Tuesday 21 May 2019

John Lynch: 'Why there's now little security in outsourcing as a business model'

But in mixed results, revenues fell 4pc last year

John Lynch

It doesn't seem a long time since outsourcing was all the rage. Managers could barely contain themselves in their desire to offload key business functions to a service provider and achieve a swift cut in labour costs. It was seen to be one of the key spin-offs of Thatcherism, but like many of the Iron Lady's other 'reforms', it eventually revealed a grubby underside.

Apart from the loss of sensitive data and important confidentiality, outsourcing frequently enhanced financial risks. These lessons are still being learned.

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While it is true that Britain notched up outsourcing successes, it has also had spectacular failures in areas like rail, water and the criminal justice system.

The bankruptcy of the outsourcer Carillion, which left half-completed hospitals, emphasised this. This week we will examine another outsourcer, the huge global outfit G4S, and how it is coping with change.

Surprisingly G4S is only 15 years old, being the result of a merger between the UK's security company Securicor and the Danish Group 4. Today G4S is the world's biggest publicly listed provider of security services.

Quoted on the London Stock Exchange, it is valued by the market at £3.25bn (€3.75bn), trades in more than 100 countries and has a huge staff level of 560,000 (3,500 in Ireland), with revenues of £7.5bn.

However, the group has been struggling to rebuild itself after a series of mishaps and profit warnings going back as far as the 2012 London Olympics when it failed to provide enough security guards.

Since then the company has been in and out of trouble which has not helped investor confidence. Stories range from overcharging the UK government for tagging former offenders (including some who were dead), the bullying of staff at a detention centre, to problems in the probation services. Last year the group suffered further humiliation when the UK government said it would take back the running of Birmingham prison from G4S after an inspector's report described it as a "war zone".

And it had to settle a £130m California law suit with its 13,000 employees who were denied food and rest breaks between 2001 and 2010.

The group still earns almost half of its revenues from its traditional business of providing security guards to premises and sports events.

The company's cash solution business, which involves the collection and transportation of money in armoured cars, is attracting some attention after the group stated it was considering offloading this business. Analysts are of the opinion it could expect to receive a figure north of £1.5bn. Interested parties are rumoured to include Brinks.

Last year's results were mixed. Group revenues fell 4pc, to £7.5bn. The settlement of its meal and rest breaks contributed to a 63pc fall in pre-tax profits. However investors were pleased that full-year dividends were maintained at 10p per share, even if net debt was higher.

The group shares have risen recently to 208p, up 20pc from its yearly low following the news that long-term Chicago-based investor Harris had increased its stake.

In addition, investors also noted that the Canadian security company GardaWorld was considering a bid.

I am reluctant to advise buying shares in the outsourcing sector. In fairness, outsourcers' poor performance is not entirely their fault. Some claim that governments have failed in their responsibility, question their single-minded focus on costs and unyielding faith in the private sector. Defenders of outsourcing argue that competition keeps costs down, introduces innovation and brings private sector discipline. This is not true.

Competition is limited, with almost a quarter of the public sector contracts in the UK awarded to sole bidders. Cost savings have not always been delivered and invariably come by paying staff less, and there are few signs of innovation.

For long-term investors, it may be best to give this sector and G4S a wide berth.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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