Carillion and others: The risk of ‘step-in’ service providers taking advantage
Byon June 12, 2018
With Brexit, local elections, superpower posturing and international poisoning scandals to push the news media forward, the troubles caused by Carillion will seem like a long time ago to most. But, for the company’s employees, its suppliers whose businesses relied so heavily on the outsourcing giant, and for the clients that found themselves at the mercy of the Official Receiver with their ‘Special Managers’, PWC, the sense of dread that started with profit warnings and peaked at the company’s liquidation announcement, has never gone away.
Experience tells us that a new risk will likely have raised its head. With the metaphorical carcass of Carillion still warm, the ‘Special Managers’, along with certain ‘step-in’ providers, are very likely to be those who will be circling with hard-nosed commercial intent, rather than objective support in mind.
So, clients beware. Among the commercially ethical step-in providers that will look to fill the chasm left by Carillion, there will be some who will seek to take advantage of the stress and pressure you are under to maintain business-as-usual services being delivered. This article looks to uncover why they do what they do, how some of the more unethical ones will ‘try it on’, and how you can minimise the fallout from this new threat.
A brief history of Carillion’s demise
Back in January this year we wrote about the collapse of Carillion and the ways organisations could minimise the commercial impact from the inevitable fallout. You might have the impression that Carillion was a relatively new company, but its history stretches back over a hundred years. Back then the company was Tarmac, until it split off its construction arm in 1999. The company grew to be reportedly worth £2bn and the outsourcing sweetheart of many a central government project, including in recent years “£1.4bn-worth of work on HS2. It later won half of a £158m contract from the Ministry of Defence and a £62m contract with Network Rail”.
But it was reported that there were financial problems brewing and it seems these may have been founded in the company’s bidding strategy. It was further reported that the company might have been bidding too low for projects, which was the suggestion as to why it kept winning government contracts. In July 2017 Carillion issued a profit warning. Almost immediately 60% was wiped off its share price, but it kept on bidding for, and winning, major projects.
In a recent FT article a journalist talked about the issue of bidding low and said: ‘It was evidently because Carillion needed new contracts to keep bringing in the cash it needed [to] pay suppliers and lenders. Adding more construction work, such as the HS2 rail line, was the only way to keep cash coming through the door. It had, in effect, become a lawful sort of Ponzi scheme — using new or expected revenues to cover more pressing demands for payment.”
From the articles reviewed, it seems that by the time the company had reached the point of no return, it was £1.5bn in debt to a range of banks and its own pension scheme. Rather than going into administration it went straight to liquidation. The same FT article reported that “Carillion’s ‘compulsory liquidation’ proves it had already reached a point where there was nothing worth buying … There were no meaningful assets.”
The news media descended on the story. This provided an insight into distraught staff and suppliers owed significant sums saying they may not survive the storm. But the TV cameras rarely pointed at the other victim of this crisis: the clients. They were left not knowing whether they would ever see the completion of projects promised to Carillion and unsure of their next move. And it is into this maelstrom that the step-in service providers are walking.
The buzzards are circling
When there are ‘easy pickings’ on offer it tends to bring out those with the best capability of maximising the profit they will gain from such ‘easy pickings’. Suppliers with the capacity to step in to such situations are walking into a storm of heightened tensions, and where there is worry and stress, there are opportunities for those of a certain mindset to take advantage. Some step-in suppliers could well attempt to charge far higher prices for the service and some clients may feel backed into a corner to accept.
The reality is that you need to keep going with business as usual and if there is someone in front of you telling you that they will take on that responsibility, what do you do? And when you suspect that the reason why your former supplier got into trouble was possibly due to their habit of bidding low on their projects, then surely you’d expect some increase, wouldn’t you?
These are all interesting insights, but it’s vital to recognise the difference between commercialism and exploitation. Taking on a step-in supplier for a short-term contract, even at a higher price, will give you the time you need to step back, breathe and determine the next step forward. It’ll give you an opportunity to get your house in order and setting out the right diligence process before going back out into the market to find the right new supplier at the right price. However, some step-in suppliers will look to sign you up for the long term at the emergency level price. This should (and can, if handled in the right way) be avoided.
Don’t fall for the TUPE explanation
It is perfectly reasonable to expect that a supplier entering a problematic situation, stepping in where another has upturned the apple cart, should charge a higher risk-based price because, in the short term, it is uncertain about what it is taking on. But what that price is and how they justify it can give you a clearer indication of whether there is some exploitation being attempted.
A common reason given by such suppliers for a hike in prices is the TUPE Regulations – that when taking over part of a company to help with a client’s needs they must also take on the company’s debts and its staff responsibilities, and these costs have to pass on to you, the client. As you know, TUPE Regulations protect employee’s rights, so that in some events of a sale or transfer of a whole or portion of a business, the new supplier may be obligated to take over responsibility for all relevant employees.
However, as Carillion went into liquidation rather than administration, TUPE Regulation 8(7) applies and TUPE can often be relaxed or even disapplied. So, beware of suppliers claiming this cost as its reason for an increase in their fees.
Due diligence and process: the panacea for the wrong kind of ‘step-in’ provider
Having been railroaded into a short-term service provision at an inflated price, next take a step back and consider what you really want to achieve from future service provision. When you are ready to seek out your new supplier partner, whether they are from the pool of step-in providers or elsewhere, keep in mind the following steps:
1. Socialise the organisation vision
Involve internal stakeholders to ensure business case is clear, agreed and understood.
2. Clarify the solution expectations
Ensure that outcomes are clearly documented in the outline business case.
3. Client/supplier behaviours
Clarity of responsibilities and expectations of internal teams and external suppliers.
4. Clarity of Requirements
Requirements and outcomes must be unambiguous and aligned as well as understood by stakeholders and suppliers.
5. Key contractual principles
Headline contractual elements reverse engineered from expected outcomes, KPIs, and a need for flexibility and adaptability for real-world environment.
6. Supplier assessment scoring criteria
A defined and consistent plan for scoring suppliers to determine their suitability, financial appropriateness, and cross-group/financial bond guarantees.
7. Early market testing
Take your initial thoughts to the market to sanity check them and determine whether they are fit for purpose.
8. Commence the procurement process
Select and initiate the appropriate EU procurement regulations to follow – due to the previous processes there will be far more clarity and less room for ambiguity.
9. Preferred supplier selection and supplier due diligence
Make sure that client-side stakeholders are asking the right questions of suppliers, identify ambiguities and remove the, and ensure that supplier is able to validate that its proposed solutions will achieve your stated business outcomes. Then make sure the appropriate financial guarantees are in place.
10. Contract population and execution
Refine your agreement to ensure simplicity, clarity, and an adherence to driving actions and behaviours aimed at achieving the stated outcomes.
11. Implementation and performance management
Continuity of the right people throughout procurement and beyond is vital to a project’s success and partnership cohesion.
In conclusion, there are three things to remember above all else:
1. Short-term use of step-in suppliers, even at a higher price, can be a useful thing as it will give you the time you need to develop a strategy for hiring your next long-term supplier for the project.
2. No matter the pressure you feel you are under, do not be pushed into expensive, long-term agreement with a step-in supplier at emergency pricing levels as it is likely to work against you when you need the time to step back and regroup.
3. Once you have regrouped and developed a considered plan of action for moving forward, go to the market with all the usual procurement processes and operational/financial due diligence, as discussed above (more of which you will find in one of our articles from February about the failed procurement by the Nuclear Decommissioning Authority).