Opinion

'An insane business model' | Paul Morrell on Carillion

7 January 2019 | By Paul Morrell

Former chief construction adviser Paul Morrell on Carillion’s shortcomings.

When I spoke to Richard Howson, then newly appointed as Carillion’s CEO, to ask whether he intended to address its reputation as a bad payer, he professed not to recognise the firm I was talking about.

Whether it was ignorance or guile is for others for others to determine, but the reality is Carillion is not alone in having constructed its business model around the insane idea that the smaller players in the industry capitalise the larger ones.

“I don’t see any immediate signs of main contractors changing their business models – or of any serious consideration of a business model which focuses on value to the customer.”

Paul Morrell

At some stage, those who are not getting paid on time have to find the courage to start discriminating against those who do not pay and price differentially. Otherwise there is no reward for the good payers.

When it comes to clients, the last time I looked, central government was a very good payer but local government was not. In addition to talking sanctions against contractors, how about requiring timely payment by all public authorities involved in projects which have an element of central government funding?

I don’t see any immediate signs of main contractors changing their business models – or of any serious consideration of a business model which focuses on value to the customer – but it could be one long-term consequence of BIM, where the benefits of a more productive environment are unlikely to be captured by tier one contractors but rather trade contractors (who already enjoy better margins).

The direct delivery model is not, however, suited to major players in an industry where demand is both diverse and volatile – forces that demand flexibility in skills and resources. I suspect that if we see a customer-focused model at all, it will come from new entrants.

However, the collapse of a major firm, even one as big as Carillion, doesn’t mean the business model for a whole sector is over.

Comments

This assumes that the ‘customer’ is naive and doesn’t have a plethora of advisers.
How often is this the case?
All of the advisors work to a brief and all will be conscious of the ‘value’ of their input.
For any advisor or team of advisors to sign off a tender that they know represents poor value or is impossible to perform at the price is negligent in the extreme.
Either that or they are anticipating the ‘extras’ that come from protracted wrangling during the course of the contract or during the final negotiations.

David McCormick, 8 January 2019

Paul,
Thank you for your article that one of the main factors that affects the performance of a contractor "The Business Model".
The collapse of a major firm needs to be analysed in fine details to find out the real root causes.
I am afraid to say that the series of major firms' collapse started after year 2000. This is not confined to construction only but to other businesses as well.

Ehab Shallaby, 8 January 2019

The general tone of most of the writing I have seen about Carillion, and the Parliamentary enquiry have taken a very judgemental, tut-tut, type view of the way this major Contractor ran it's business.

There is no doubt that it had its short-comings but no-one seems to want to talk about the reasons why any major corporation would want to take the sort of risks Carillion were taking.

The reality is that Construction procurement and dispute resolution and avoidance remain very flawed processes within construction. Very few employers are able, or even interested in identifying the true value of a project at the procurement stage with most interested in the lowest cost with the greatest risk to the contractor. The competitive tender process continues to result in an award to the Contractor who's closest to the brink in terms of risk combined with the lowest margins. If the project proceeds with perfect delivery, execution and results in no disputes and the Contractor gets paid everything they are due the Contractor might hope to make a margin of 1-2%. In what other industry would this be the case?

Until the industry comes up with a better method of selecting the right contractor and awarding projects at a sustainable price the status quo will remain with a continued lack of investment in training and innovation and monumental business failures.

Scott Kennedy, 8 January 2019

Richard Howson was a player hence his introduction of non claw back of bonuses excepting very limited circumstances. He has in fact done the FTSE a favour by exposing Auditors and their convenient relationships with greedy Directors.

Dave Knight, 14 February 2019

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