What’s Going Wrong at G4S?

What’s Going Wrong at G4S?

The world’s largest security services provider has suffered another reputation hit today with a £23m refund to the government. We look back at a defining 16 month period for the company.

 

 

G4S appointed a new chief executive in June 2013.

G4S appointed a new chief executive in June 2013.

June 2012 was one of the wettest Junes on record in the UK. Despite the extra bank holiday that was granted to the nation for the Queen’s Diamond Jubilee celebrations and the Olympics in London just around the corner it’s fair to say spirits were low.

A public weary of rain and austerity was looking at the upcoming festival of sport with a high degree of scepticism. Would the transport be able to cope, would there be a terror alert, would Team GB prove a massive disappointment?

So it was that a sceptical public were almost delighted at the news that the security services company G4S were on course for a spectacular failure to deliver enough security guards for the event. Tired of the way in which big banks had brought the world to the brink of financial disaster, a narrative of this vast multinational corporation being greedy and over-promising its ability to deliver the giant contract was too good for the media and public to ignore — and they didn’t.

Suddenly, Nick Buckles was one of the most famous business leaders in the country, held in such esteem as Fred “the Shred” Goodwin and Bob Diamond.

But in reality, the Olympic contract and the furor surrounding it was a minor blip for G4S, which is the third largest private-sector employer in the world, after only Walmart (which owns Asda in the UK), and Hon Hai, better known as Foxconn, the manufacturers of iPads and other devices. G4S employs more than 620,000 people in 115 countries and last year made revenues of £7.3 billion, up 8.1 per cent on the previous year, in spite of the Olympics.

That contract lost G4S £88m after they refunded £70m of the management fees, as well as additional costs including £7m of “marketing costs” — presumably in an attempt to repair the reputation damage done. The refund was in an attempt to engender good will with the UK government, which now-former CEO Buckles described as “an important customer.”

G4S then is possibly one of the most important companies in the security industry, and when it suffers reputation damage, so does the industry. We have to ask if this firm is too large, and if it can keep a handle on all parts of its business.

Further scandals

Since the summer of 2012 Buckles has stepped aside. The Olympic security guarding contract was always going to be challenging, and many in the security industry always believed that one company would never have been capable of delivering it by itself — rivals were certainly relieved that the embarrassment had not been theirs.Buckles had been instrumental in the merger of Securicor and Group 4 Falck that created the company in 2004. After his appointment as chief executive of G4S in 2005 he had seen revenue increase by almost 77 per cent, from £4.13 billion to £7.3 billion. Perhaps the most damaging blow to a man who was otherwise credited with such huge successes at G4S was the failed £5.2 billion bid for Danish facilities business ISS, and a subsequent profit warning that saw him leave abruptly in May 2013.

This paved the way for the arrival of Ashley Almanza who has begun trying to rebuild investor confidence in earnest. However, he has had a difficult start. In July, a jury returned a verdict of unlawful killing after three G4S guards restrained a man on board a deportation flight from London Heathrow to Angola.

In the same month, the Serious Fraud Office launched an enquiry after it was suggested that G4S and rival Serco had been charging for electronic prisoner tags on people who either were dead, were in jail, or had never been tagged. G4S Chairman John Connolly said that it was he that prompted the SFO to launch their investigation, but nevertheless the firm today revealed it would be issuing the Ministry of Justice with credit notes worth £23.3m.

Almanza is under pressure to show that the huge firm can find new revenue streams. A partnership with the Lincolnshire Police that started in 2012 has been very successful. G4S collects individuals who have been arrested by a police officer and transports them to a privately-operated “police” station where they are processed and identified by the firm’s back-office staff. This creates significant savings in the need for Police IT and infrastructure, but is also worth £200m over ten years to G4S.

But not every private-public partnership has been successful. The G4S-operated Oakwood Prison, in Staffordshire, received the Ministry of Justice’s lowest rating in a July 2013 report, and inmates told inspectors on “more than one occasion” that “you can get drugs here but not soap” during an unannounced inspection in June. The subsequent report stated that one in seven prisoners claimed to have developed a drug problem while at the prison — all this in a facility that only opened in April 2012.

 

 

G4S's share price since July 2012. The immediate downturn is when the Olympics contract story broke, followed by the more dramatic fall in May 2013, when the company issued a profits warning.

G4S’s share price since July 2012. The immediate downturn is when the Olympics contract story broke, followed by the more dramatic fall in May 2013, when the company issued a profits warning.

Too big?

Almanza is taking steps to turn the company around including the recent announcement of restructuring plans that will see 400 jobs lost in the UK and the restructure of 35 business units. Almanza said that his review of the group’s strategy had confirmed that G4S had “outstanding” worldwide market positions. He continued:

G4S has strong fundamentals and these will be improved by changes to the way we manage the business. We will sharpen our strategic focus and strengthen our investment in customer service, organic growth, and technology, and innovation.

A group the size of G4S has, fundamentally, to be concerned about its share price. The Olympic contract story saw G4S’s share price fall from 290.3p to 241.80p in just two weeks. The profits warning that hailed the departure of Buckles in May saw it crash by 21 per cent from 312.2p to 247.7p in the same period. In fact, the G4S share price in July 2013 was the lowest it had been since May 2009.

Almanza also questioned whether the previous administration had lost its way, saying that while the company’s staff understood and were committed to the company’s values, “I don’t think as a management team we always applied those values in a concentrated way”.

Can Almanza turn the firm round? Analysts seem to think so, with one calling 2013 a “year of consolidation” and another saying that the shares still represent good value as the new management team grows in confidence. Whatever happens, it’s fair to say that right now G4S is more concerned with securing its business, before it can secure your world.

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