The recent collapse of Carillion is one of the biggest domestic insolvencies in almost a decade, characterised by some as another Lehman. For Britain’s second largest construction company, its 43,000 global employees also provided a range of facilities management and ongoing maintenance services, most notably to a variety of UK government agencies. Until last July, the combined business had a market capitalisation of nearly £1bn, but today PwC is managing the lengthy liquidation process to salvage what it can for its many creditors. Below, David Allen, Chief Operating Officer of Monimove, delves into the issues that led up to Carillion’s downfall, from contracts to supply chain management.
The current consensus is that Carillion overreached itself, taking on too many risky contracts that proved to be unprofitable. In turn, with just £29m in cash assets, this made it impossible to manage its substantial £900m of bank debt and a similarly burdensome £600m pension fund deficit. Most acutely affected by Carillion’s demise are around 30,000 dependent businesses in its supply chain. Suppliers and subcontractors are owed roughly £2bn according to Carillion’s most recent results statement for “trade and other payables”.
According to a survey by assorted industry bodies, small businesses are owed an average £141,000; those with 50 to 250 employees face a shortfall of £236,000; while £15m is the typical debt owed to larger firms. Many of these supply chain companies are at risk of financial difficulties because of unpaid services: insurers estimate that they will pay out only £3lm to affected businesses who had appropriate cover for trade credit insurance. The future of these supply chain businesses, particularly smaller firms, is in doubt since most are unlikely to be paid anything of what is owed. Inevitably, some will go under themselves.
Many suppliers were using Carillion’s Early Payment Facility system which processed more than £400m in invoices, but this has stopped since the insolvency was announced. Meanwhile some subcontractors will be offered further protection through Project Bank Accounts (PBAs) which ring-fence money from the client when a main contractor goes under. But it is not known how many PBAs have been applied in Carillion contracts.
Under the heading ‘Sustainable supply chain’, the Carillion website boasts: ‘With an international supplier spend of around £3 billion, we believe our supply chain partners can help us make a tangible positive impact on sustainability.’ But the reality is that Carillion was not sustainable in any sense: its collapse was predictable because of a reliance on old school technologies to manage its extensive supply chain.
Lack of modernisation over recent years meant that the Wolverhampton-based conglomerate had poor control of labour, materials and services across its broad portfolio of projects. In this context, the specific problem was Carillion’s use of ineffective and irrevocable letters of credit to its contractors and sub-contractors.
One method employed by Carillion was to sign contracts, receive a large sum of money and then delay payments to subcontractors which allowed it to generate profits from holding that money. These down payments resulted in widespread neglect of key contractual requirements.
There was a systemic failure to ensure that there were robust terms and conditions with the necessary protection of enforcement clauses in the supply of goods contracts combined with an insufficient ability to exercise such clauses and if necessary, undertake injunctive action.
Sales were also prioritised over sound management. Carillion’s use of an inefficient supplier management system facilitated late payments to suppliers – over 90 days in most cases and often up to 120 days or more – which resulted in frequent late deliveries and penalties. The combined effect caused delay in project delivery across several key projects, such as the Royal Liverpool and Midland Metropolitan hospitals, with hefty penalties imposed on Carillion itself as a result, turning what should have been profit-making contracts into loss-makers.
Furthermore, the changing specifications of materials under “value engineering” cost time and encouraged bad suppliers. Consequently, there were no clear effective agreements between contractors, subcontractors and suppliers, which meant that all parties were operating in a “grey zone” that was conducive to gross mismanagement.
Within the context of backward supply chain management, Carillion’s downfall was circumscribed while the implementation of new supply chain technology may have saved it from going under. This is not a case of being wise after the event: these problems were entirely foreseeable and preventable.
Discussing the latest on stock markets, currencies and the news that Carillion will be heading into liquidation, Rebecca O’Keeffe, Head of Investment at interactive investor talks to Finance Monthly below.
The strength of sterling and the euro are seeing European stock markets fall slightly, as currency gains cap equity valuations. Sterling has been riding high both on the basis of a weaker US dollar and expectations of a softer Brexit than previously forecast. These currency moves are having a mixed effect on big corporates in the UK, where dollar weakness has given commodity prices a further boost with the big miners benefiting, while other big global companies are falling on the basis of lower dollar profits when converted back into sterling.
The government’s decision to walk away from Carillion appears to be based on optics rather than logic and looks like the wrong decision was made for the wrong reasons. There is no doubt that Carillion posed a huge political challenge for the government, which did not want to be seen to bail out another group of private shareholders and banks after suffering such a backlash from their decisions during the financial crisis. However, the prospect of the government temporarily funding existing Carillion public service contracts, alongside the likely increase in costs for renegotiating contracts with new suppliers, make it highly likely that they could ultimately pay far more than if they had provided the guarantees that Carillion’s creditors needed. It is far from clear at this stage what the wider implications will be from the liquidation of Carillion, both in terms of its impact on the construction industry and on the wider economy as a whole, not least from the enormous uncertainty that now afflicts the tens of thousands of Carillion staff and those other companies directly dependent upon it.
