A key question rising from the smouldering ashes of Carillion, troubles in Kier and Interserve is “how many of the top government suppliers will exist in 2020?” There is no doubt that the market is stressed, and there is a palpable nervousness amongst debt and equity investors, industry leaders and leaders in government.
In a flurry to pivot and self correct and reposition themselves as market leaders, many leading outsourcing providers are restructuring, and following the Carillion liquidation, there is also changes in Government procurement policies with outsourcing playbook and related initiatives.
Is the industry experience a market correction? Or is this end of outsourcing as we have understood it until now? The unavoidable question then becomes, how did we end up here and how do we move forward?
The crux/history of the matter
What lies at crux of the current situation is that for the last two decades, risk was transferred to private sector and with only profits in their sights, big actors in the sector were happy to underplay the risk as they slid down the path of taking on less and less lucrative work, in a bid to maintain status.
The time that has lapsed has two implication 1) the Government no longer has the capacity to bring the work back in-house (for all the outsourced services) 2) Public sector leaders would be both underprepared and unwilling to be scrutinised in the same manner the private sector is. This has left the government holding many providers ‘hostage’…
The implication for businesses has been an increased wariness of the cost of winning and the need to over expend their resources and capabilities to supply the demands of the government. Post austerity projects have become complex and can only be provided by large providers, but how much longer can the government bully big players, before they hunker down and deal with their reality, which increasingly looks like toe the line and be the next Carillion or deviate and innovate an entirely new and untrodden path, both of which pose inherently difficult consequences. Are we too far down the rabbit hole to come back? This is a system where there is no contract management capability to manage supply chain – incidentally this was passed down to outsourcing providers as well.
Following the money
A key question then becomes, how is the market reacting to this? After consulting with over 20 blah blahs, the jury seems to be out…some are – to make a quick buck and out. However, the uncertainty around this market is not good for industry or government and with the Capita and Interserve question looming over the horizon, tension is rife and all parties are uneasy. This leads onto the following question, what lessons can we draw from the existing troubles in Industry?
The whole market is perceived to have more stressed and distressed assets and the chances of business lines growing is very slim, the likes of Capita turned acquisition and dividends down and there are Questions regarding the cash Conversion operating cash flow.
How can the companies build cast iron balance sheets which are investment grade?
How does the transformation upfront payment work?
What is your steady state margin? Private sector margin? and Public sector margin? What is their ability to raise cash, if any?
Why does companies have Millions and Billions in Deferred income?
What does that substantively even mean? How accurate are the outsourcing providers cash outflow and earnings profile? It’s close to 6 weeks from Carilion liquidation.
How many Carillion assets were actually transferred, how did the government manage the whole administration process?
With multi million debt due for many providers in the next 6 -12 months, who will fund them in such an anxious market? Consequently, what is the risk of next one defaulting? And how many will follow swiftly behind? There are many unanswered and difficult questions, all of which have significant implications and require a much greater depth of analysis than that which can be adequately done in this article.
What is most important at this stage is to scramble. The industry leaders must scramble for lessons and strategies that allow them to rise like the phoenix. In addition to this frank conversation must be had between Government and Industry.
So what are the key take-aways that can be gleaned from this situation?
Simply put, the first action is that Industry must ‘simplify to multiply’. Many providers do too many services and have become unnecessarily complex, this inhibits the effectiveness of any growth strategy.
Leadership matters; external leaders need to trust in your team and internal leaders need to bring in fresh thinking. As the investment industry grows increasingly agitated with outsourcing companies, thought leadership is required in shifting their working capital profile.
Another area of leadership is that of government, it is essential that the UK government acknowledges the truth in this situation and that is in order to meet their service needs sustainably they must begin to truthfully converse with suppliers and create a strategy that takes back some of the risk and also expand their suppliers lists to engage more SME’s. The very low interest in CCS FM Framework is an early indicator that without this pivot, the existing structure is sure to fail.
In conclusion, Is there a chance that the market will correct itself? Yes, however what is necessary is a radical shift in thought, without which the outsourcing industry “multiple” is coming down. If the industry doesn’t join up and start to show case the impact of their work to public, you will continue to negative views demotivating the millions of front line outsourced workers underneath all this is a workforce which is shifted every 4 years! How many Dead bodies are hidden in every outsourcing provider/? Will kier or interserve be the Carillion?
This is not to paint a gloomy outlook, are there opportunities in the market , yes there are many!
And there are leaders in Serco, Capita, MITIE, Sodexo, ISS and Babcock who are harnessing the industry and reshaping the existing landscape through collaboration and not competition its time to share the value creation of your services. Brexit gives an opportunity to move to value-based procurement – will the big players take it? Staying silent and maintaining the status quo of uncompetitive competition could be the end of this industry.
What will be the body count in the top 20 if there is no action? The time has come. Collaborate or cease to exist.