Carillion: A textbook disconnected disaster

Many outside the industry may not have heard of Carillion before the news of its collapse broke earlier this year, but it’s importance to the UK economy cannot be underestimated. The industry giant had around 20,000 employees here, 450 governmental contracts, major construction projects across the country - including High Speed 2 and the redevelopment of Battersea Power Station, maintenance contracts for 50 UK prisons, as well as wider operations in the Middle East, the Caribbean and Canada. The full extent of the impact of its demise is yet to be seen, but already there are doubts over the completion of the Royal Liverpool Hospital and the number of Carillion employees losing their jobs continues to rise.

A collapse of this magnitude involves a huge range of factors. The ethics of how the company was run, a case of a business overreaching, or perfect storm of high-risk contracts going wrong – all three have been touted as possible causes. What’s clear is that it was not one factor in isolation, so I want to explore some business learnings that can be taken. What are the core business practices that Carillion should have done better, and that organisations across every sector can adopt?

Don’t start on the back foot

One of the key elements of the Carillion downfall was a series of large contracts that proved less lucrative that expected. It slashed the value of these projects by around £845m and the company’s debts soared to cover this, eventually crippling the business. Part of this originates from poor project assessment. All businesses should recognise the importance of due diligence before approving projects. They should also acknowledge that every project is different, and will have its own complexities requiring specific modelling and analysis. Businesses need to have the right technology and rigors in place internally to safeguard against starting projects on the back foot.

See also:

• Skills shortage in the UK construction industry

• Carillion’s UK facilities management contracts to be acquired by BGIS

• Fairfax to purchase Carillion's Canadian operations

The blind leading the blind

One of the calling cards of Carillion is the apparent out-of-the-blue nature of its collapse. Even the company’s own board of directors appeared to not see it coming. They declared in the March full year results that the company had a “good platform and clear strategy to develop the business”. There were clear signs from the market, with an unheard-of proportion of shares reaching 30% in April last year – being used in “short trades”; betting against the company’s success. What did these hedge funds see that the business itself could not?

Without properly connected planning and reporting, the leadership team could not have had full visibility of what was going on in the company, particularly at a reasonable level of granularity. In the new financial landscape, basic profit and loss indicators are no longer sufficient. Each business stakeholder needs relevant indicators with fine levels of granularity, updated weekly, daily or even in real-time; reviewing finances annually or quarterly is simply too little too late.

The legacy financial tools that many business leaders use today are not equipped for the rigors of running a global enterprise in this more dynamic and volatile economic environment. Organisations need to be looking to the cloud if they are to get the real time insight they need, allowing the leadership teams to work, plan and forecast together, and not be caught off guard.

Effective forecasting

If you don’t have proper sight of your working capital, how can you manage it effectively and avoid inevitable cash flow problems? Part of Carillion’s demise has been attributed to payment issues with Middle Eastern contracts, but such delays are an inevitable part of doing international business. Any SME owner can tell you the importance of getting money in the bank as soon as possible – and it’s no different at the enterprise level. Organisations of all shapes and sizes have to be able to mitigate against potential delays like this. In today’s volatile economic markets, fortunes can change in the blink of an eye and businesses need to have complete sight of their current financial positions, no matter how big or complex the enterprise is. Late payment is endemic in the construction industry. Carillion should have been able to manage the impact of payment delays, forecast their ripple effect throughout the business, and see the action that would need to be taken now to mitigate those future negative impacts.

The collapse of Carillion could have potentially huge consequences on the UK economy and those the lives of many of its employees. While it is difficult to know for certain if this could have been avoided, it’s important that the wider business world takes key learnings from Carillion, so they are not caught unaware. Organisations need to be ready for any scenario, in what is becoming an increasingly uncertain and volatile global economy.

Karen Clarke, AVP Northern Europe, Anaplan