What Can Be Learned from the Collapse of Carillion?
The collapse of Carillion in the UK sent shockwaves through the construction and infrastructure industry of Britain and beyond and there are no winners with infrastructure delays imminent, job losses, missing pensions and thousands of uninsured sub-contractors out of money and luck. As one of the UK’s largest government contractors to the tune of 450 key public-sector infrastructure projects including rail, roads, hospitals, schools, Defence housing, prisons, and even MI5 and the Tate Modern; employing 43,000 people worldwide with 30,000 sub-contractors, they had racked up £1.5b in debts. Exposing an enormous risk for small and medium-sized enterprises (SMEs) and government heavily invested in Carillion either directly or as a service provider. Creditors are expected to receive a pittance in insolvency proceedings.
First let’s touch on where it all went wrong. There are serious questions around how Carillion continued to win contracts despite issuing three profit warnings and with rising debt raising some big red flags. Rapid expansion, the wake of the GFC, concerns over the UK economic outlook and uncertainty over Brexit…questionable governance and overreach, desperately patching old losses with new funds? Underlying it all was the question of effectiveness of outsourcing public services to private enterprises, which appears to have been based heavily of price and how well, if at all, the Government vetted Carillion before awarding these contracts. David Lammy, a prominent Labour politician, described the situation as “…Vulture capitalism underwritten by the taxpayer.”, but the reality is more complicated with both upward and downward pressure playing a part. The UK wanted to invest in infrastructure, but it was also squeezing the life out of contractors which comes with now obvious risks.
So, what can be learnt from this? For SMEs the lesson is simple. Don’t have all your eggs in one basket, or if that’s too tempting, limit credit terms and program systems to closely track credit and prompt collection activities to limit exposure to sudden non-payment. While short-term wins leading to rapid expansion may seem attractive, the long-term risks have been laid bare. Even if you are lucky enough to avoid being sucked down with the collapse of a major supplier, investors may be cautious if your client list is short and undiversified. Along with some level of diversification also comes greater propensity for relief from the impacts of cyclical markets and fraudulent activity.
In terms of active supplier management, there were clearly some gaping holes in Government’s approach. Supply chain management should ensure that processes are undertaken with due regard to fairness, equity and impartiality, especially in the use of sub-contractors. There are five generally accepted probity principles which we apply to tendering and procurement processes. The key probity principles focus on:
- Accountability and transparency
- Fairness, impartiality and honesty
- Management of conflicts of interest
- Maintenance of confidentiality and ensuring security
- Attaining value for money
However, these are just the guidance to produce a robust process that can be rigorously defended. In this fast-paced and complex business environment we operate in where exponential change spurred by new technologies reaching critical adoption in record times, and where disruption reigns, there is a need to remain agile and innovate to get more bang for your buck. This is most definitely not achieved by simply picking the biggest, cheapest supplier which may have done it all before but without a proper and thorough vetting process. The trick is to do this within a governance framework that streamlines processes and enables agility and innovation without compromising on risk exposure or jeopardising probity.
To streamline this process, first, identify and manage risks. Have a risk assessment plan that protects the organisation from financial risk as well as fraud and corruption including identifying personal associations between procurement professionals and suppliers. Keep your eyes open and seek information on where else your suppliers have contracts. The ability for organisations to seek detailed and current financial information on preferred suppliers can not be understated, as is the ability for government agencies to review existing contract information held across government. Be active. Include intelligence pertaining to characteristics of potential suppliers’ credibility, financial status, historical financial activity and behaviour in the market. Formulate a preferred supplier list including cost estimates and delivery capabilities so you’re comfortable with what’s available before you approach the market. Make every effort to protect yourself in contracts, including contingency clauses. While contracts are in progress, keep your intel up to date. Pay attention to what’s happening in the market – look for early warning signs such as slower timeframes, inexplicable delays, decreased documentation and increases in disputes. This should all form part of a complete evaluation to ensure a procurement is going to provide the benefit sought and not just simply adhere to rules.
Evidently it doesn’t matter how big your supplier is, all should be subject to a thorough vetting and active consideration process.