Carillion’s Demise

I confess, until it ran into financial difficulties and made the news last week, I’d never heard of Carillion, the company the British government seems to have outsourced a lot of stuff to. According to the BBC:

The company employed 43,000 people worldwide, 20,000 in the UK, and had 450 contracts with the UK government.

And this graphic shows us what they actually did:

To me, this looks like a catch-all company that has bedded itself in with the government and helpfully told politicians and civil servants that they can take care of everything. No problem, just leave it to us, just keep that cash hose turned on full.

Having emerged from a company specialising in civil construction, Carillion appears to have branched out somewhat. I don’t know how much synergy there is between providing hospital beds and building a high-speed railway line, but they look like an outfit which has lost focus of its core business, probably wooed into other areas by guaranteed government revenues.

To many, governments subcontracting services like prison maintenance and school catering might seem like a good idea and on paper it probably is. But when mass-subcontracting like this you need to be careful you’re not just replicating the problems of government-run bodies further down the contracting chain.

A company like this will be well-connected politically, which means they likely hired a lot of former civil servants and had the mobile numbers of plenty still serving. If you’re a company dependent on sucking up to politicians and civil servants while offering a sprawling array of services on high-profile and highly-politicised projects, chances are you’re a lot better at politics than you are business. Over time, I expect the upper and middle management got a lot better at telling government representatives what they wanted to hear and a lot worse at delivering core services, which would have been increasingly subcontracted to specialist companies to the point Carillion might not even own a single cement mixer.

This is pure speculation of course, but readers of my blog are used to that and I’m just running with what I’ve observed in modern corporations, especially those involved with governments. A post-mortem of Carillion might show a company stuffed full of very modern managers who excel in telling their superiors and clients exactly what they want to hear, a pattern which extends right up to the CEO. Most will spend their time in meetings discussing figures and schedules which are wholly fantastic, in a culture where career progression is based on how “on message” you’ve been thus far in your tenure in relation to the nearest manager’s latest whim. Experienced hands will have retired taking their knowledge with them, replaced by bright young things who’ve been told to get with the programme or else from day one. Power-skirts will have arrived en masse, egged on by government bodies tasked with ensuring their main contractors fulfill all obligations regarding diversity, gender compliance, and office environmental practices. Everyone would have been focussed solely on the process, the outcome be damned. Anyone left over from a previous era who liked to “get shit done” would have been hounded out or shoved in a corner, his career over, for having the wrong attitude. Anything useful carried out under Carillion’s management would have been done by strong, Sun-reading, fit young men in dirty coveralls with a different company logo on the back, subcontractors each and every one. Meanwhile, Carillion’s employees would have shared spreadsheets and Powerpoint presentations in air-conditioned offices and congratulated each other on how much value they were adding.

Perhaps I’m being unfair, and I know nothing about Carillion. But from what I can tell, this is the direction a lot of large corporations are heading in, i.e. becoming bloated monstrosities engaged in process-driven guff while subcontractors do all the useful work. What was the size of Carillion’s overhead on a typical project, and how much markup did they need to apply to cover it? I’ve seen the figures for a large engineering company on a major project and their overheads – mostly useless company-men calling themselves managers – would make Diana Ross feel like she skimped on her global tours. I think we’re going to see a lot of large corporate failures in the next decade, with many surviving until then thanks only to a lifeline of legacy rents which the current management is wholly unsuited to maintain or replicate. Thanks to James Damore’s lawsuit we’ve already seen what state Google’s management is in; I expect this is typical, to some degree, of a lot of modern corporations.

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41 thoughts on “Carillion’s Demise

  1. So, looking at the graphic, I can see this is a disaster. Crazed felons will now run free, children starve at school, old folks will expire in hospital corridors, our army will surrender more quickly and most important of all, executives will miss meetings because they will soon have to walk to the north from London.

    However, Kayleigh wasn’t a bad song.

