Carillion: collapsed contractor aimed to double Whitehall profit margins in recovery plan

Written by Richard Johnstone on 7 February 2018 in News
News

Proposals indicate that the firm, which went out of business last month, expected to be able to get double its profit margins on some Whitehall contracts

Failed outsourcing firm Carillion intended to refocus its business towards winning contracts from central government as part of a recovery plan it developed last month.

A corporate turnaround plan, which was published yesterday by the Work & Pensions Select Committee and the Business, Energy and Industrial Strategy Select Committee as part of their inquiry into the firms collapse, set out plans to double its margin in government work.

Carillion collapsed last month after months of speculation that it was unable to service its debts, but the strategy set out plans to “refocus” the group on its strengths, which it stated were infrastructure contracts in both road and rail, and government contracts.

Its own recovery plan acknowledged the firm "had become too complex with an overly short term focus, weak operational risk management and too many distractions outside of our ‘core’”.

According to the plan set out by interim chief executive Keith Cochrane and chair Philip Green, the firm would move out of a number of markets as part of an effort to increase its focus on UK government work. This would have increased the share of group revenue from these areas, as well as corporate and local government work, from 44% in 2017 to 56% in 2022. The projection said that the firm’s revenue would fall, as a result of this leaner focus, from £4.7bn in 2017 to £3.9bn in 2022.


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As part of this, the firm expected to be able to achieve higher profit margins in government work, due to what it said were “lessons learned” by the Crown Commercial Service about the impact of low margins in the first range of CCS frameworks. Carillion stated it made an operating profit margin of just 2.5% on government contracts in 2018, but said it could increase this to 5.4% in 2022, with a “mid-term margin target” of 4.5%-5.5%.

“First generation contracts tend to be at tighter margins/more commercially difficult – lessons learned by central government departments suggests a more progressive and collaborative second gestation CCS [Crown Commercial Service] framework,” the plan stated.

It noted that the firm would need to diversify to improve profitability, with a focus on increasing facilities management provision to central government departments through the CCS frameworks.

Among the government contracts that it set out as priorities were retaining its Ministry of Defence contracts, including its facilities management deals, as well as its prisons maintenance contract, which was with the Ministry of Justice's National Offender Management Service. The MoJ has subsequently taken these services in-house following the collapse of the firm. The plan also stated that there were opportunities in departments including the Home Office, the Ministry of Justice and the Foreign Office.

The publication of the plan came after the committees took evidence from Cochrane and two of the firm’s former chief finance officers, Zafar Khan and Emma Mercer, yesterday.

In a statement issued yesterday, committee chairs Rachel Reeves and Frank Field accused executives of blaming their failures on others.

“We heard variously that this was the fault of the Bank of England, the foreign exchange markets, advisers, Brexit, the snap election, investors, suppliers, the construction industry, the business culture of the Middle East and professional designers of concrete beams. Everything we have seen points the fingers in another direction – to the people who built a giant company on sand in a desperate dash for cash.”

They said the evidence presented appeared at odds with the recovery plan’s description of the problems at the company, including the statement that “the group had become too complex with an overly short term focus, weak operational risk management and too many distractions outside of our ‘core’”.

They noted there was also scant mention of the pension schemes, now estimated to carry a £2.3bn deficit, in the recovery plan.

About the author

Richard Johnstone is CSW's deputy and online editor and tweets as @CSW_DepEd

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