Which supplier is making 30% margins from government buyers?

The recent National Audit Office report into major suppliers to government exposed that firms such as Capita, Atos, Serco and G4S were making huge profit margins of around, er, 5% from their government business. (Margins varied a fair bit, not surprisingly, but overall the average seemed to be something around this figure).

This  was a bit of a shock to those who were expecting headlines of “rip-off”  and “profiteering” by the big suppliers.  The report really didn’t suggest that this was the case, and there wasn’t even any evidence that the suppliers were making higher margin from public sector business than from private sector.

However, we can expose today a major supplier to the public sector that last year made a profit margin of very nearly 30%!  Yes, almost six times that of Serco, for instance. Or around three times the average margin made by major FTSE or Dow quoted firms.

This organisation provides a range of services across different categories, and are developing what is clearly more and more of a monopoly position. Indeed, that monopoly position has been strengthened by political dictat, amazingly, literally forcing government organisations to buy from the organisation, despite these super-profit type margins.

This organisation is known as the ‘Government Procurement Service’. A shadowy business, and indeed we understand they are currently consideringa change of name – perhaps to conceal their past excesses or throw the media off the scent of their profit levels?

We have obtained a document, no longer publicly available, that gives the following shocking data.

                                                                                                2012/13 (£M)                     %

Net Income  (£M)                                                            37.93

Total operating costs                                                      26.76                                     70.55

Surplus before restructuring, ROCE and PIF         11.17                                     29.45

Source: GPS Performance Review, 2012/13

 You may note the element of financial engineering (“restructuring, ROCE and PIF”), clearly designed to conceal the true profitability. But that word “surplus” cannot lie.

We call on the authorities to take firm action now to require this organisation to reduce their margin significantly. Firm negotiations, along the lines of those held with the top suppliers to government, releasing some £800M savings according to Cabinet Office, are needed.  We also suggest an open-book contract is clearly essential, and perhaps a Crown Commercial Representative is needed to go and bang a few heads together.

But one way or another, a better deal for the government departments who are locked into contracts with this organisation must be the goal.

Voices (10)

  1. Little acorn:

    My question would be – what is the ‘real’ margin on the Serco, G4S etc. contracts? What with divisions withing divisions, each charging it’s mark-up so that it’s amazing the accounts aren’t showing a loss! In GPS’s defence (I’ll now need tomgomsit in a darken room) it doesn’t have multi-layers to use to fudge the numbers.

  2. Feetontheground:

    Yes indeed, a government buyer known to me confirms that suppliers under GPS Frameworks add a surcharge to their invoices of 0.5 – 1% (figure was negotiable at one stage for large value contracts). This is picked up by Dept buying the goods or service.
    The levy was to cover the cost of GPS and the same secret source tells me that a few years back, the surplus was redistributed to their customers. Now though, the surplus is supposed to cover training, IT enablement, collection of MI etc across Government and presumably the creation and staffing of the Crown Commercial Service (to which GPS have just been rebranded), Crown Commercial Representatives etc etc.
    Presumably it also covers the cost of the signwriters in Liverpool who must have a standing order to rebrand the Buying Solutions, no Government Procurement Service, no Crown Commercial Service offices there…….

    1. InTheAbsenceOfAHorse:

      It’s not 0.5% to 1%. It’s an average of 0.33%. That’s in the document Peter referred to.

  3. Ian Taylor:

    How about organising a group of ex CIPS Presidents to act as a Collective Crown Commercial Representative to do this. I’m sure Amyas Morse would endorce that on behalf of the NAO!

    1. The Guitar Man:

      Count me in Ian!

  4. Market Dojo:

    We never really did find out how the GPS is paid for its services by other governmental authorities, but we do know there is an element of invoicing suppliers who pick up business via GPS tenders/frameworks. I wonder which of the GPS revenue streams generated the biggest profits? As a supplier to the GPS, a negotiation would be great, and if so can we have some of our money back?!

    1. InTheAbsenceOfAHorse:

      GPS is funded in two ways. A supplier levy of around 0.3% of invoice value on spend through frameworks and fees for running procurements.

      1. Market Dojo:

        Ah, fantastic, thanks for clarifying. I take it the authorities that contract the GPS to run these procurements pay the fees?

        Still interested to note what the split in revenues is from supplier levys vs. contracted services.

          1. Market Dojo:

            Excellent, many thanks for sharing the link. That’s very interesting to see. 1% of the entire contract value…wow. Given the size of some of these government contracts, they can generate some significant revenues, and I would dare say that the resources required to fulfill the services are not linearly proportional to the revenue potential. so a 3 month piece of work to tender a £XXXm contract = massive profits.

Discuss this:

Your email address will not be published. Required fields are marked *