Serco forced to backtrack on attempt to squeeze suppliers

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It had written to more than 190 of its biggest suppliers seeking a 2.5% "cash rebate" to meet the Government's austerity drive. This angered ministers, who expected Serco to make savings from lower margins rather than by squeezing suppliers.

Francis Maude, the minister directly in charge of the efficiency drive, demanded an explanation.

Suppliers described as the move as "brutal" and "absolutely appaling".

Serco runs prisons, ports and other public-sector schemes on behalf of the Government and local councils and has been described as the most important company Londoners have never heard of. It runs the Docklands Light Railway, the Woolwich Ferry and the cycle hire scheme among other projects.

In a statement today Serco said: "As a company that values our relationships with all our supply chain partners, large and small, we deeply regret this action and apologise unreservedly to them for the concern that this has caused. We are now retracting the letter."

Serco shares tumbled on the news, with City analysts noting that it is unwise to antagonise your biggest customer — in this case the Government. The stock lost 48½p to 565½p, down 8%.

The letter from Serco finance director Andrew Jenner said: "I am asking you to offer us a rebate of 2.5% (exclusive of VAT) on Serco's full-year spend with you for the 2010 calendar year in the form of a credit note.

"Like the Government, we are looking to determine who our real partners are that we can rely upon.

"Your response will no doubt indicate your commitment to our partnership but will also be something I will seriously consider in our working relationship as Serco continues to grow."