prove to Be an Outsourcer’s Oyster,” Financial Times (London), Companies & Finance UK, January 16, 2001, p. 30.

——, “Serco Soars Despite Air Traffic Loss,” Financial Times (London), Companies & Finance UK, September 5, 2001, p. 21.

Foster, Angus, “Serco Pays £12 Million on Move into Civil Aviation Services,” Financial Times (London), UK Co. News, April 11, 1992, p. 18.

Fuller, Jane, “Public Sector Work Aids Serco’s 23 Percent Gain,” Financial Times (London), UK Co. News, August 30, 1991, p. 17.

”Independent Hospitals Mean Welcome Tonic for Serco’s Prospects,” Times, Bus. Sec, December 17, 1990.

Martinson, Jane, “Australian Demand Helps Serco to £18 million,” Financial Times (London), Companies & Finance, March 5, 1997, p. 31.

Nicoli, Alexander, “MoD May Close Nuclear Warheads Assembly Plant; Defence BNFL Consortium Wins £2 Billion Contract to Manage Facilities,” Financial Times (London), National News, December 2, 1999, p. 2.

Ostrovsky, Arkady, “Nomura Sets Up £1 Billion Infrastructure Fund; Investment Venture with Serco to Bid for Services Such As London Underground and Air Traffic Control,” Financial Times (London), Companies & Finance, February 1, 1999, p. 20.

Pike, Alan, ’ A Stronger Emphasis Now on Partnership: Companies Are Depending More Than Ever on Managed Service Suppliers,” Financial Times (London), Survey—Business Britain: Managed Services and Outsourcing, November 18, 1999, p. 1.

“Serco/Nomura,” Financial Times (London), Lex Column, February 2, 1999, p. 24.

Tieman, Ross, “Consortium in 15-Year Deal to Train Forces’ Helicopter Pilots,” Financial Times (London), Back Page—First Sec, October 2, 1996, p. 18.

——, “More MoD Projects May Be Awarded to Private Sector,” Financial Times (London), Front Page—First Sec, October 14, 1996, p. 22.

Voyle, Susanna, “Board Shuffle at Serco,” Financial Times (London), People Sec, March 4, 1999, p. 12.

——, “Corporate Odd-Job Men Get Some Big Ideas of Their Own: Outsourcing Started with Cleaning and Catering But the Fashion Has Spread to White Collar Sectors,” Financial Times (London), National News, September 18, 1998, p. 11.

——, “Outsourcing Expansion Buoys Serco,” Financial Times (London), Companies & Finance, March 4, 1999, p. 30.

——, “Serco Hails Growth in Main Markets,” Financial Times (London), Companies & Finance, September 3, 1998, p. 28.

——, “Serco Makes German Support Services Purchase,” Financial Times (London), Companies & Finance, August 11, 1999, p. 21.

——, “Serco Sees Opportunity in Asia,” Financial Times (London), Companies & Finance, March 5, 1998, p. 32.

——, “TBI Acquires Leading Airports Operator,” Financial Times (London), Companies & Finance, May 21, 1999, p. 24.

—Frederick C. Ingram