The public and the supply chain think the outsourcer’s collapse was not due to fundamental problems with the model – but issues with Carillion
The collapse of Carillion was one of the biggest failures of its kind in recent years. The event sent shockwaves through the industry and its shadow still looms large, with implications for 20 public sector contracts, 3,000 employees and the 30,000 SMEs that together lost £1.2bn. The future of outsourcing was put in jeopardy and questions were raised about whether the system is fit for purpose.
To uncover the views of those affected and the public, Scape’s latest research report, After Carillion: The Future of Outsourcing, surveyed the wider UK public as well as 50 senior managers across a range of tier one, two and three contractors within the public sector supply chain. The aim was to find out whether, a year after the collapse, they think the current model of public outsourcing is robust enough and supports our supply chain adequately.
The outsourcing model for delivering public services continues to offer benefits in terms of efficiency, timesaving and risk mitigation
Our findings suggest that factors including mismanagement, rising debt and the active concealment of the extent of Carillion’s debt were to blame, rather than the outsourcing model itself. That said, the benefits that the model offers to taxpayers, small businesses and the public often still go unacknowledged.
SMEs are the lifeblood of the construction industry. The latest government estimates suggest it has just under a million SMEs, representing one-fifth of all SMEs in the UK. Not only that, but a staggering 99.9% of all private sector businesses are SMEs and they account for 60% of all private sector employment. Their contribution to the local and national economy cannot be underestimated. But, as an industry, we are failing to offer these small businesses the support and reassurances they need – and large outsourcing conglomerates like Carillion play a central role in whether an SME sinks or floats.
Read: Carillion by numbers
One such example was Carillion’s use of supply chain finance schemes, which allowed it to delay paying its subcontractors for as long as 120 days after being invoiced. At the time of the collapse, many suppliers were uninsured against the risk, meaning these businesses will never recoup their share of the £1.2bn loss.
To avoid unacceptable payment terms, the solution is to use ethically managed frameworks that offer SMEs the certainty of a pipeline of work from a reputable provider, by agreeing to fair payment terms. Some 82% of SMEs we spoke to agreed that payment terms of reputable framework providers offer them more protection than those offered by Carillion.
Public trust also relies on outsourcing’s ability to deliver social value for communities. The suppliers we spoke to recognise the opportunities that ethical frameworks provide in terms of upskilling workforces, sharing skills and expertise and building strong working relationships that support a pipeline of work. Three-quarters of SMEs think their team has more opportunities to develop and learn by working on projects with reputable framework providers, while 93% believe it benefits the professional standing of their organisation.
Through our suite of fully performance-managed frameworks we have engaged with more than 36,000 SMEs and microbusinesses across the UK. Using local labour and local spend, we have generated £1.6bn, not only boosting local economic growth but supporting the wider UK economy. We have also introduced 92,000 young people to the construction sector over the past 10 years, helping to address the industry’s acute skills shortage.
Although Carillion’s collapse highlighted the vulnerability of the supply chain, it also exposed failures on the part of the Financial Reporting Council (FRC), which missed opportunities to expose the potentially cosy relationship between Carillion and its auditors, KPMG – strengthening the argument of those who want to see a radical shake-up of the audit industry.
KMPG audited Carillion for 19 years and sold consultancy services to the company. Before its demise, Carillion had accumulated worthless contracts of more than £1bn on its balance sheet. It had aggressive accounting policies but had failed to recognise the decreasing value of its assets. The sector agrees – 93% of the construction industry suppliers we spoke to question the close relationship between Carillion and its auditors, with 57% agreeing that a reform of the Big Four auditing firms is necessary.
More than a year later, it is clear that the public and the supply chain think the outsourcer’s collapse was not due to fundamental problems with the model – but issues with Carillion. The public wants to see large providers delivering services with the associated positive outcomes in terms of social value and tangible community benefits, not just low-cost solutions.
We must celebrate and promote contractors that understand this and whose best practice needs to be adopted across the board. Additionally, greater oversight and closer management of auditing practices is needed to rebuild trust in the industry, but we must make sure that these reforms do not put increased cost pressures on an industry that is already contending with the cost of materials and reduced access to labour.
The outsourcing model for delivering public services continues to offer sustainable benefits in terms of efficiency, timesaving and mitigation of risk, despite the actions of Carillion. While many SMEs had their livelihoods affected by the collapse, the security provided through frameworks that are performance managed, rigorously governed and include embedded risk management should not be forgotten.
Download the full report, After Carillion: The Future of Outsourcing, from www.scapegroup.co.uk/research.
Mark Robinson is chief executive of Scape Group