What went wrong at Carillion?

A professor at Manchester University has said Carillion’s woes are caused by its decision to become an outsourcing conglomerate.

As the fate of the UK contracting and services giant hung in the balance over the weekend, many were asking how it could have failed so badly.

In July Carillion revealed an £845m black hole in its finances, blaming a number of large, loss-making contracts.

That, on top of a pension shortfall of £587m, left it facing a debt mountain of around £1.5bn.

But Professor Karel Williams at Manchester University’s Alliance Manchester Business School, said Carillion’s decision to evolve from a building contractor, primarily, into an outsourcing conglomerate was "a bad idea".

The strategy certainly made Carillion indispensable to the UK government. It maintains 50,000 homes for the Ministry of Defence; manages nearly 900 school buildings nationwide; is the second-largest supplier of maintenance services for Network Rail; and holds £200m worth of prison contracts, according to figures compiled by the BBC.

But that’s the problem, said Williams.

"With outsourcing, you have to continually bid for new contracts, and the stock market expects to see continuous growth," he told newspaper The Guardian on Saturday. "But sooner or later you take on a contract that makes huge losses and the operation can’t sustain those losses.

"There are problems when you move past being a specialist outsourcer. Many conglomerates just churn through contracts and move into areas they don’t understand, until their luck runs out. This was an accident waiting to happen."

Whether or not Williams’ assessment is accurate, Carillion’s misfortunes on a few major projects will have made its underlying position even more untenable.

Last year a review of contracts by KPMG uncovered the need for the £845m "provision" for loss-making projects. Of that figure, £375m related mostly to three UK PPP projects, including the troubled £335m Royal Liverpool Hospital, while £470m was lost in the Middle East and Canada.

Overseas, Carillion has been reported to be locked in a "£200m row" over cashed owed on a major contract in Qatar linked to the 2022 FIFA World Cup.

As GCR reported in October, citing City A.M., Carillion had not been paid for nearly a year for work on a $650m (£493m) contract it won in a joint venture with a local firm on part of the $5.5bn Msheireb Downtown redevelopment of central Doha.

Image: As well as building things, Carillion expanded into facilities management for schools, prisons and government (MoD) housing (Carillion)

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  1. Completely wrong, from first hand experience I know that Carillion’s business model was totally unsuited to UK construction. It was too centralised and bureaucratic, and had no real construction expertise at the highest level. It’s poor performance and lack of cash backed profitability was masked by very aggressive supply chain management. Unfortunately like so many large business failures the architects of its demise will be long with their carpet bags stuffed with cash.

  2. Good grief! What an oversimplified view of business! With that philosophy, no-one would do anything new!

  3. Greed springs to mind, I agree it does look like carpet bagging is at the route of the problem. We should spare a thought for those poor shareholders. Another pension pot being raided similar to Robert Maxwell perhaps a sea cruise is needed for certain company representatives, auditors and even some of the procurers of these services.
    It is interesting that Capita are also having problems.

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