Corporate Reputation in the Outsourced State

Since the turn of the century a handful of corporations have grown in part on the back of contracts outsourced from the public sector. The types of services being outsourced have become increasingly complex, such that quality is difficult to measure and contract for. In this context reputation incentives become important in regulating supplier behaviour (Tadelis, 2012). If corporations are reliant on future business from the public sector then they have an incentive to ensure that quality is maintained. This mechanism has been strengthened by recent reforms of European procurement law to allow the past performance of bidding companies to be considered in the tendering process. However, the potency of this mechanism does rely on buyers having alternative options. This paper focuses on three companies -Serco, G4S and Capita - and the way that their position in markets for public services in the UK interacted with reputation concerns during the Conservative-Liberal Democrat government (2010-15). The three companies vary in their degree of exposure to the public sector and the extent of their diversification across public policy. The paper presents a narrative account of outsourcing during the coalition years and the fortunes of the three companies during the period and an empirical analysis of corporate reputation. Over the period of the coalition two of the companies (Serco and G4S) were investigated by the Serious Fraud Office, temporarily ‘excluded’ from bidding for government contracts and lost their chairs and some senior executives as a result of problems in their government contracts. All three companies had their performance scrutinised by parliamentary committees. The empirical analysis takes two tacks. First, I provide an overview of trends in media and political attention to the three companies. Data comes from coding of print media coverage from 2008 to May 2015, indicators of salience of and sentiment toward the corporations are derived and are analysed using models for continuous and count time-series data. The paper also explores the pattern of public interventions from political actors such as select committees, questions in the legislature and public statements from ministers and officials. Second, specific negative events are analysed. The period 2010 -2015 yielded a series of damaging episodes that revealed information about company performance in the delivery of their public contracts. These include the death of a prisoner during deportation, failure to fulfil contracts or meet performance criteria relating to GP services, Olympic games security, court translation, military recruitment and in addition a scandal related to the overcharging of government on several contracts. The paper analyses share price movements in response to these events to try to assess the extent of reputational damage. I conclude by discussing how the structure of the industry relates to the way that reputation mechanisms do and do not work to discipline corporate behaviour in the delivery of public services. As more of the delivery of public services is moved to the private sector, the effectiveness of reputation mechanisms in this context will become more crucial.