Following the demise of Carillion, what lessons should FM clients take from the fallout to ensure that their key suppliers’ finances are sound? If they do encounter a major problem how can they ensure the project or service is still deliverable?
Although there has been commentary in the press about the low margins Carillion was operating under in the facilities management sector, more of the debate has been focused on the firm’s construction woes.
Having been a developer in my earlier career, I am only too aware of the pressures faced by the construction sector. Main contractors only need one or two projects to go bad, and it puts stress on the rest of the business. There are so many factors that can impact on a construction project’s profitability. Developers are exposed to numerous ‘risks’ and often the impact of these risks flow through to their contractors, most notably related to cashflow due to project delays and funding issues. While property development is a high-risk, but high-reward, business for developers, for their contractors it is generally a low margin business, with high exposure to the developer’s risk. That said, there are obviously many examples of very successful construction projects which have delivered profits for the businesses concerned.
In my previous role at EMC and then Dell, when looking at potential FM vendors, I was reluctant to contract with facilities management service partners which were exposed to the ups and downs of the construction sector. I would certainly take that into account when procuring future partners. Companies such as Sodexo, Compass and ISS don’t have that same level of risk. If they lose a major FM contract, it’s not going to have the same impact as a huge construction project failing to deliver forecasted cashflow and profitability which may be material to the FM partner or its parent.
Obviously, you would expect clients’ procurement teams to look into the financials but it can be challenging for clients to detect where that payment risk might be when you’re dealing with a conglomerate business such as Carillion. That risk could be hidden in unrelated business (such as construction) which are difficult to assess. It’s often comforting for the public sector to deal with big businesses, like Carillion, but a more sustainable, successful and risk-averse approach is to contract with FM service partners who are expert in their specific service lines and fully focused in this sector.
Any client, needs to have the confidence the service provider they are hiring has the capacity to deliver the work being planned. The bigger the project the more rigour needs to be applied and one critical element that must be part of the procurement process should involve a financial check at pre-qualification stage. Then, the contract terms should allow for regular financial updates to be provided by the supplier.
In terms of risk, the procurement teams also need to understand that suppliers are now unwilling to shoulder risks that they have limited ability to control or manage. There needs to be a move back to collaboration where each entity is clear about their abilities and obligations and identify any risks that are best managed together.
It pays huge dividends for the client and suppliers to be open with each other, transparent in terms of accounting and honest about the commercial margins needed to make the project and the business of FM sustainable. Both parties need to appreciate the others’ needs and respective priorities and fundamentally understand each other’s true business goals and requirements. So, it is vital not to keep each other at arm’s length and crucial for the long-term success of any service agreement to work together, not pursue some form of command and control relationship.
To that end, it is also important that the client team retain some in-house knowledge so that they can assess, procure and even be able to pick up any work if necessary should there be any performance issues, not just necessarily those caused by financial failure.
One point that the wider industry needs to focus on now – something that can help clients be confident in the financial performance of their suppliers– is developing far better guidance around how you value and report financial performance in FM. Things need to be more consistent – from a client perspective, from an industry perspective and so that all the stakeholders are able to reassure the end user – i.e. the public – that real value is being added. How are the risks or returns on long term PFI contracts consistently reported? How are lifecycle funds and adequacy risk dealt with consistently? How are mobilisation and transformation costs accounted for by FM businesses, what is the visibility around pension deficits and what is ‘acceptable’ and ethical in terms of payments terms for supply chain? How do some suppliers account for their bid costs? The valuation of FM contracts needs to be consistent so that all businesses that operate within the sector can be reviewed by the clients on a level playing field.
The FM sector, which should include its clients and the whole supply chain, needs to work on these questions. There have been arguments in the media for consistent accounting procedures, maybe even standards, and something the industry can apply now is the ISO 41011:2017 Facility management standard. BIFM has adopted it and IFMA and RICS have been encouraging people to actively engage with it as well as RICS’ own strategic guidance.
The tools for better procurement already exist. It is behaviours that need adjusting. So, as a starting point perhaps we should seek to apply some broad (and obvious) principles of procurement in the first place. Make sure you are clear about the services you are procuring, and you have enough in-house knowledge to understand what you are asking the market to provide. Be clear about the risks associated with the services and look to ensure that those best able to manage the risk take the risk.
Provide the most robust and complete enquiry documentation to ensure that there is minimal interpretation of what your requirements may be, this would include asset data, specifications and performance requirements as an absolute minimum.
Depending on the size of the procurement you are embarking upon be sure that you don’t put all your eggs in one basket and choose a procurement strategy or route that gives you options should one of your suppliers fail in any way.
Encourage dialogue within the procurement process so you can review any points or contention or confusion. Have some assessment criteria that matches your aspiration – for example do you want your suppliers competing on quality or just price.
Which takes us back to something at the heart of providing a great service – which we all want. How are you, as a client judging that service? On price or quality? Because that the final evaluation tells you everything you need to know about a client’s drivers and the set of behaviours they are adhering to, or not.