Public Sector Outsourcing: Learning Lessons from Carillion and Interserve

Several months ago I enjoyed my weekly airing of all the topical news stories with my mother over a strong cup of tea, in which Interserve’s state of health figured highly. This was so mainly because I’d done some work within the procurement team at Interserve, enjoyed working with them at Head Office and wanted them to prove the sceptics wrong and turn their fortunes around. I’d been optimistic and really thought they'd beat the downward spiral that Carillion found themselves in by getting the backing of their investors and financial institutions.

In my glass half full moment I backed Interserve to pull through and not fall foul of repaying their debts or needing a further funding boost to stave off administration.  I got it wrong.  I didn’t think another ‘Carillion’ would happen again.  I realise the situation is not the same; Interserve’s assets have been moved into another group controlled by the lenders to continue to deliver the contracts and so far, jobs seem somewhat more secure than in the Carillion case. The company as it is, Interserve, is no longer and the future of the existing, important contracts to be delivered and the employees remains in question.  At least 16,000 small shareholders have lost their money and a company that has existed since 1884 as a cargo transfer company is no longer trading.  The main shareholder of Interserve was a US-based hedge fund, Coltrane, which opposed the proposed restructuring programme, thus forcing administration.

Interserve reportedly holds £2.9bn of government contracts, including probation services, hospital cleaning, school meals.  It won a government contract (with the Foreign & Commonwealth Office) last July, worth £66m when its financial difficulties were well known and refinancing packages had been put in place.  The wounds created by the collapse of Carillion were still smarting, with a reported cost to the taxpayer of £150m, nearly 2,000 redundancies and significant delays in the delivery of projects like Liverpool and Birmingham hospitals.  I appreciate that there needs to be support from the customer for a supplier who is working on turning its fortunes around, but once the financial troubles started to be reported and with financial risk analysis being very much part of the due diligence process in government contract award, I’m pretty baffled that the government, ‘the client’, continued to award contracts, significant in financial terms or service delivery terms, to an ‘at risk’ supplier – particularly given the recent collapse of Carillion.

If you were to draw a comparison with a private sector customer, would their procurement and approval process, as well as the shareholders, accept placing important contracts with a supplier known to be at significant financial risk? And would they do that if the company’s fingers had already been burnt two years earlier by another supplier who’d gone under and cost the company millions of pounds to get back on track?  Is it me or is the decision to continue to award to a supplier at risk rather staggering?

Interserve brought in new exec management in September 2017, Debbie White and Mark Whiteling (CEO & CFO), to help turn the fortunes of the company around.  They were well remunerated for the responsibilities they undertook and I am sure they worked hard to make the business leaner, smarter, more appealing.  I do feel puzzled though, as to why they were awarded bonuses at the end of 2017 at least, after 4 months at the helm and also why they chose to accept the bonuses.  I thought about them and Interserve this morning as I listened to an interview with Stig Abell, Editor of the Times Literary Supplement and author of a new book ‘How Britain Really Works’ on Chris Evans’ radio show. He offered interesting perspectives on several topics and I’m definitely going to buy his book after hearing him.

One strand of the conversation was the inability of one person, no matter how brilliant they may be, to effect real change.  He took the example of Barack Obama.  Obama was a figurehead of change (‘Yes We Can!’), positivity, that things were going to be different with this person in charge, but actually, not much noticeable change (if any) happened under his tenure as U.S. President. Abell mentioned Obama to highlight the point that one person cannot change much; significant change comes from a collective and often with quite radical and revolutionary ideas on how to go about change.  No direct link to Interserve here, but it does feel relevant that bringing in one or two new leaders will likely not create the change needed so why do it at significant cost and late in the day?

Interserve employed more than 45,000 people in the UK and in the contracts they operated delivered vital services to often vulnerable sectors of society. Evaluation criteria on how the government awards such contracts in such vital areas to suppliers known to have associated risk needs to be challenged. There are so many other outsourcing organisations which make up a huge part of our social, healthcare, local authority network, perhaps more services outsourced than in-sourced in certain areas; the authorities who make these decisions need an urgent review of their award criteria on future contracts or face yet more wrath from the ever more vocal tax payer.

 

Voices (3)

  1. Dave:

    Jenny, you say “If you were to draw a comparison with a private sector customer, would their procurement and approval process, as well as the shareholders, accept placing important contracts with a supplier known to be at significant financial risk?”.

    The question is “what happens next?” If the public sector turns down a supplier on financial risk that can be challenged – in court if necessary, which would have a significant cost and could tie up the contract award for month. Who can prove that that risk is too great? Having not worked in private sector procurement I’m assuming that the risk of challenge is much less!

    Openness and transparency within the public sector has its advantages and disadvantages!

    1. Patrick Tuite:

      Couldn’t agree more Dave. I think the PCRs 2015 are a good thing but they must be revised to provide contracting authorities the power to exclude companies (if they wish) who are in this exact situation.

      I went to a CIPFA talk where they demonstrated that Carillion’s accounts indicated a general decline in business in the years preceding their collapse but not to the extent where they would have provided grounds to exclude them from any public procurement.

      1. Dan:

        The problem is, these decisions are usually based on audited accounts which are many months out of date, rather than the financial status at the time of contract award which will be unknown

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