  2. Anyone left over from a previous era who liked to “get shit done” would have been hounded out or shoved in a corner, his career over, for having the wrong attitude.

    As it happens I have a friend who worked for Carillion in their bidding department and in contract management. He got increasingly disillusioned by the types of people you mention who insisted on winning bids at all cost and took early retirement. I haven’t seen him for a while as he moved up north but I’ll bet he’s not surprised.

  3. I don’t think you are far from the mark, Tim. On the other Tim’s blog is this rather pointed comment

    In March 2017, Carillion looked in reasonable shape, albeit with a lot of debt and very high levels of accounts receivable. By the time of the first profit warning in July, things looked dreadful : suspension of dividend, profit warning, debt climbing very rapidly, £800m provision on major contracts (probably the reported receivables not being collectable) , CEO demoted to COO – generally a sign of the board losing trust and sending him to clean out the stables.

    Why the government continued to award them new contracts after this is astonishing.

    A few months later, September, that COO left the company along with the CFO and the managing directors of the construction and the services divisions. Never a good sign. The CFO of the UK operation moved up to the group job and a Chief Transformation Officer was parachuted in by a Consultancy outfit – one of those turnaround specialists. But the problems were too big to deal with. I am surprised that the banks didn’t pull the plug earlier but maybe they didn’t want the publicity “greedy vulture banks more interested in money than hospitals.” I wonder if they put in the turnaround guy

  4. A few months later, September, that COO left the company along with the CFO and the managing directors of the construction and the services divisions.

    Well, that’s handy, eh? Take the company to the edge of a cliff and step out just before it crashes over. Shareholders need to get a much better grip of their boards, IMO.

  5. On face value, they do look as if they were too diversified but too me the suspicious and damming issue may be that they have went into receivership at this early stage of the UK construction boom. You would expect a mediocre organisation to survive in a buoyant market up until just before high tide anyway.

    Assuming that the average staff will get their entitlements, the tragedy here will be all the competent subcontractor/suppliers that have been providing good services that simply will not be paid or at best get pennies in the pound for their debt in two to three years if they can survive that long. Just imagine that you have been strung along by Carillion and are now in 90 day arrears, had put in your December claim, paid all your staff and your suppliers including Christmas holidays and finding this out. And that is how it tends to go down.

    Cash flow is probably my biggest worry in business and something that keeps me awake at night, if most folk knew how close to the line a lot of organisations run I don’t think anyone would believe you.

    Coincidentally I sold a tranche of shares of a similar type of organisation on Monday. Their name is Lendlease and they are about 50% bigger than Carillion and have recently been picking up some big development projects in the UK they are also fairly diversified but not to the extent that Carillion were. They issued a profit warning recently and also went ex-dividend so I cut and run and took the gain. We do work for them in Australia and we gave them a presentation last year in one of their new ostentatious towers on Sydney harbour called Barangaroo. They had waiters come and serve us in the meeting rooms that had 180 degree views of the harbour and the bridge right there you could nearly touch it, my boss who is a hands-on type business owner said it will all end in tears. I showed him their share performance on my phone when we came out and he said he didn’t care mark my words.

    By the way given the existing rail network and the short distance between major densely populated business centres I thought that the UK would be much further ahead with their high-speed rail network but if anything seem to be at the bottom of the pack when compared with their peers? there may be a reason but it sticks out like dogs balls.

  6. Their name is Lendlease

    Yes, I know of them: they run a lot of the giant shopping centres in the world. Interesting that they might be in trouble.

    By the way given the existing rail network and the short distance between major densely populated business centres I thought that the UK would be much further ahead with their high-speed rail network but if anything seem to be at the bottom of the pack when compared with their peers?

    The problem here is Britain is densely populated: you can’t go far between cities without running into towns, villages, and roads. This means land acquisition is difficult and expensive, plus you need lots of tunneling to get past roads and hills. Compared to France – which is largely open countryside – or Holland – which is completely flat – much of England is difficult to put railways in.

