Carillion Collapse What Went Wrong ?

The negative impact of the news is not only to their shareholders, current employees, and previous employees (on their pension payments), it extends to its JVs (although some will be impacted positively), subcontractors, suppliers and clients. Clients projects will be delayed, re evaluated and might even being stopped completely.

Although, there are top professionals on boards, strategic planning, risk management, projects directors/managers, QA\QC, financial auditors, project controls, accounting … etc. however, they missed the alert (or actually decided to proceed even with high risk).

Carillion reported global sales of £5.2 billion ($7.2 billion) in 2016. Only six months later (as stated by the company) due to late payments on construction contracts and a fall in working capital they had to issue a profit warning and some decisions to reduce costs. In related decisions to ME, they decided to exit from construction markets in Qatar, KSA and Egypt. Beside the disposal of 50 per cent of the economic interest in the Group’s business in Oman, Carillion Alawi, for an immediate cash consideration of £12.8m.

For the record on first half of 2017, Carillion secured £2.6 billion contracts. Despite the forecast of UK construction output slow down form 2.4% in 2016 to 1.3%, 1.2% and 2.3% for 2017, 2018 and 2019 respectively.

Since I started my research on such cases (Systems Failure To Alert Decision Makers For The Early Proper Actions) in 2010, I am still finding it surprising that giant companies with high quality systems collapse. Please refer to my other article What Went Wrong? Which bring more similar data.

https://zalbasireppm.com/business-transformation/what-went-wrong/

So from your perspective, what do you think are the main factors for the failure of the system to alert the impact of the negative cash flow on the foretasted reports? Is it the raising cost? Is it the slow and weak due diligence and decision making? Is it the team reports not providing the right information and right proposed actions? (like to stop the projects which fall below the KPIs threshold). Is it not having collaborated live system? Or is it not having the proper governing and procedures systems? Is it the new regulations? Or other reasons you might bring on to the table. Let’s remember, there are similarities in most cases, however, we should consider it case by case too.

In common cause in some cases and maybe applied to this case, no proper financial reporting was there (in purpose). In this case, there are already requests from top officials for full investigation.

We are discussing here companies with high quality systems and tight auditing as a public listing company. There are thousands every year outside the radar which collapse with no proper system and no one argues why because they don’t have systems to find the root cause of the collapse.

When big giant like this start issuing warning, some of them issuing it on late stage when they can’t fix the situation. They thought, they can fix it. They collapse fast with no way to stop the domino effect.

Some companies change course through different actions early and avoid more loses. In Carillion case, something is not right. the first profit warning issued on 10th July 2017 was only six months after Dec 2016 very good profit and results reports.

There are a lot to discuss in this case, however, it is not my main goal of such short article. A full peer review research should prevail the main factors for such companies.

What I want to highlight here is that in the GCC market, there are big challenges and tough situation with new regulations and taxes implemented on short time which put big pressure to the companies to survive challenging market trying to recover form 2008 downturn. Companies we know that they don’t have proper systems are struggling and companies with systems they need a lot to be done to comply with the new costs, laws and challenges. All of that needs a new initiatives to invite for joint efforts between the government, public companies and private companies on ongoing workshops to deal with the raised challenges to have early decisions to avoid any implications. Moreover, the construction companies need to develop their systems to avoid the traps on the related cases.

Best wishes for all

Ziad Albasir

18th Jan 2018