Serco, one of government's biggest contractor firms, has admitted that two of its largest suppliers gave in to aggressive pressure for rebates within days of receiving its demand for the return of past payments.

Media coverage shamed the outsourcing firm into apologising over the rebate demands. Serco said it had already abandoned the aggressive strategy but not before two unnamed suppliers had wired through some of the requested 2.5% of Serco's annual spend with their businesses, it emerged today.

Serco, which is trying to draw a line under the affair, said the payments, which it described as "relatively small", had been returned to the two firms, which it refused to name. It has also issued a public statement, saying: "We deeply regret this action and apologise unreservedly to [our suppliers] for the concern that this has caused."

The episode underlines the difficulty facing government contractors, which are under pressure to cut the amount they charge without passing on cutbacks to the smaller suppliers that ministers hope will drive the economic recovery.

This weekend Royal Mail became the latest business to have its tough negotiations with suppliers aired in public after details of a presentation outlining its "radical cost-cutting programme" were leaked. Delivering a presentation to an audience of 150 suppliers two days before the Serco news broke, Kath Harmeston, Royal Mail's procurement director, set out plans for "a 20% minimum target reduction per key supplier".

Careful not to be seen leaning too heavily on small businesses, Royal Mail said: "We are striving to get the best value for money throughout the business ... But we are absolutely not imposing a blanket cut on suppliers' bills."

The Serco demand, sent by the finance director, Andrew Jenner, to its 193 suppliers, said: "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."

The episode was embarrassing for the group because the language used by Jenner appeared to clash with assurances given to Cabinet Office minister, Francis Maude, that agreed profit margin cuts would not be passed on to suppliers. In the ensuing public spat, Serco's finance director and chief executive Chris Hyman were called in by Maude to explain themselves.

The affair wiped almost 8% from Serco's share price in two days as investors grew concerned about damage to its relationship with government and its ability to protect margins in supplier negotiations.

Source: http://www.guardian.co.uk/business/2010/nov/07/serco-admits-suppliers-gave-in-rebate-demand