  7. Bardon, most countries pay for rail services mostly from general taxation so fares are very low. In the UK, fare payers take the brunt. When it comes down to it people seem to prefer not to take trains if the fares are comparable to say the costs of driving.

    Also the UK train service is concentrated around London. Outside the rush hours the trains are fairly empty. Distances are another factor. A high speed train between London and Birmingham is only going to save something like 20 minutes over a normal train. It’s not like going from Paris to Marseille where the time saving is 5 or 6 hours

  8. “Shareholders need to get a much better grip of their boards”

    If its any consolation they will all get the same level of haircut on their failed investment. I just looked at their share price they were a dog since 2014 but i guess speculators were buying on hope. Maybe class action coming?

  9. “Interesting that they might be in trouble.”

    I think they are in far better shape than Carillion and also have a healthy and diverse client bases as well, I wouldn’t say they are in trouble though. They could be a buy again once the profit warning is fully priced in.

    With the money I got back out of Lendlease I was looking at two share options to buy back in one was an established gold miner the other was a lithium exploration company (batteries) I decided to go for the less speculative gold miner, they are down about 1% but the lithium dude went up 30% in one day! Win some lose some and I do have other lithium stocks anyhow.

  10. Tim, in large public companies, shareholders have essentially no power whatsoever. See Foss v Harbottle:
    The judge opined

    Wigram VC dismissed the claim and held that when a company is wronged by its directors it is only the company that has standing to sue. In effect the court established two rules. Firstly, the “proper plaintiff rule” is that a wrong done to the company may be vindicated by the company alone. Secondly, the “majority rule principle” states that if the alleged wrong can be confirmed or ratified by a simple majority of members in a general meeting, then the court will not interfere

    So only if there is a motion at the company AGM can the shareholders decide anything. Carillion held its AGM on May 3, before the profit warning!

    It’s a coordination problem as much as anything. Shareholders with support of 5 per cent of the total vote can call meetings, and can circulate suggestions for resolutions with support of 5 per cent of the total vote, or any one hundred other shareholders holding over £100 in shares each. Not even fund managers, who generally hold about 2-5% stakes in companies and who are in regular touch with boards of directors, feel inclined to go to the hassle. They also seem to have been blindsided by events.

  11. And lets not forget each of the directors will be insured against any action taken against them personally in their capacity as a director, so if you want to go say the Board, what and when did they know, how did they disclose then you are effectively taking on the insurance firms lawyers. The big end of town lawyers from both sides are the only ones that will benefit from such an action.

  12. @Graeme

    Thanks for the explanation.

    HSR hasn’t taken off in Australia either even the arguably viable Sydney to Melbourne 900km route. That is one of the busiest air routes in the world, same in other areas Australians they will tend to fly before they would take a train or drive.

  13. Holland doesn’t have much real HSR either, and Belgium only parts of the link between Brussels and London. As countries, neither really need it, but it would be nice to have faster international connections.

  14. HSR2 may be Britain’s next big disaster. There appears, north of Watford, no great demand for it (and even a little resentment that the only people who will gain will be those rolling in expense accounts) and indeed open resentment such as in a pleasant village not far from where I live where better properties than mine have been purchased to be pulled down in order to help along the slightly faster choo-choo, at some point in an inflation-riddled future.

    A lot of northern England is undermined and while there aren’t great distances between population centres most of the land is spoken for by people with money who either want more money to relinquish it, or in the case of a former group CEO of mine, was able to put sufficient pressure to bear on the government to make them (at public expense, admittedly) bend an improved dual-carriage road around his property rather than him lose any of his precious land to tarmac and rubber.

  15. Some lengths in kilometers of HSR speed of 200 km/h (120 mph) or over by country including lines under construction, I stand corrected on the UK there is far more than I thought.

