Carillion and Supplier Financial Risk – Ongoing & Robust Monitoring Needed

As the reverberations of Carillion’s insolvency continue to resound, a whole range of procurement-related issues are still front of our minds and presumably those of many professionals. We had a fascinating discussion about supply chain finance in that context last week, which we will come back to soon, just as one example.

But let’s return to the supply chain risk issues and the financial risk in particular. One of the most shocking aspects of the Carillion process was just how quickly matters descended into the critical state.   In December 2016, the company told investors that performance was "meeting expectations" and that it expected "strong growth in total revenue and increased operating profits".

Famously, accounting giants KPMG signed off the 2016 accounts published in March 2017 with Carillion defined as a “going concern”, only to see the firm announce a £845 million contract write down and profit warning months later – all prior to eventual demise last month.

So this shows very clearly the need to carry out some sort of continuous monitoring of suppliers’ financial situation and health. It is no good at all doing a snapshot when you first onboard the organisation, then hoping for the best, or even doing an annual check, perhaps around their annual results or report. The position can change very quickly. Monitoring must be ongoing to pick up changes in sentiment, payment profile perhaps, or other signs that matters may be getting to a worrying point,.

We published a short paper last year, as part of a five-part series, sponsored by risk management platform providers riskmethods. The full title was “The Most Effective Ways to Mitigate Supplier Financial Risk -  Supply Chain Risk Briefing (Part 1)”.

You can still download it here (free on registration) – but here is a sample with some Carillion relevance.

Suggested Actions and Mitigation Strategies

Monitoring supplier financial health in order to get early indications of suppliers in financial trouble is the other key strategy here. While carrying out financial due diligence at the time of placing the contract is recommended and important, it is simply not enough to mitigate this sort of risk properly. Continuous tracking of suppliers’ situations is vital. Even using Dun & Bradstreet (D&B) or similar ratings and reports on an ongoing basis will not pick up every problem; there are numerous examples of firms going out of business without any obvious warning signs from D&B and similar organisations. Agencies use historical information to assess financial viability, so when situations change, which they can rapidly, it takes some time for this to be reflected in ratings and reports.

So the best way to manage and reduce this risk is to consider tools that can pick up early warning signs from multiple sources. That applies to both country-level risks, where economic issues will have a knock-on effect on businesses, and company-level issues.  Monitoring senior staff moves and changes or new ownership, taking on debt or signs of other corporate finance activities can all form part of the warning system; even social media can provide clues and evidence of potential problems. These signals do not necessarily result in a bankruptcy or supply interruption, but they could. It is therefore important for buyers to be prepared, take preventive actions and implement proactive risk management.

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First Voice

  1. Secret Squirrel:

    One thing seems missing to me here, Peter. The people who are sufficiently skilled to interpret the data.

    CCS have (or at least did have) a supplier intelligence team. But I’d be surprised if they had the ability to interpret and identify the risks to a business hidden in a complex statement of accounts or other financial document. They certainly didn’t when I had dealings with them. They would provide data on the accounts (key ratios etc) but following that with a risk evaluation would have been beyond them.

    I suspect the same would be true of many organisations and I’m not sure how you’d fix it given the level of expertise that would entail bringing in beyond relying on the kind of ratings services that can miss these risks too.

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