Turning our attention towards Manufacturing, Finance Monthly spoke to Ray Torres - President and CEO at Checkers Industrial Safety Products, who sheds some light on the company’s work, the challenges that it typically faces and the achievements that he is most proud of.
Can you tell FM a little about the services you provide and the kind of clients you deal with?
Checkers Safety Group designs, manufactures and sells, primarily through Distribution, safety products focused on protecting People, Assets and Environment.
Our customers are typically distributors who service industrial and commercial end-users in various markets, including oil & gas, mining, manufacturing, construction, infrastructure projects, utilities, energy, aviation, military, food service, janitorial and sanitation.
How do you tailor your services to the needs of each individual client?
One of our core competencies is “We Listen” - we listen to the market, our customers and the end-users to better understand the particular safety issues that need to be addressed and then design products to solve those issues and needs. We are the experts and thought leader in our niche safety products categories and our customers look to us to provide innovative and revolutionary products solutions.
Are there at times particular challenges involved in delivering services? Do you have any examples?
There are always challenges in every business, but our challenges are typically associated with new product introductions, which we put through extensive independent third-party testing. This often means a longer lead time to market but ensures our products meet the performance standards required by our customers and the industry. In addition, oftentimes we have competitors attempt to copy our products, without the requisite quality and performance standards, so we spend a fair amount of time defending our intellectual property and differentiating our products from copycats who try to grab market share, trying to piggyback on our product quality innovation, with price and inferior products.
How would you describe the evolution of the US health & safety manufacturing industry over the last decade?
Safety is clearly becoming more important across the board in every industry and we are seeing more governing bodies and regulatory agencies issuing safety standards and performing health and safety audits. Everyone is more conscious of health and safety and are demanding a safe work environment. Risk assessment and mitigation is more prevalent and companies are now better understanding the cost of an unsafe work environment.
How significantly would you say this has affected US legislation, businesses, and risk prevention within particular industries such as construction and transport?
This has pushed safety to the forefront and businesses are trying to get ahead of the issue, by preventing accidents and installing safety procedures and products to protect workers, assets and the environment, which is an integral part of our mission.
Given the quality of products you provide, how would you say this compares to safety groups from elsewhere around the globe?
Our products are sold globally into more than 70 countries and are considered the market leader in our niche product categories. We tend to have a leading market position in the markets we serve and our products tend to be the best value, combining quality, durability, reliability and price to be extremely competitive.
In providing safety products or services, what are the key compliance considerations you have to make?
First, we have to understand the conditions under which the products will be used to design the product properly to meet the harshest conditions. For example, many of our products are used in extremely cold and extremely hot environments, with temperatures ranging from as low as -40 degrees to as high as 140 degrees, so our products have to be sufficiently robust to meet the extreme differences. Second, we have to ensure our products meet regulatory requirements, not just from a performance perspective but also with the raw materials we use. Third, our products need to be durable enough to last multiple years or multiple usage and still perform under the harshest condition.
Are there any complexities involved in the regulations of safety equipment you develop?
There is no one overall governing body that applies to all of our products; some are under the auspices of OSHA, while others are governed by MHSA, for example. Therefore, we need to understand the various regulations and design products that might have to comply with multiple agencies and regulations.
In terms of market competition, where does the company stand globally and what are its goals moving forward?
We are viewed as market leaders and we typically enjoy a leading position in our product categories and end-markets. Our goal is to be the thought leader and expert in our product categories and end-markets. We focus on offering differentiated products, with some level of intellectual property. We want to continue to expand our safety product offerings, adding logical adjacent new product categories to complement our existing product categories.
Is there anything else you would like to add?
We are active in the acquisition front, looking to acquire companies that have a similar mindset of offering top quality, niche products, with a leading brand and market position. Our passion is around protecting people, assets and the environment and are interested in adding products that fit that criteria. We focus on family owned businesses, where the owners are looking to transition the business and want a safe haven and friendly acquirer to maintain the legacy they have created. We have a proven history of helping businesses grow when they become part of the Checkers family.
“We tend to have a leading market position in the markets we serve and our products tend to be the best value, combining quality, durability, reliability and price to be extremely competitive.”
In 1987 Checkers Safety Group began with a simple vision: to be a dynamic and growing organization dedicated to saving lives and protecting assets by delivering innovative safety products. That vision still drives Checkers today. With the company’s product offerings of House and Cable Protection Systems, Wheel Chocks, Warning Whips and more, Checkers has created a unique solution for each or their customers’ unique problems.
Checkers Safety Group is headquartered in Broomfield, Colorado, U.S.A. with another manufacturing and support facility located in Mesa, Arizona. Each of the company’s products is produced in the United States. Serving a diverse number of customers and markets worldwide for over 25 years has provided Checkers with the knowledge and insight to ensure every one of their customers’ needs is satisfied. Through the company’s continued growth and innovation, Checkers is poised and positioned to continue to serve as a leading global provider of industrial safety products.
