Serco thunders down the tracks

Traffic lights, rail services, atomic weapons, the time of day. This secretive company manages them all

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Serco has a reputation for being a tad secretive. This is perhaps not surprising, as it manages the Atomic Weapons Establishment in Berkshire, where nuclear weapons are made, and runs the ballistic missile early warning system.

There are parts of AWE that even the head of the company, Kevin Beeston, can't go into. Other secrets, too, are kept from him, such as where the company stores evidence on behalf of the National Crime Squad. "I don't need to know or want to know," he says.

While many people haven't heard of Serco, almost everyone in this country will have come across its services. It is Serco that runs the speed cameras on the M25, and maintains the traffic signals on a third of motorways in the UK. Half of London's traffic lights are run by Serco, as are all the signals in Dublin. Manchester's tram service, Metrolink, and London's Docklands Light Railway (DLR) are both Serco-operated. When you ring National Rail Enquiries, you will speak to a Serco employee. The company has also built hospitals and prisons.

In fact, Serco is so ubiquitous, it even sets the time. It manages the National Physical Laboratory, which owns the atomic clock that gives us Greenwich Mean Time.

You'd be forgiven for thinking Serco was a government ministry. It has roughly 500 service contracts in total, and £1bn of last year's £1.1bn sales came from government or transport services.

Beeston, who is chief executive and soon to be chairman, does not resemble a grey-suited civil servant or a slick and slimy government minister. In fact, he looks more like an average bloke down the pub, an affable, down-to-earth, friendly character. You won't be able to judge this for yourself, however, as Serco's board don't want pictures of themselves published. "We don't want things personalised. We run the whole business as a team," says Beeston. He would like all members of staff to be involved in strategic decisions such as buying a company or pricing a contract bid. "It doesn't matter if it's a secretary or a security guard, they can contribute somehow to the decision."

In fact, the report containing the full-year results describes staff as the "Serco family". All the offices at Serco's headquarters are open-plan; even the board directors don't have individual rooms.

The company also likes to promote from within. Still only 39, Beeston has been chief executive for three years and a Serco employee for 17. He has followed in the footsteps of Richard White, who will retire as chairman in May and was chief executive from flotation in 1988 until Beeston took the job.

"It's a bit of a risk to go out and hire someone you don't know, into what is a complicated business," Beeston says. "We'd much rather bring people in and get to know them."

As well as having a novel corporate culture, Serco also has an intriguing history. It started out in 1929 as the UK maintenance division of RCA, at the time a cinema and radio equipment company. In the late Fifties it got its first taste of top-secret government contracts. The Ministry of Defence needed a radio equipment specialist to design, build and run the four-minute warning system for nuclear attacks. RCA got the job and has been maintaining it since.

But it was in the early Eighties that the government-related business really started taking off. Beeston takes up the story: "Mrs Thatcher had come in power in 1979 and began reducing public sector costs on a tax-reduction agenda and carrying out privatisation. One of biggest areas that was first turned to contractualisation was the Ministry of Defence."

Happily for Serco, Thatcher's successors, John Major and Tony Blair, both exhibited a fondness for getting the private sector involved in the public sector. The company went on to work for other government departments.

One of the biggest challenges it faced was to change its culture from that of the public sector to the private. Of the 25,000 people Serco employs in the UK, around 15,000 were once employees of the state. "We inherited some brilliant people," says Beeston, who is keen to avoid criticising the public sector. "We just apply a management template. We do things like giving people entrepreneurial ability to make decisions, to actually go out and grow the business."

Since Serco floated in 1988, its growth rate has been almost 20 per cent a year, most of it funded by profits rather than by asking shareholders for extra cash. Such has been its success that the stock market now values the company at £1.3bn, a high figure when compared with last year's profit of £46.4m. When the company made a rare fund-raising last week for £120m, the demand to invest was three times what it had room for.

But this enthusiasm is in marked contrast to warnings coming out of the City that the Railtrack fiasco will reduce investment in public private partnerships, or PFI, in which Serco specialises.

"The banking community is still very keen on PFI," Beeston says. He also denies that banks will now require more money to cover the perceived increase in risk. "I think, if anything, margins are coming down on PFI in banking terms."

Serco has shown demonstrable improvements in the public services it has taken on, says Beeston, pointing out that last year the DLR was voted National Rail Operator of the Year by Rail magazine.

The company's association with the National Physical Laboratory has also been a success story, he says. "It's a classic case of an organisation that was run as a government department, and the budget was reduced in real terms year on year. That meant recruitment freezes, and the average age of scientists was increasing. Since we've taken over, we've developed third-party income streams, selling the facilities and expertise to other commercial customers, and the scientific staff have increased by about 100."

Serco runs such a diverse range of businesses that some analysts are concerned it's doing too much. "The question is whether they are spreading themselves too thin," says Adrian Cattley, an analyst at Dresdner Kleinwort Wasserstein.

Beeston admits there's too much going on. "We have such a big pipeline of opportunities that what we're trying to do is grow the business reasonably steadily and judiciously without biting off more than we can chew."

There are not many companies who can complain about having too much business. But as the Government has a yearly budget of roughly £400bn, it's likely that Serco's problem will only get worse.