COMMENT: In January, the news of Carillion’s demise broke and the construction and outsourcing sector was plunged into darkness, says Ezra Nahome, chief executive, Lambert Smith Hampton.
For many it was a huge shock, but for others a corporate failure of this scale was inevitable. After all, plenty of firms have been wrestling to maintain both cash flow and margin since the financial crisis.
Delving deeper, it is clear a trend has been emerging for some time in the property industry.
Advisers are continuing to compete at such levels that margins are squeezed to the point where there is little room for manoeuvre.
In the case of procurement in the public sector, in which Carillion dominated for some time, it is sadly an increasing case of a race to the bottom.
In a sense it becomes a big game of KerPlunk – one hiccup and the whole empire collapses.
Jumping through hoops
The root of the problem seems to be the nature of the procurement process.
It is a time-consuming, inefficient and challenging procedure for any business to make government project shortlists.
The fact is, a supplier must jump through multiple hoops to secure the coveted prize.
Little thought is given by procurement teams to the opportunity cost – businesses, after all, aren’t paid for the time spent to make shortlists.
This can take anything up to a year and is often shunted to already overloaded junior staff as senior personnel are consumed by client work, juggling the demands of existing projects.
Sadly, the outcome of the process is all too common as well.
The differentiator becomes price and, yes, the lowest tends to win.
Some will argue this surely is business, but the flaw to this assertion is the assumption that price and value are the same.
Instead, let’s think and turn this on its head for a second.
When employing staff, all firms are after the best talent and they know a premium needs to be paid to secure the brightest.
Yes, there is inevitable negotiation, but in the long term it is a no-brainer.
Clients gain value, expertise and experience that pays time over through the focus on quality and accepting that better resources cost more, compared to the cheaper option without the skill set that’s sorely needed.
Casualties may keep coming
The alternative is stay as we are and the end result is the string of difficulties we’re seeing in the outsourcing market.
To put it bluntly, the casualties may not be over.
Inevitably, and unfortunately, the competition becomes so intense that an increasing proportion of contracts in our industry are not making money or worse still, are loss-making.
Over time this is clearly a dangerous financial tightrope to be treading. An undercutting mentality ensues which can leave balance sheets teetering precariously on the edge. One knock and it unravels, with the consequences felt by all.
In Carillion’s case, the tune was debts of £1.3bn, a pensions black hole of c£2.6bn and mass redundancies. Interestingly, it was cash flow that caught them out.
The property sector is not alone in this malaise. This has just been highlighted in the British passport fiasco dominating headlines.
Franco-Dutch company Gemalto is set to win the post-Brexit contract to re-introduce blue British passports, and rumour has it that it’s done so by undercutting its rivals by £50m.
Solving the problem
Surely now is the ideal opportunity for this to stop. The onus is on the property, construction and outsourcing industries to come together and recognise we can and must do better.
Rather than pointing the finger at rivals – which, of course, should be done if financial mismanagement and irregularities came into play – it’s important to look at ways to solve the ongoing conundrum.
It makes zero sense when contracts are blindly followed to the point where core business fundamentals are lost.
One solution is to reduce the length of the procurement process – this will allow more time to focus on generating value, creating savings and improving buildings.
Another could be the introduction of legislation that assesses the financial viability of a contract. If certain parameters aren’t met, the deal can’t be done.
It has to be secure enough that the contractor makes a certain margin, and the client is assured their supplier won’t go under.
This will strengthen the whole supply chain for everyone operating in our sector.
