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.

Comments

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17 Feb 2018 09:24 AM

I want to add my own analysis regarding the collapse of Carillon. I consider that when you are running a business it is your responsibility to fit yourself with the competition.That's means that Carillon must take some precaution by reducing cost or having the same price or slightly different(Benchmarking). I dont cover the Government but I consider that each business is responsible for their policies and the way they will like to manage their cost. To arrive in the total closure, Carillon had several P/L accounts in LOSS to notice them regarding the situation. A lot ratios like the average debtors or creditors days, the time to serve a customer ,profit per staff member overall the productivity and profitability ratios may help them to save their company. They may think about how much they earn and match it with how much they spend .Did they try to change the contract to their employees and make worked some people that are not profitable for the business or they are just waiting every year for the help of gouvernement?By working for more than 20 years I realise that some people are pay for nothing and some work too much.King(2017) states that the grocery facing a huge challenge they never have for more than 40 years and he states as well that Sainsbury and Tesco have change the way they manage this situation. In addition, He said that Sainsbury order their none grocery from Argos. That's allow them to didn't have a amount of stock and therefore they just order what they need. I think if Carillon done that ,they may be able to save they company. The bottom-up or Hubbart formula is well know for the pricing of a new investment where you return first the investment or in another words an upside down P&L account(Burgess,2010). It is also a level of debt that a business cannot cover any more ( In French taux de sur endettement and can be mesure with effet de l'evier (Melyon 1999)
Now whether they were aware about that and they dont want to do or they call it as you states "aggressive accounting procedures ,I dont know .However I consider that a financial controller or an accountant who used those methods help a business to succeed . I will say more that when you meet them ,you must worry every time because they are looking for profit not loss or a total closure as it happen to Carillon. As an owner of a small business it is very difficult to have finance but big businesses have what they need and sometimes arrive in the end with the result like Carillon.

Burgess,C.(2010).Essential financial techniques for hospitality managers. A practical approach. Goodfellow publisher limited

Meylyon,G.(1999) Gestion financiere.Breal editions

King,J.(2017)Food Matter .Available at:https//www.youtbe.com .Accessed:21 November 2017)