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UPDATE 1-Serco agrees deal to keep government contracts

LONDON, Nov 12 (Reuters) - Outsourcer Serco has struck a deal with the UK government to cut the cost of its contracts after an earlier attempt to make its smaller suppliers shoulder the burden backfired. The company had asked 193 suppliers to make a 2.5 percent cash rebate on work for this year, or risk losing future contracts, according to a report in the Sunday Telegraph on Oct. 31. The demand, which Serco later "deeply regretted", incurred the wrath of the government, which said cost savings agreed during contract negotiations should come from margins and process redesigns and not from squeezing smaller suppliers. Serco said on Friday the savings would be made through scope changes and cost efficiencies and were not material to the group's financial expectations. Chief Executive Christopher Hyman said: "I am very pleased that we have signed our MoU with the UK Government, and we look forward to continuing to support our customer in the delivery of essential public services." A number of major suppliers including Logica, Cap Gemini, BT and Cable & Wireless Worldwide have agreed to cost cuts in order to retain government contracts. Shares in Serco, which has contracts with business advice service Business Link and runs London's new cycle hire scheme, closed 0.7 percent higher. (Reporting by Paul Sandle; Editing by Will Waterman) Keywords: SERCO/ (paul.sandle@thomsonreuters.com; +44 20 7542-6843; Reuters Messaging: paul.sandle.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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