Outsourcing – is this the beginning of the end?

With the recent catastrophic demise of Carillion, I wonder, is the outsourcing market out of control and in need of a major reset?

The UK’s construction industry has never seen a company of this size collapse in such a short space of time –  from a profits warning in July 2017, closely followed by the resignation of the CEO, to a third profits warning in the December. By January the share price had plummeted by 90% and Carillion went into liquidation at the end of the month. With a £20Bn order book and 20,000 employees it seems unimaginable that the UK’s second largest tier 1 contractor could have owed its supply chain over £1bn, which was further compounded by a reported £600m pension deficit.  It appears that the option to trade out of this predicament was a bridge too far and the decision to cease trading via a compulsory liquidation was the least risky way to realise what value there was remaining for the creditors.

Carillion is not the only high profile organisation to be in troubled times – Capita has seen its share price dive from a high of 720.50p in June 2017 to a current low of 142.5p. This 80% fall in share price was partly due to the damning report of the new CEO, Jonathan Lewis, who joined the business in December 2017 who concluded that Capita is too complex, too diverse and driven by an unhealthy short term focus on financial performance.  Mr Lewis could do worse than embrace the thinking of one of the icons of business strategy and leadership – Jack Welch – the former Chairman and CEO of GE, whose mantra was you needed to be either No.1 or No.2 in your sector to be truly successful. In his 21-year tenure, between 1981-2001, he grew GE into one of the World’s biggest, oldest (115 years, as at his departure) and most successful corporations.  Unfortunately, both Carillion and Capita were/are not seen as being top in their field for the majority of the sectors they operate(d) in.

It appears that the current outsourcing market has been engaged in a race to the bottom by winning work based on the lowest price as opposed to providing a superior service compared to their competition. The result for the likes of Carillion and others, is that although they may have had impressive order books the reality is that these were not necessarily at the required level of profitability to be sustainable.

Most people in business know, either through bitter experience or imparted wisdom, that you drive revenue for vanity and secure profit for sanity.  It also has to be said that client organisations are partially responsible for this behaviour as they constantly expect ever lower prices without the acknowledgement that all businesses have to make a profit to survive and prosper.

Some of the clients left in limbo as a result of the demise of Carillion are currently paying the price for driving down contracts to unaffordable levels.

It will be interesting to see how Mr Lewis restructures Capita and how long it will take to return the business back to halcyon days of £7.00+ per share.

More importantly, there needs to be a thorough review of the outsourcing models and in particular an acknowledgment by client organisations that you only get what you pay for.

Date: 31/01/2018
Category: Steve's Blog