"Too much emphasis has been placed on avoiding risks with small suppliers" ©Getty Images
"Too much emphasis has been placed on avoiding risks with small suppliers" ©Getty Images

Procurement lessons to be learnt from Carillion’s demise

The services giant collapsed in January, taking hundreds of supply chain contracts with it. The effects are still being felt throughout industry

New minister for the Cabinet Office David Lidington was sitting in his office on 8 January, his first day in the job, when John Manzoni, civil service chief executive, popped his head round the door: “I need to have a word about Carillion.” A week later Carillion, holder of 450 public-sector contracts, collapsed into liquidation. The fallout is still being felt.

Facing a parliament liaison committee in February, Lidington – whose ministerial remit covers procurement – said £150m had been set aside to keep services run by Carillion going while alternative arrangements were put in place. Others have put the potential cost of government intervention at £300m.

Questions have been asked about the risk of concentrating so many contracts and services in the hands of a few, very large companies, while the overall policy of outsourcing has come under scrutiny. So what can procurement learn? Buyers need to get better at managing risk and improving their data, Ian Makgill, founder of data analysts Spend Network, told SM.

“Too much emphasis has been placed on avoiding risks with small suppliers, forgetting that suppliers with multiple contracts could be carrying a much greater, systemic risk,” he said. “Public bodies also need to manage contracts better – too much effort is put into the up-front procurement and too little into managing contracts. Carillion was allowed to go bust with 450 contracts because no one knew they had 450 contracts. With better data, we can understand the risk and act before disaster strikes.”

It appears Carillion’s business model depended on hoovering up new contracts at very low margins and using this initial income to support older, unprofitable deals. “Making a contract-award decision on delivery at lowest cost is too crude a set of requirements for such important services,” said Adam Jacobs, executive chairman at consultancy Bloom.

Jacobs said in-house expertise is crucial in managing outsourced services. “Even when the actual service is outsourced, the expertise needed to accurately scope that service and then robustly contract-manage the delivery is essential,” he said. “One major issue is too much focus on the procurement process, rather than project outcome. Following due process alone will not necessarily lead to success. Proper viability checks and risk management of potential suppliers is a key part of any procurement environment – especially when it comes to having a holistic view of a supplier’s work.”

The question of in-house skills was flagged by government chief commercial officer Gareth Rhys Williams when he appeared before MPs. He said more expertise is needed to split up large contracts – something that has been happening in the IT space to reduce dependence on large firms and boost innovation and SME engagement. “We have been disaggregating those contracts, and that has involved bringing several thousands of IT people and additional procurement people into the public sector, in order to consider buying from several tier twos instead of a single tier one,” he said. “We need to go further in terms of the number of people we have with the skills to do that sort of work.”

Another of the Carillion business practices that emerged was its treatment of firms in its supply chain. Despite signing up to the Prompt Payment Code, which advocates settling invoices within 30 days, Carillion was “notorious for being [a] late payer”, with terms of up to 120 days, according to the Federation of Small Businesses (FSB). “Carillion was able to use its dominant position to squeeze smaller firms to mask their own financial failings,” said FSB national chairman Mike Cherry, describing the code as “toothless”.

Ben Jackson, CEO at Oxygen Finance, said: “Businesses throughout the supply chain are suffering as a result of Carillion’s demise. The reverberations will be felt by thousands of fledgling businesses, which will quietly slip into administration.”

Carillion had contracts across not only the public sector, but also the private sector. Building society Nationwide has already transitioned 250 former Carillion contractors into its property-services department. Its CPO Laura Faulkner told SM it was a case of continuity planning, but added that it might lead to a review of other services. “It doesn’t matter that it’s happening to these firms at this point in time; every procurement team should understand what it needs to do next if something goes wrong,” she said. “It’s making sure you’ve either got an alternative supplier or the ability to insource, and that you’re doing the right thing by your company and the staff at those firms. We had two key objectives: ensure the services and do the right thing.”

Others, meanwhile, have spotted a business opportunity. Andy Milner, CEO at Amey, has written to a number of local authorities, saying: “In what is an unsettling time for the industry, I want to assure you that Amey remains dedicated to your organisation and the service we provide. I would welcome an opportunity to meet and discuss any practical issues with which we can be of help.”

MPs were told government spend with external suppliers in 2015-16 totalled around £250bn, while there were about 27 strategic suppliers. Manzoni confirmed to MPs that “between 10 and 99” contingency plans, similar to the one produced for Carillion, are now being drawn up. At the same time, questions are swirling around other big outsourcers such as Capita and Interserve. The government’s procurement mandarins may well be facing tough questions again soon.

Timeline

10 July 2017 Carillion issues profit warning. CEO Richard Howson quits.

17 July 2017 Consortium including Carillion wins £1.3bn contract to help
build HS2.

18 July 2017 Carillion joint venture wins contracts worth £158m to supply services to British military.

24 August 2017 Carillion wins £300m Manchester property-development contract.

29 September 2017 Issues second profit warning.

27 October 2017 Carillion appoints Andrew Davies as CEO.

6 November 2017 Wins two contracts with Network Rail worth £320m.

17 November 2017 Carillion issues third profit warning.

12 January 2018 Cabinet Office confirms crisis talks are under way.

15 January 2018 Carillion goes into liquidation.

24 January 2018 Government launches inquiry into Carillion.

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