Danger lurks in outsourcing too much to a small clique of firms

Outlook: Handing over extra cash to companies that mis-price contracts willy-nilly is a dangerous game to get into

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The Independent Online

A handful of companies are now responsible for the provision of a vast array of government services and projects. Were one of them to go down, the consequences could be ugly indeed.

Which brings us to Balfour Beatty. Once a rather dull but consistent company that could be relied upon to turn in profits just a bit above analysts’ forecasts year in year out, it is in the midst of a crisis following a string of profit warnings.

KPMG is now rooting about in the books of its UK business, which gobbled up contracts during the recession by dint of some highly aggressive pricing, only to run into trouble when the recovery took hold and the cost of labour and construction materials increased.

Hence the call for an extra £50m to complete the works on the Olympic Stadium that are required for it to fulfil its new purpose as the home of West Ham United, among other things.

One’s natural response might be to say you can whistle. Handing over extra cash to companies that mis-price contracts willy-nilly is a dangerous game to get into. Balfour may feel encouraged to use the tactic with other contracts. So might its peers. That £50m extra could very easily turn into a blank cheque.

This is not a mistake the Balfour of old would have made. But worryingly, we may not yet have learned the worst of what was going on in the business. Which raises the question: is it greed that has led to Balfour appealing for more money? Or is it need?

Of course, we’re not at that stage yet and we may not get there. Balfour, which isn’t making any comment on the issue, could yet end up completing the contract as signed, even if it does mar a future set of results with a chunky one-off exceptional charge.

Still, it’s worth recalling the National Audit Office’s report into government contractors a while back that raised the question of whether they were becoming too big too fail.

The NAO highlighted the issue because of the sheer number of projects and services now being handled by just a handful of firms, of which Balfour is one.

Conservative (with a small c) is a phrase once associated with Balfour. This affair highlights the potential dangers of contracting with firms that aren’t. Perhaps someone in a ministerial office might like to dust off the NAO’s report and give it some fresh consideration before signing more deals. Just a thought.

For Adidas, the expensive trainer is on the other foot

Adidas is caught between a rock and a hard court. Sell its Reebok brand to a consortium of investors who are said to be mulling a bid and it is, in effect, admitting that it made a mess of things.

Don’t sell, and a consortium of activist funds may force its hand anyway.

It’s easy to see why the company is under pressure to start divorce proceedings, and not just because the settlement – the figure of $2.2bn (£1.3bn) has been reported, which is a 30 per cent premium based on Reebok’s estimated value – would be a lucrative one that might keep its critics quiet, at least temporarily.

Reebok was supposed to strengthen Adidas’ position in the US, providing a fresh bridgehead with which to attack the all-powerful Nike. The latter’s successful poaching of Reebok’s contract to supply the NFL (American Football) rather underlined the failure of the attempt. Such deals might appear expensive, but they have a habit of paying for themselves, often in a matter of months.

Reebok did bring with it the contract to supply the NBA (basketball), which subsequently became an Adidas contract. And the NBA contract is a nice piece, to coin an American phrase, of real estate to have.

But Adidas still struggles mightily to persuade people to wear its basketball shoes, and it’s hard to see even the return of its star signing Derek Rose, equipped with the company’s Boost technology, eating into Nike’s dominance of the market.

And while Adidas has struggled in the US, the same is not true of Nike in Europe.

Ironically Reebok’s recent performance – the brand having been repositioned somewhat – has represented a rare bright spot for its parent, which is currently grappling with a stuttering share price and some ugly profit warnings.

Despite that, Adidas’s bosses may ultimately have little choice but to give up on Reebok if they want to buy some time to work on reviving the core business. Otherwise the activists may take that job on for them as well.

Well, Chaps, it might be worth having a review

Red faces at the Bank of England after its Chaps payment system, which handles the transfer of large sums between banks, was suspended yesterday after a technical fault.

Manual back-up systems – inconvenient but effective – spared the City from any sort of meltdown. But there was no such fallback available to house movers. Many of them spent hours on the floors of their empty old homes awaiting notification from their solicitors that monies had been transferred to allow them to move into the new ones.

It looks like the foul-up has ultimately done little long-term damage. But if the prospect of future pain isn’t enough to persuade the Bank to act quickly to ensure there’s no repeat, perhaps the fact that the institutions it regulates will be bringing this up for years to come will do the trick.