January 16, 2018

Are Procurement too Good at their Jobs? The £5.2bn Carillion Collapse

Carillion Liquidation

With the news that the £5.2bn turnover (2016), Carillion has collapsed and gone into liquidation, it seems a good time to reflect upon the difficult decisions the government had to take. After all, this is a company that employees 43,000 people and has a huge supply chain. A supply chain that is owed, collectively, £1bn. A sum that will undoubtedly see more companies go under if they are not paid what they are owed.

As anyone in procurement is aware, the importance of risk management and supplier relationship management cannot be understated. You need to know the health of your suppliers and the risk of things going wrong. After all, they are your life blood and without them things can go drastically wrong.

Think HS2 for the UK Government. Carillion had previously entered into a partnership with Eiffage and Kier that won two HS2 deals worth £1.34bn that will result in fifty miles of high speed railway being built. This will now be a partnership of two. Amongst other hugely significant contracts they are one of six main contractors for Network Rail and will have to be covered there too. The list goes on and on into the hundreds.

It’s safe to presume that the UK Government’s procurement department knew things were shall we say, not on solid ground, after all, Carillion had released a profit warning in July 2017. Since then, records show that the Carillion have been awarded £1.3bn of contracts, albeit with the bets hedged in the form of partnership deals.

This begs the question, if the procurement team knew that the situation was so dangerous, why did they continue to award these contracts?

At first glance it seems suicidal.

But is it so simple?

David Lidington, the Minister for the Cabinet Office has said that the government were carefully monitoring the situation all along and had taken the precaution of awarding joint venture contracts in most cases. Jeremy Heywood, the Head of the Civil Service also made the valid point that if the government had simply pulled all its business it would have triggered a complete collapse of Carillion.

With these thoughts in mind, the government continued to award contracts. Presumably in the hope that in doing this they were giving Carillion time to recover and with that they would be protecting all those at risk. Perhaps there was even planning in the background to lessen the (inevitable?) impact – we shall find out in time. Whether it was the right approach to keep awarding contracts or not will be debated endlessly with the political world being what it is, it will hog the headlines in the UK for a good while yet and answers will come.

One interesting question that arises from this fiasco is – what should the relationship between a supplier and a buyer look like?

There are a number of examples, in which dominant buyers own significant stakes in their suppliers and in doing so control their supply chain. The argument being that this can result in a stronger supply chain, one in which the relationships are stronger, the visibility is excellent and long term planning can excel. The flipside being that a supplier can quickly become complacent and the lack of competition results in a supply chain that slowly moves backwards as they are overtaken by the cut throat world of competition outside of their safety net.

As with anything there are pros and cons, but, when the supply chain ‘owner’ happens to be a government things get political far too quickly. So let’s follow suit and move on too.

The Financial Times journalist, Matthew Vincent, raised another point rather erm, poetically?

‘Contrary to popular – and populist – opinion, outsourcing is a messy business with little margin for profit. Or for error. Serco boss Rupert Soames (Grandson of Winston Churchill) has a lavatory brush on his desk to remind himself not to bid for work below the average cleaners 5-6 per cent margin. He calls it his “Shitometer”. But if former Carillion boss Richard Howson had something similar on his desk, he ignored its proximity to the fan.

Today, the former hit the latter – and Carillion entered liquidation.’

Perhaps procurement departments can be at fault when these things happen?

There are numerous examples of procurement departments being so determined to push prices down that instead of benefitting their employer, they are in fact causing untold damage.

If a supplier agrees to supply a service at cost, or below cost, they are inevitably hoping that this is the beginning of a relationship that will be more fruitful in the long run, so the initial loss is acceptable. Even if there is a margin for profit, one mistake can destroy said margin in seconds.

If this is the case and one buyer in particular is the main source of income it is inevitable that the supplier will need to make savings elsewhere in order to stay in the black. Often this results in a poorer service or a product that has deficiencies. A dangerous situation for everyone to be in, both supplier and buyer. Dropping safety standards to ‘streamline’ costs would be one situation which could easily result in catastrophic results.

Did the UK Government’s well-meaning desire to save money actually result in damaging an important supplier?

Perhaps, perhaps not. Although that could be the wrong way to look at it. Nobody forced the leadership at Carillion to accept the deals they did. Clearly their decision making ability has, to put it mildly, suffered somewhat in recent years.

Another question could easily revolve around the lack of competition for these huge contracts. Is that down to the complexity of government contracts making it too difficult for smaller players to break in, or are there other reasons?

I’m sure there will be a few of you reading this who will be far better informed in this area. Hearing your thoughts would be interesting.

Regardless, there are a lot of questions at this stage and there will to continue to be in the coming weeks. Whatever your politics or understanding of procurement, the importance of managing relationships and being well informed has been highlighted here in an explosive fashion.

Let’s hope that beyond the predictable cacophony of name calling and screeching, lessons are learnt.

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