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Carillion collapse: what now for Governmental Outsourcing?

As another outsourcer with large Government contracts collapses, what does it mean for the future of the outsourcing industry?

Carillion

After G4S, Serco and Capita’s well-publicised troubles we have now seen profit warnings from Mitie, Interserve and Carillion culminating in the latter’s liquidation.

Outsourcing-bashers will no doubt take the opportunity to call for immediate nationalisation of all contracts. However, it is worthwhile taking a moment to pause and consider why the sector is still vital to UK Plc but in such a poor state of health.

Here the question of risk and its relationship with outsourcers’ margins comes into sharp focus: the balance appears to be badly out of whack. The benefit of an outsourcer to H.M. Government is that the private sector delivers services far more cheaply and efficiently than a Government department and takes on almost all the risk. In return for carrying that risk the outsourcer should be in a position to charge sustainable margins in order to avoid the current circumstances arising. However, as government contracts are awarded on a ‘compliant and cheapest’ rule, competing firms scrap for work to survive but in so doing only compound the sector’s downward spiral. This engenders a sector where the main players are forced  to operate on paper-thin margins, which are not sustainable in the long-term and lead to “aggressive” accounting procedures.

 

“Carillion’s “compulsory liquidation” proves it had already reached a point where there was nothing worth buying. All it had was its contracts, on which the margins were evidently too low to cover its ever growing liabilities. There was no viable business to sell. There were no meaningful assets.” – The Financial Times

 

If the Government wants long-term partners who can provide vital services efficiently and take on risk, it must be willing to pay sustainable margins. The days of ‘compliant and cheapest’ must be consigned to the Whitehall history books and a braver, longer-term view be taken by Governmental Procurement officials.

 

Paul Phillips leads the Infrastrcture, Business & Support Services practice at Interim Partners.

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