    United States 44.8
    Netherlands 175
    Belgium 209
    United Kingdom 1377
    France 3317
    Japan 3446
    Spain 4900
    China 38155

  16. Bardon the above post explains why we don’t really need HS trains. Our existing intercity trains go at a fair lick (125 mph = 201 kmh). Going that bit faster at great expense is a shite return on investment when viewed a standalone. But…and there is a bit of a business case here… we need more capacity on trains going North/South anyway. New lines. It costs very little extra to build HS new lines than it does 125 mph new lines – hence HS2.

  17. I think the issue with the lack of shareholder activism in the UK is that the majority of shareholders aren’t aware of the fact they’re shareholders at all, much less that they can vote on stuff. As far as they’re concerned, the contribute to a defined contribution pension and that’s that.

  18. I don’t know whether HS2 is a good idea or not, but the criterion should not be reducing the time taken to travel between London and Birmingham and then further north, but the expansion of rail capacity with a new line.

  19. Good post at Raedwald about this as well:

    Yes, that is a good post, and the comments. Thanks!

  20. Yes that was the point I was trying to make before with Great Britain’s well established rail corridors and facilities they could really capitalise on improvements to the existing networks. It would be good to see them getting some more benefit from having the worlds best and starting the whole thing off, James Watt, Brunel and the like would approve.

    @Watcher

    Property rights, certificates of title and common law are some of the best things that England has bestowed on the Commonwealth, please don’t change them in the mother country!

  21. I think Tim that is probably a pretty shrewd statement of the problem.

    The key point to take away is the sucking at the taxpayer teat. Unfortunately most of the comment in the Mostly Socialist Media is the opposite – ie that it is privatisation which has caused these problems.

    May’s Blulabs are nowhere to be seen making the point that the root cause of the problem is that Carillion (along with presumably Crapita and BAE and doubtless others) no longer operate or reason like proper private companies in free and competitive markets.

    They have subsumed onto the maw of the monster that is state spending and just like the NHS, are pretty crap.

  22. My father rarely discussed business at home but he did describe one episode as part of a sermon to the effect that the managers of big companies were typically no businessmen.

    He won a contract to deliver material to a site belonging to Division X of Company A. He looked around and found a good supplier – Division Y of Company A. This profitable line continued for some months. As the contract was approaching its end he thought he’d have some fun. So he told Division Y that he’d pay them a bit extra per load if instead of delivering to his stores they delivered direct to site. And they agreed.

    So there he was, pocketing a profit while Company A delivered stuff to Company A. Wot larks!

  23. Just cause it hasn’t been mentioned yet…imagine how much sooner Carillion would have gone under if interest rates were 2% higher than they are now. Actually some enterprising soul can probably calculate it by looking at their accounts.

  24. Just to make you giggle, here is an extract from the last annual report:

    “Creating a diverse and flexible workforce, based on strong employee engagement, is also critical to our success. In 2016, we continued our journey towards greater diversity by increasing the proportion of female employees in the Group to 37.8 per cent (2015: 36.9 per cent) and the proportion of females in senior leadership roles was unchanged at 18 per cent. We have also launched our Diversity Strategy which sets out our corporate goals and introduces the concept of a Diversity Council in the UK that will represent all strands of diversity”

  25. When I make one of my (rare) investments in an individual equity, one of the first things I investigate is the company’s commitment to diversity and equality.

    The best find is one that is declaring a newfound priority in such concerns in the face of slowing growth.

    Makes for a great 6-12 month short.

  26. It would be good to have a correlation on that. If a large corporate group – and Carillion had at least 2000 operating subsidiaries s in a wide range of cultures – starts focusing on such stuff (later in the report they talk about the success of the LGBT team in UAE) it must be a portent of disaster. It used to be as easy as getting the Queen ‘s Award to Industry or Exports. An unfailing clue to imminent disaster

  27. Christ! Is Battersea Power Station redevelopment still in progress? One of our lads went off to sub on that must be…. well I remember Frankie Goes to Hollywood released Relax about then. So they’re both Golden Oldies. For some, anyway.

