Carillion collapse: A flawed system is to blame more than management excess

Labour and the unions have accused Carillion of behaving irresponsibly, but the collapsed company took on low-margin business without charging an arm and a leg

Chris Blackhurst@c_blackhurst
Monday 22 January 2018 02:59
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Executive pay wasn't quite reason behind the company’s collapse as many have suggested
Executive pay wasn't quite reason behind the company’s collapse as many have suggested

We were on holiday in Greece. The children were tiny at the time and, as is the wont of ones so young, they woke up early. So I would be pushing a buggy round the resort at some ungodly hour.

I was not alone, though. Always there was a man, another guest, in reception, the one place with wi-fi, huddled over his laptop. I’d marked him down as a serious business type – he sometimes wore work-type shirts during the day, in sweltering heat.

We got talking. He was a senior executive at Carillion and he was involved in a hospital management project. Clearly, judging by his mood and the time of day, things were not going well. When I broached that with him, he rolled his eyes. “You don’t want to know,” he said politely.

I thought of him this past week. Remembered his tension and obvious weariness. Recalled, too, how even then there was juxtaposition, between this seemingly high-powered capitalist and the management of an NHS hospital.

The bits I could glean were to do with productivity and delays, of key performance indicators that had gone wrong and percentages that were disappointing. It seemed odd, hearing KPIs and returns being discussed in the context of the public health service.

That unlikely marriage, of private and public, has been brought to the fore with the subsequent collapse of his company, Carillion. Plenty has been written and said in recent days about this supposedly appallingly managed company that exhibited naked greed, overpaid its senior people, and was an exemplar of shameless profiteering. Its downfall was presented as a major shock.

Really? Or was Carillion a disaster waiting to happen, an inevitable outcome from a model that had been dangerously over-extended, that encouraged union between odd couples?

There might have been surprise at Westminster at Carillion’s demise but in the City there was none. That should tell the politicians something.

Carillion shares had been shorted for four years, by investors betting on the company hitting trouble. Those who followed Carillion were aware the company had four large contracts that had run into problems.

They knew, too, that Carillion had issued repeated profits warnings and its management was in a state of flux.

Yet the public sector contractors carried on handing the firm work regardless.

When Carillion did fall, opprobrium was heaped upon its bosses for being overpaid. But they weren’t, not by the standards of big business. In relation to the public service, yes they were, but that’s in a sector where the Prime Minister’s salary is widely touted as the bar that should not be exceeded.

Carillion was panned for having only £29m in cash in the bank when it went down. That’s not a lot but neither is it too little – plenty of companies keep their cash balances low. It would be strange indeed, and would be worthy of criticism, if Carillion, which made its money from tightly managing public projects, had a much higher amount lying around, dormant.

And that is the issue here – the disconnect between private and public, between a private company being asked to perform a public service.

“In too many cases, we were building a Rolls-Royce but only getting paid to build a Mini,” said Keith Cochrane, the company’s interim chief executive.

That in essence is the difficulty with the private-public partnership. It’s not a meeting of equals, nowhere near a match of like minds and values.

Not in terms of how a company is judged and assessed, not in how it is run, not in its operations. One side is about growing profits and producing dividends for shareholders; the other is about getting something for as little as possible.

The cement that joins the two is the oft-touted phrase “value for money”. An outsourcing contractor is looked upon to be financially parsimonious while keeping its investors sweet. The public organisation must ensure the requisite level of service is provided while sticking within tight financial parameters.

The result is a contract that is run right at the margin. In theory, in talk and on paper, when the deal is being negotiated and sealed, it’s entirely manageable. In practice, the wriggle room is slight.

Carillion was brought to its knees by some projects going wrong at the same time – four out of hundreds. But the company had nowhere to turn.

Labour and the unions have accused Carillion of behaving irresponsibly and exploiting the private-public structure. But it was Labour that drove the ideal, seeing it as a way of securing capital projects without breaking public sector borrowing rules – Carillion and companies like it would fund a project, and then be paid back over decades in the form of a service agreement.

If anything, Carillion can maintain it acted too responsibly, taking on low-margin business, and not charging the earth. It had, said Cochrane, “a desire to do the best thing for customers without properly assessing what is right for Carillion from a commercial perspective.”

Neither side comes out smelling of roses. Carillion took on too much, too cheaply; its public service clients allowed it do so. Carillion issued profit warnings and did not pause and take stock; its customers ignored the signals.

They both acted in a manner that went against their ethos. For that, the system has to be at fault. More realism and transparency are urgently required from private, more worldliness and sophistication from public. Otherwise, there will be a lot more Carillions.

Chris Blackhurst is a former editor of The Independent, and executive director of C|T|F Partners, the campaigns and strategic communications advisory firm.

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