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Serco boss quits as firm seeks new start after scandals

By Christine Murray and Neil Maidment

LONDON (Reuters) - The chief executive of outsourcing firm Serco has quit as part of a major reorganisation aimed at rebuilding its reputation with its biggest customer, the British government, following a series of scandals.

The UK government, which accounts for about 25 percent of Serco's revenue, said in July it would not award the firm or rival G4S any new contracts pending a review of existing ones, after an audit discovered they had charged for tagging criminals who were dead, in prison or not being monitored.

The scandal has intensified the debate in Britain over the outsourcing of public services to profit-driven private firms - a key strategy to reduce government spending, but which has also led to a string of embarrassments, such as when G4S failed to supply enough security staff for the 2012 London Olympics.

On Thursday, G4S said its UK chief executive had resigned and been replaced by the group's chief operating officer.

Serco, with over 120,000 staff in more than 30 countries, said on Friday Chris Hyman had resigned as chief executive.

As part of a company-wide overhaul, Serco said it would strengthen its board by adding three new non-executive directors and would split its UK central government work into a separate unit, allowing it to devote more time to its top customer.

"We are taking all of the actions which we believe are appropriate in order to restore that confidence of government," Chairman Alastair Lyons told Reuters. "I have a high level of confidence that it's repairable."

Lyons added that Serco had already commissioned a search to find a new CEO, whom he said would come from outside the firm.

The news was taken well by investors, with Serco shares up 1 percent around 1520 GMT. It was also welcomed by the government which described it as a "positive move".

WIDER SCRUTINY

Serco shares had lost more than 10 percent in value, or 320 million pounds ($517 million), since the government first said it had concerns over the tagging contract.

In August, the company's problems increased when the British justice ministry asked police to investigate alleged fraudulent behavior by some Serco staff working on a prisoner escorting contract.

The scandals came to light as the government centralized more procurement and placed suppliers under increased scrutiny. Prior to 2010, firms like Serco had enjoyed double-digit percentage rises in revenue for two decades.

Four of the government's biggest suppliers - G4S, Serco as well as rivals Capita and Atos - have been called to appear before a committee of British lawmakers next month for questioning about the outsourcing sector.

Analysts at Jefferies said Serco's move to split its UK & Europe division would allow greater transparency around profits from its contracts - a key government priority.

Serco, which makes annual revenue of around 4.9 billion pounds, has continued to win deals in its other markets, such as a 335 million pound tie-up to run Dubai's metro system, though it has encountered some problems abroad.

It is due to appear in the U.S. House of Representatives to explain its part in the troubled rollout of the "Obamacare" healthcare laws, though it is not accused of any wrongdoing.

Ed Casey, who has led Serco's Americas division since 2005, will take over as acting CEO while the group looks for a full-time replacement.

"He has not been involved with the UK business up to now so whilst he understands all the issues from being part of the executive committee, he is able to actually come to this with a completely fresh relationship with government," Lyons said.

Serco is now awaiting the results of three UK reviews: one concerning details of its tagging contract, a Cabinet Office investigation into all its biggest government deals, and an assessment led by government non-executive directors into whether it has taken appropriate steps to address shortcomings.

All three are expected to report before the end of the year.

On top of those, the UK government has also asked the Serious Fraud Office to consider carrying out an investigation into G4S and then later Serco.

Serco has agreed to repay all past profits on the prisoner escorting contract and forgo any future profits and will repay any amount due on the electronic tagging contract.

(Writing by Kate Holton; Editing by Mark Potter)

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