  28. Bardon
    “Just imagine that you have been strung along by Carillion and are now in 90 day arrears”

    My experience of UK construction payments was the average payment was received around 110 days after invoice. Carillion had a reputation as one of the worst payers, 180-200 days. A large part of their cashflow was generated by arbitraging between quick government payments and screwing contractors with long, long payment terms from what I understand.

    A lot of subs will be deeply in the hole.

  29. Bardon;
    “Their name is Lendlease and they are about 50% bigger than Carillion and have recently been picking up some big development projects in the UK they are also fairly diversified but not to the extent that Carillion were. They issued a profit warning recently and also went ex-dividend so I cut and run and took the gain. We do work for them in Australia and we gave them a presentation last year in one of their new ostentatious towers on Sydney harbour called Barangaroo. They had waiters come and serve us in the meeting rooms that had 180 degree views of the harbour and the bridge right there you could nearly touch it, my boss who is a hands-on type business owner said it will all end in tears. I showed him their share performance on my phone when we came out and he said he didn’t care mark my words.”

    I’m a big believer in the fancy new HQ signalling the end for any kind of company. BHP did this in Perth a few years back, just turned the lights on the new palace as the iron ore price crashed.

    “December 2007 – BHP signs the biggest office leasing deal in Perth’s history—60,000 sq m.[3]
    2007-2008 – BHP denies it will be relocating its headquarters to Perth
    March 2008 – Perth’s Lord Mayor announces that BHP will be headquartering in Perth, and their Melbourne operations will be significantly downgraded.[3] (This is confirmed in August 2014).[4]”

    i.e. they had to move all their operations there to justify the spend.

    Nothing wrong with celebrating success, but when it turns into a culture of entitlement in any company, the end is near.

  30. Whenever I am a potential client and walk into an excessively expensive HQ I’m not impressed because I know I’m going to be paying for it.
    At which point, if at all possible, I take my business to a company with more modest premises.

  31. “When I make one of my (rare) investments in an individual equity”

    I just bought into ERM Power Ltd [ASX:EPW] this morning, its mostly about their price action and sector for me. I kind of like buying high and selling higher and I don’t go looking for bargains in stock ie its not a supermarket bargain stocks are always a bargain for a reason. This horse is a little bit unique being an electricity merchant that sells power to businesses and also helps them manage their consumption and therefore reduce their fixed costs.

  32. “Carillion had a reputation as one of the worst payers, 180-200 days.”

    That is massive and clearly unsustainable cash flow velocity to any functioning business with outgoings, the only hope for the suppliers is that they have client debtors insurance, it would be hard to imagine any business being able to write off that amount of bad debt unless Carillion were only a very small % of their overall revenue stream. Payment defaults are the number one catastrophic risk that a business faces, it is part of the matrix and always will be and it bites business all the time.

    “A lot of subs will be deeply in the hole.”

    All those suicides, broken families, broken businesses, financial hardship, broken dreams, now mal-investments suddenly flushed down the drain because your client didn’t pay you for work that you had properly performed and paid all your outgoing costs for. Its a risky business alright.

  33. One of the (many) reasons I consider myself to be an ex-libertarian is they ‘everything private good, everything state run bad’ meantality, and how some overlook such failures and always find some way to blame the government for private sector comic ups (see also Libor, VW emissions, etc)

    IMAO it doesn’t matter anymore if it is a state of private run, the problem is the uselessness of British Management. Related to your previous post about governments and their people’s (which I’ve only just caught up on) I suspect part of the problem is that for a few hundred years our brightest and best all moved to the colonies, and those that didn’t were wiped out in the two world wars.

  34. “Here you go, an official 120 day payment policy, with reality being much longer…”

    Jesus wept, talk about a red flag, 120 days is off the planet, never mind late payments after that! The suppliers must have been on a factoring system as well, ie financing based on say 80% of their invoice value, yuk what a cluster fuck.

