Interserve Collapse: 7 lessons learned from Carillion that are relevant for clients of Interserve
Byon June 4, 2019
Since Interserve’s collapse, many people have likened what happened to this multibillion-pound organisation to the set of events that led up to the demise of Carillion, which itself collapsed just 13 months earlier.
We have already written a number of articles on the subject that have looked to show the difference between the two, primarily around how service delivery can be less disrupted. However, this article focuses on what lessons can be applied to Interserve clients, against the backdrop of an NAO report on the situation.
The Parallel Track Taken by Carillion and Interserve
Both organisations had been in existence, in some form or other, for over a century. Carillion was established in 1999, but its roots go back to 1903, mostly under the Tarmac name. The Interserve brand was launched in 2001, but the company it originated from was established in 1884.
Both organisations grew to be major strategic suppliers to the UK government, each with hundreds of contracts outstanding when they collapsed. However, both suffered from the same issue of varying profitability and cash flow levels on those contracts. Some were quite lucrative, others barely profitable, or in a number of cases, heavily loss-making, creating negative cash flow. It is this latter situation which certainly is considered by some to have led to a proportion of the instability they both experienced.
Both had tens of thousands of employees – 68,000 at Interserve and 43,000 in the case of Carillion, many of whom lost their jobs when the organisations went into liquidation.
Both organisations announced profit warnings and yet both were also given millions of pounds worth of new government contracts in their last days despite this, with Carillion awarded £1.9bn in new contracts in the six months before its collapse and Interserve £660m. And, at the time of collapse, the majority of shareholders for both companies saw the value of their investments disappear in the blink of an eye.
Are You Thinking of Moving Suppliers?
While the pre-pack administration seems to have created an interim continuation of services for Interserve’s clients, it will take several months to determine whether this continuation will deliver the expected levels of service. The pre-pack administration arrangement was designed to allow for a smooth transition to ensure BAU could be maintained for Interserve’s client base. However, it would be sensible to be mindful of the possibility that it may not – preparing for the worst so you are not caught off guard if the worst actually happens. Watch out for any drop in material service levels, key staff leaving, or a lack of innovation motivation; these are likely to be signs of a downward spiral. But keep in mind that these signs are simply indicators and should be interpreted in context with the other realities of the project and relationship.
With £660m of new contracts pre-administration, there are likely to be numerous new and old clients currently with very little in the way of contingency planning, possibly unaware of the full implications of being so exposed.
Seven Tips for Moving Suppliers
With this in mind, we have put together a seven-point plan for assessing how your current services are being delivered, but also, in the event services have degraded and you have tried everything to improve matters to little avail, then how to go about exploring the marketplace with a view to choosing your next supplier. Hopefully they will only ever be your back-up plan, but it’s better to be safe than sorry.
1. Clarity of expectations: your primary goal when thinking of moving suppliers
It is unlikely that anything positive will be achieved until you have documented your clear expectations of the supplier market. You’ll already be aware that the pros and cons for any business case to switch suppliers needs to be considered, alongside the current position of the relationship, the expected outcomes, the quantifiable benefits that will be achieved from the output of any project, and why you perceive that a new supplier would be better placed to deliver them. All relevant internal stakeholders must be involved in providing data for this business case and all sides should be listened to, then data and decisions documented so you can explain to others why those decisions were made and conclusions arrived at.
2. Roles and responsibilities
While this process – of developing a clear business case and identifying the roles and responsibilities for all parties – may well have been completed at the outset of your existing supplier relationship, it’s just as important to rerun the exercise should you consider changing suppliers. To start off with, the goalposts may well have changed through updated expectations, the skills you have to work with could well be different, your relative position in the project could have changed, and the practical knowledge of working with the provider you have gathered along the way so far, could well change your perspective, understanding or direction. All of this should be added to the mix to determine who is expected to do what in this new relationship.
3. Have clear supplier assessment scoring criteria
Today you have far greater knowledge and understanding of your existing service delivery model, what new service structure you need to have in place (your ‘Future/Desired State’), the relationships you need to develop and the pitfalls to avoid along the way. All of this should enable you to develop a specific and unbiased scoring criteria that you can use to help you determine which supplier stands the best chance of helping you to achieve your goals. This is for two fundamental reasons: a) the intelligent application of detailed criteria to your selection process can help you to maximise the possibility of choosing the right partner, and b) if you are in the public sector, using this criteria consistently will protect you from complaints that suggest an unfair selection process.
4. Early market testing
If you do have time, exploring the ‘art of the possible’ is really critical to assure you get a better supplier solution/cultural fit. Go out to the market prior to any formal procurement exercise. Ask those suppliers who are experts in specific fields for their opinions on your outcome expectations. Listen to their feedback and incorporate it into your ‘Future/Desired State’. These vital insights are likely to influence your procurement decisions to assure you achieve the right levels of service delivery and optimise value through the life cycle of your relationship.
5. Supplier-side due diligence and their duty of care/duty to warn
During the procurement process, it’s important to ensure that your suppliers are doing all they should and can do to assess the validity of your expectations and their capacity to achieve them. This should be their detailed analysis which concludes in them informing you of any lack of information, manpower, skills or technology, any material reason at all that could limit their ability to deliver your stated outcomes, and whether those outcomes are in fact achievable in the first place. Suppliers have a duty of care and a duty to warn to inform you of this, but it makes sense for you to have confidence that they have asked themselves the right questions at the right depth internally. Having a robust due diligence exercise conducted by your supplier will save you time and money, and usually helps to avoid material misunderstandings between you.
6. Contracts reverse engineered from business outcomes
If you know where you’re going (your ‘Future/Desired State’) and you have gathered information on how to get there from prospective suppliers, then it’s sensible to reverse-engineer your contract from this in order to create a more ‘real world’, practical document for both you and your supplier to work by. Clarity, simplicity and mutual understanding are key to a good contract as lengthy, overly complicated and jargon-full documents are likely to be just as full of ambiguities that are likely to lead to deviating expectations. As we always recommend, a great contract is one that encourages the reality of change in a relationship, building in a biannual review and refining process so all sides have an opportunity to optimise the delivery of services and value for money on an ongoing basis.
7. Intelligent client and intelligent supplier behaviour
In any complex service relationship, you will already know from your own experience that optimising value is not a one-way street. Both sides need to live up to their responsibilities and have a duty to ensure that not only their counterparts are doing what they should in the way that they should, but that their colleagues are also. ‘Intelligent Clients’ and ‘Intelligent Suppliers’ appreciate that the right behaviours breed trust and confidence in one another, and that creates the right actions that will drive maximum value and success.
The fundamental difference between Carillion and Interserve – and it’s an important one for their clients and the people they serve – was that post-collapse, because of the pre-pack administration deal that the company had put in place, Interserve’s contracts could run as close to normal as was possible under the circumstances. New hierarchies were created and business as usual standards quickly established. We will have to see whether the appropriate levels of service delivery last. But it makes sense to have a supplier back-up plan waiting in the wings.
If your own supplier is experiencing challenges (or worse) then a back-up supplier is a sensible strategy to consider. But if you do, use this as an opportunity to fine-tune what you know was lacking in your current relationship, a rethink/refresh that allows you to make better assessments, selections and decisions for the future.
Photo credit: Irina-Strelnikova, iStock