The Tate Modern holds the national collection of British art from 1900 onwards. It is one of the largest museums of modern and contemporary art in the world. The Copenhagen Metro spans 12.7 miles and boasts an annual ridership of 61 million people. The Dubai Marina Towers are six, high-rise, residential buildings and collectively have 1,026 separate apartments. What do these decidedly leviathan projects all have in common? Carillion, a multinational facilities management and construction services company based out of the UK.
In 1999, Carillion sprung forth from Tarmac, which was founded in 1903 and is the UK’s largest supplier of construction materials. While Carillion’s primary focus was construction contracting, it dedicated plenty of resources to growth and the acquisition of companies in somewhat relevant lines of work. First, it bought out G.T. Railway, a rail maintenance network it held a minority stake in, and created Carillion Rail. Since G.T. had been growing since 1994, this acquisition made it easier for Carillion to carry out and land lucrative, government infrastructure contracts. A year later, Carillion bought Citex Management Services, a facilities management company. Carillion didn’t stop there. Next, a £40 million acquisition in 2005, then two more in 2006 for over £900 million.
The list of acquisitions could go on and on. Simply put, Carillion was a titan in its industry. In 2016, the company reported revenue of £5.2 billion. Globally, around 43,000 Carillion employees worked on myriad projects, ranging from mosque construction in Oman to commuter rail station remodeling in Canada. So why, in January, 2018, did Carillion collapse?
Given its size, and the various projects it was involved in, there were many reasons, all of which have combined in some way to force the ailing mega-company into liquidation. First, poor financial planning led them to discover they’d overvalued many of their larger contracts, ultimately devoting time and resources to projects that wouldn’t pay off. Additionally, poor Supplier relations, shady sub-contracting, and lackluster internal management played a significant role.
The company had been known to engage in poor business practices, namely late payments on Suppliers’ bills. As the deconstruction of the company continues, the media spotlight will likely remain on the more recognizable, collapsing enterprise rather than the much smaller Suppliers and subcontractors left in Carillion’s wake. This is an issue that has become sadly pervasive in the world of Supplier/Buyer interactions on the enterprise scale. According to the Federation of Small Businesses, 37% of small businesses in the UK run into cash flow difficulties.
The primary culprit? Larger firms not paying for goods and services on time—or as the federation calls it, supply-chain bullying. If payments were made on time, and the procure-to-pay process were better managed, 50,000 more small business could stay open in the UK. It’s estimated that, at the time of its collapse, Carillion was leaving behind £1.2 billion in unpaid bills to its thousands of small subcontractors and Suppliers.
The modern supply chain is entering a new era of globalized business, but too often business are still using archaic, paper-based invoicing systems rather then embracing newer, streamlined digital solutions. Reliance on paper invoices, manually entered data, phone calls to AP offices in foreign countries, and countless other dated practices leave too much room for friction in the procure-to-pay process. Too much friction leads to fire, and now countless small business and employees are suffering due to the irresponsible practices and lack of transparency.
There are likely many theories about what was the largest factor in this collapse, but it’s clear that a considerable chunk of Carillion’s business wasn’t well organized, and that the larger company didn’t do right by many of its subcontractors, partners, and Suppliers. Hopefully, in the near future business will look to avoid mistakes made by Carillion. With the availability of financing options like Tungsten Early Pay, there will be less pressure placed on smaller Suppliers and their relationships with the larger Buyers. Furthermore, a transparent invoicing process can provide unpaid Suppliers with much-needed insights into the status of their transactions. Disasters like Carillion should be preventable; it will be interesting to see how companies begin to adjust to avoid a similar fate.
It’s worth noting that Carillion had taken advantage of a poorly-structured supply chain finance initiative in which they extended the pay terms to as many as 120 days, and often forced exorbitant fees on the supplier. That sort of practice is extremely harmful to smaller companies.
Carillion’s issues spanned a broad spectrum, but one of the sorest spots will be left on the small businesses who have expended time and resources with little or no return. Flora-tec, a horticulture company, said it’s owed more than £800,000 for its work on Carillion contracts. Employees were out in knee-deep snow this winter, spreading salt and shoveling at 3 AM to ensure hospitals, prisons, and schools could function the following day. Ideally, optimized systems for invoicing and payment can help prevent situations like this in the future.