    But its worse than that as I said before their only hope is that they had client payment insurance. Normally it is quite easy to get income insurance for a client that is listed on the stock exchange but there are exceptions. There is chance that the insurers would not insure a client that has terms like this and that have published warnings against them. If this is the case it may mean that a lot of the suppliers did not have client debt insurance cover and if not and they have a big exposure say 3-6 months of income then they will probably fold.

    For example, I had a fairly high profile client last year that was listed and when we applied for debtor insurance the insurer refused cover because their research revealed that they had financial problems. Debtor insurance is a condition of our offer, so we renegotiated with the client for advanced milestone payments, happy days. That is up until the final stages of the job when there was a problem outside of our control which delayed the job and caused us additional costs and opportunity costs, over and above what we had received in advance. We had to wait longer for this payment as we had to go through the agreed contractual process for approving variation which took about 60 days in total from when we were able to raise our paid on presentation invoice which was about 25% of the increased contract value. Heard nothing back, no payment made, chased them up and eventually got a Dear John letter from the administrator. Written off as a bad debt. That was the only one for that year and a relatively small amount in our overall income numbers (less than 1%) but it does happen even if you manage it closely.

  35. “for a few hundred years our brightest and best all moved to the colonies”: except that they clearly didn’t. In my family the big emigration to the US was in a generation when the mediocre brothers left and the bright boy stayed. A record exists of why they left: cheap land and less competition.

    I once tried to think of anyone conspicuously “brightest and best” who left the UK for the US before WWII. In the very top flight I came up with only one name – Joseph Priestley. And he was pretty much chased out by the mob. One tier down there was Alexander Graham Bell. The point is that people clever enough to cope with competition in a developed society where the social niches were already full were unlikely to head for the backwoods of the US or its dreary provincial towns. So the US probably got mainly a ragbag of people fleeing wives, creditors, and the police, mixed with mediocre but respectable people like my kin, plus indentured servants, religious loonies, and criminals being transported.

    P.S. The expression “brightest and best” was originally intended as sarcasm. In my view it’s best reserved for that.

  36. So the US probably got mainly a ragbag of people fleeing wives, creditors, and the police, mixed with mediocre but respectable people like my kin, plus indentured servants, religious loonies, and criminals being transported.

    And, related to my post on the weather and how it effected farmers, agricultural workers on the wrong end of a depression or a spell of bad weather.

  37. “Christ! Is Battersea Power Station redevelopment still in progress?”

    Its being flipped as we speak.(cough)

    …………..

    Battersea Power Station to be sold for record £1.6 billion

    The proposed deal, announced on the Malaysian stock exchange this morning, would make the Grade II* listed former generator the most expensive building ever to change hands in Britain, dwarfing the £1.3 billion paid for the “Walkie Talkie” City skyscraper last year.

    Its next owners are the Malaysian asset management group Permodalan Nasional Berhad, and the private-sector workers pension fund Employees Provident Fund of Malalysia (EPFM).

    They have agreed to pay about 1,000 times more for the building than the original purchaser, theme park entrepreneur John Groome. He handed over £1.5 million for it to the Central Electricity Generating Board in 1987.

  38. Patrick,

    “But…and there is a bit of a business case here… we need more capacity on trains going North/South anyway.”

    Do we? Really? What are all these people doing? Why is there more demand for railway, when I can work on software running in Dublin, Lincolnshire and New Jersey? It’s not like they’re off to work down a pit or at the foundry or picking grapes. They’re going to an office in London, mostly to sit at a computer and make things or fill things in and talk to people on the phone. You can do that from home, or from a Regus office.

    I’ve done work for clients in London and most of their staff didn’t need to be there. You can categorise photographs from Belfast or Inverness. I know businesses that moved out. They have a couple of people in London for client liaison, but the rest are in Berkshire and Yorkshire.

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