Could Government Commercial Organisation Have Done More To Head Off Carillion Collapse?

Carillion went into liquidation yesterday, as we reported here. It is not the usual form of liquidation though – the “official receiver” is in charge, assisted by PWC, and that means the government has more say than is usual in these cases. Cabinet Office Minister David Lidington explained yesterday that government clients would be making supplier payments to the receiver and they would in effect guarantee that staff would continue to be paid on all government contracts operated by Carillion.

But let’s look at whether the government might have done more to head off this event. While we shouldn’t principally blame the Government Commercial Function or Organisation for this, it does show the limitations of the Cabinet Office’s major supplier programme. Carillion is (was) identified as one of government’s critical strategic suppliers going back to 2011 when the then Minister Francis Maude introduced the programme.

“Crown Representatives” were introduced, senior business figures in the main, who are supposed to lead cross-government scrutiny of major firms to manage risk and performance better. The last list of “Crown Representatives”, published here last September, had Carillion being looked after by “TBC”, that well-known construction expert.

But in a recent parliamentary answer, the new Cabinet Office minister David Lidington said that the post was only vacant for 3 months, from August to November. However, he didn’t say who previously held it or who holds it now. But Construction News claims the new rep has not actually started yet, and that an ex Rolls-Royce operations and supply chain leader, Julie Scattergood, held that role previously. She does not appear to be a Crown Rep any longer.

It is also worth noting that the Strategic Supplier Risk Management Policy published by Cabinet Office here, suggests that suppliers designated “high-risk” in terms of their financial situation are likely to receive less work from the government.

“In-Scope Organisations should reduce where possible the extent to which the Strategic Supplier is  given additional work under the terms of an existing contract (by, for example the exercise of any option or change requests) so as to contain the risk to the taxpayer.  As a result, Strategic Suppliers  who are designated as “High Risk” may receive reduced revenue from Government”.

But the document is even more cagey about new contracts – it does not say “no new work”, limiting itself to this:

“The fact that a Strategic Supplier may have been designated as “High Risk” is not of itself relevant  to the  conduct  of  procurement  activities.  Information  held  by  the  Cabinet  Office and which forms part of the basis for designation may be supplied to In-Scope Organisations at  their  request,  however, to  discharge  their  function  of  assessing  the  suitability  of bidders when deciding to whom contracts may be awarded as mentioned in paragraph 4.1 above”.

It is not unreasonable to challenge Gareth Rhys Williams here as the government’s Chief Commercial Officer – this is obviously not a good advert for the major investment in “improved commercial skills” within central government that has been made in the last couple of years.

And we might ask why there has been this lack of consistency in the “Crown Rep” role, and why has Carillion got to this point despite supposedly close scrutiny as a key supplier?  Should government have stepped in sooner and perhaps pushed the firm into a re-financing earlier?

However, it is easy to be wise after the event and harder to say categorically that Cabinet Office could have saved the situation, whatever steps it might have taken.  As we said yesterday, a bail-out from government would have had all sorts of unpleasant consequences and was never a serous option, we suspect.

The media is also commenting about contracts that continued to be awarded by MOD, HS2 and others after the first Carillion profit warning last July, but if the government had cut off new work immediately, it might have been accused of driving the firm into the ground. It really was a damned-if-we-do, damned-if-we-don’t situation in terms of continuing business with Carillion, and it is also claimed that in some cases, other joint venture partners will step into Carillion's role on those contracts.

Finally, for now, we might also be controversial and ask whether big buyers are getting “too good” at procurement? Is the competitive process driving firms into under-bidding on major contracts? That seems to be one of the core problems here, with Carillion actually losing large amounts of money on certain contracts. Or maybe it was sheer managerial incompetence; while external events in the Middle East may be one part of the problem here, something pretty endemic has gone wrong internally for the firm to get into this sorry state. More on that to come too.

Voices (8)

  1. Andrew Cox:

    Could not agree more with Dave Atkinson on these issues. IIAPS has long argued that outsourcing without understanding how to avoid adverse selection and post-contractual moral hazard is a recipe for disaster. Procurement and commercial staff in UK government have shown no interest in the IIAPS take on best practice, so it is no wonder that chickens are now coming home to roost. For those interested in understanding how to avoid adverse selection and moral hazard the principles are explained in a number of White Papers on these issues at http://www.iiaps.org. There is even one about Carillion!

    1. Peter Smith:

      Andrew, Sorry, slow in replying to you. I recently recommended privately that Cabinet Office should be engaging with you directly if they are serious about bringing “best practice” into the Government commercial organisation. I think some senior people there have good intentions but whether there is the will to really move things forward I don’t know.

  2. Final Furlong:

    There were three very big deals that went wrong that had very little to do with central government procurement.

    This reminds of Southern Cross. You could see it coming from a mile away but it was seen as 130 local problems (ie: a problem for each of the local commissioning councils) as opposed to a national problem for the Department of Health (in which was a small team, at that time, focused on the Social Care supply chain – CSED – which never focused on supply risk).

    I could give you another hundred examples.

  3. The Lady Doth Protest:

    KPMG gave Carillion a clean bill of health in March 2017. https://www.theguardian.com/business/2018/jan/16/carillion-subcontractors-laying-off-staff-collapse

    1. Peter Smith:

      the big accounting firms have not been good at highlighting potential or upcoming problems with their clients in recent years. i wonder why?

      1. The Lady Doth Protest:

        Vested interest in earning their fees and keeping a happy client?

        Which begs the question: if procurers rely on such statements, then you can get situations like this….

      2. The Lady Doth Protest:

        I mean, what does their bonus ride on? Keeping the client happy or telling the truth?

  4. David Atkinson:

    Just few quick points:

    1. Having been involved in launching SRM some years ago (at what was the OGC) with a fledging team of cross-government relationship managers, it was immediately apparent that departmental power (and fiefdom-like behaviour) was always going to make it a huge issue for ‘Crown Rep’ types to operate effectively. The challenge of influencing without executive authority was/is always likely to scare-off the best pros, sooner or later. I suspect that challenge remains as tough as ever.

    2. Most organisations woefully underestimate the investment required to put in place effective governance or relationship oversight for contractors large and small. They too often ‘outsource a problem’ and fail to apply systematic SRM to the relationship. High-level skills and real experience in supplier management remains in very short supply.

    3. As for being too good at procurement, I suspect not. It’s likely that suppliers and providers have become too good a low-bidding, and pulling the wool over the eyes of ‘procurement’ (and just as likely – maybe more so – those key senior decision makers who are mainly interested in headline results, and have never themselves put in the ‘hard yards’ of rigorous contract and performance management).

    4. Addressing the ‘too good’ issue again, suppliers and providers have long mastered the art of recovering profits through poor change control at the client organisation. Bid low, win later.

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