Carillion may not have been a household name, but it employed 43,000 staff globally, around half of these in the UK. Its recent collapse has put thousands of jobs as well as other companies at risk.
It managed the Smart Motorways traffic control system and supplied school dinners as well as maintaining about half of the UK’s prisons and Young Offender Institutions. Its responsibilities included cleaning, landscaping and catering. Carillion was also the second-biggest supplier of maintenance services to Network Rail.
Carillion relied on large contracts, some of which have proved much less lucrative than it expected. They included the planned HS2 high speed railway line, the Royal Opera House, the Library of Birmingham, the Tate Modern, and the hoop-shaped building of GCHQ.
In 2016, Carillion ran into trouble after losing money on big contracts and running up huge debts. Some argue that it overreached itself, taking on too many risky contracts that proved unprofitable. It also faced payment delays in the Middle East that hit its accounts.
Last year, it issued three profit warnings in five months and wrote off more than £1bn from the value of contracts. This made it much harder for the company to manage its debts and pension deficit.
The firm finally buckled in January 2018 under the weight of a massive £1.5bn debt pile.
What happens to the company’s contracts?
The UK government has said staff and contractors working on public sector contracts will continue to be paid.
Lee Causer, of the accountants Moore Stephens, said customers would have clauses in their contracts that allow them to break the deal if Carillion became insolvent. While some customers may have contingency plans, delays in delivering projects appear inevitable, along with disruption in the supply chain.
What about subcontractors?
They could face big problems. As many as 30,000 small businesses are thought to be owed money by Carillion. Causer of Moore Stephens said: “Carillion’s collapse could trigger a number of insolvencies across the construction sector, in an industry that already experiences the highest levels of insolvency per year in the UK. The ramifications of the failure of Carillion could be huge.”
What lessons have been learnt?
Well, for starters it reaffirms the point that no company is “too big to fail”. Also that however big you may be, you can still get too greedy and spread yourself too thinly.
On the one hand it makes sense not to put all your eggs in one basket but equally you can go too far in the other direction, especially if you are taking on lots of clients that are riskier than average.
If you are a small business, then the real lesson here is to be careful not to have too much of your revenue coming from one or two clients. It’s an old business adage: About 20 percent of your customers produce 80 percent of your sales. The inherent risk in this is obvious: if something happens to that 20% (i.e.; insolvency) you may take a huge hit as a consequence. The kind of hit that can put many small businesses under.
Spread your exposure more evenly across a higher number of clients and ideally across different types of clients. For example, clients that range in size, industry, geography etc…
Finally, we have said it before and we will say it again, credit check any new client so that you can set the right payment terms with them and reduce the risk of late or no payment.