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Carillion’s collapse – the end of an era?

13 August 2018

This article is taken from August's public matters newsletter. Click here to view more articles from this issue.

Carillion, a major supplier of works and services to government, ran into financial difficulties in 2017. The government decided not to bail the company out and, in January 2018, it went into liquidation. This sudden collapse raised a number of questions. In the short term, concerns that there would be a serious impact on public services proved largely unfounded. Opponents of outsourcing also pointed to this as evidence that public services should be performed by public bodies, that outsourcing is inherently risky, and that private contracting is, by its nature, incompatible with the required ethos of public service.

The Public Administration and Constitutional Affairs Committee released a report on Carillion on 9 July. Although somewhat excoriating about the processes that led to the firm’s demise, it fell short of recommending an end to the era of outsourcing which began in earnest with Compulsory Competitive Tendering in the 1980s.

Instead, the report calls for a step-change in the way in which outsourcing takes place. The findings are wide ranging but the key messages are:

  • although the UK outsources a similar proportion of services as comparable countries such as Denmark and Germany, and is seen as a global leader in the field, it has failed to learn key lessons. For example, in relation to risk transfer. Under various programmes, such as the private finance initiative (PFI), risk transfer to the private sector was seen as desirable in most cases and vigorously pursued. Although, since 2010, there has been some belated realisation that the private sector is not always the best party to manage risk, transfer of poorly understood and un-costed risk has continued. This was a key factor in the collapse of Carillion, and may be storing up problems for the future – particularly where large outsourcing companies are, in aggregate, carrying substantial risks on behalf of a range of public sector bodies.
  • decisions to outsource services, or keep them in house, should be made following a clear process and based on published evidence. Currently, there is little transparency in the decision to ‘make or buy’ a particular service.
  • there have been increases in government’s commercial capability, but they have focussed too narrowly on driving down cost. The result has been competitive pressure during tender processes which has led firms to price too keenly. This has resulted in the re-negotiation of contracts, and unprofitable arrangements for private sector partners. Although the proximate cause of Carillion’s collapse was cost overruns on a number of significant construction deals, it also failed to take into account the true cost of a delivering some outsourced service contracts.
  • high barriers to entry for government contracting means that the market is effectively restricted to a small number of providers, leading to a lack of diversity and innovation and a market which is not functioning effectively.
  • increased government commercial capability must be allied with better contract management and related skills in costing, project management, IT, financial planning and subject-matter expertise. Too often contracts have been let and allowed to run without sufficient oversight. Moreover, increasing financial difficulties in private sector partners have gone unnoticed, or have not been acted upon. This is because, without clear data about the companies involved and the operation of their contracts, government has been forced to rely on public information which has not proved sufficient.

So, despite understandable and deep concerns about the Carillion’s downfall, the report concedes that partnerships with the private sector will remain a feature of public services, notwithstanding the political composition of a future government. However, it has blunt lessons for commissioners of outsourced services and the underlying processes of government contracting.

Public confidence in private sector involvement survived Carillion relatively unscathed because services by and large, continued to be delivered. The authors of the report are very clear that, unless these lessons are learned and the appropriate values of partnership and commitment to service delivery are embedded on both sides, this confidence may be permanently damaged.

The outsourcing industry and public sector commissioners of their services will hope that, rather than an end to the era of outsourcing, Carillion will herald a new phase of transparency, effective delivery and genuine partnerships which bring together the best of private and public sectors.

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