Recently, the giant British multinational facilities management and construction company Carillion recently faced compulsory liquidation– a court-based procedure through which company assets are realised for the benefit of creditors. A recent report by the UK Works and Pensions Committee concluded that the company’s rise and “spectacular fall” was a story of “recklessness, hubris and greed.” The company was a key contractor to the UK government with 43,000 employees worldwide and 19,000 in the UK involved in delivering some of the most essential infrastructure for the economy; from NHS hospitals to new roads. The demise of Carillion has emphasized the vulnerability of British main contractors and outsourcers. Its fall has caused losses to smaller business subcontractors and has wider implications for the construction sector and the economy in general. Could we have learnt anything from the past with regard to perhaps averting the collapse of Carillion?
A recent report ‘Castles in the Air?’ authored by Professor Hedley Smyth at the Bartlett School of Construction and Project Management, UCL has traced the collapse of Carillion to management problems originating more than a decade back. It comprehensively outlines the changes in management structure in the UK construction industry that took place over time and links it to the collapse of giant firms like Carillion. Carillion made attempts to bring forth a series of ‘changes’, which were largely about rebadging existing activities to present the company as dynamic to the stock market. However little changed internally and despite a well-respected leadership programme, capabilities were not developed at the firm level to improve performance. Growth came from acquisitions and securing work at low margins. The report suggests that although a lot of importance has been given to the projects undertaken by Carillion as the source of risk and financial distress, the attention should be on the management structure that was adopted by Carillion. Professor Smyth has argued that many of the problems which emerged at the project level actually have their roots in failure of management to sufficiently address the capabilities of the firm.
Change in Management Trends over Time: A Brief History
Changes in management structure over the decades have contributed to the collapse of Carillion. Before the beginning of the First World War there was rapid development in construction materials and technology. However, the birth of the modern construction sector in UK traces its origins in the Second World War where government was the biggest client and direct government control was exercised in the construction sector. This period resulted in concentration of major projects into a group of modernised leading contracting firms which had national coverage and were equipped with diverse technical capabilities.
This pattern continued in the reconstruction period post World War 2 from 1945-55. This era was marked by greater consolidation through organic growth which resulted in main contractor firms engaged in more diverse workloads and having stronger national coverage. The period from 1955-1968 saw a change in the structure of management becoming more corporate from a family-owned business model. The change in structure was led by problems faced due to issues of succession, acquisitions and demands of growth.
The period thereafter from 1968-80 has been characterized in the report as the end of the long boom. Although output per employee increased between 1968-71 by 20 percent, the construction industry remained fragmented. This period was characterized by several features which included continued contractor diversification for building and engineering works; expansion of projects overseas and an increasing reliance on private sector commercial work. The latter was however more susceptible to economic cycles. All these changes resulted in management focusing on revenue generating projects and sectors and keeping investment and expenditure at minimum levels. Thus, the management of the firm continued to be conducted in reaction to market forces rather than trying to proactively manage the position of the firm within the market.
The period from 1980-2000, also saw a lack of reform in management and investment practices. This period has been described in the report being characteristic of contractor growth through international geographical spread in distant markets. It was also a period of reform and accommodation of procurement and contracts in response to private sector client drivers. But more importantly, this period also continued without any reform to management and investment practices. Interestingly, it was in this period that there was a movement bent on divestment from housing and focusing on the ‘core business’. This was aided by the use of technology and software in portfolio management. A crucial example of this movement was the demerger of the firm Tarmac out of which was Carillion was born.
Like the previous period this era was also characterized by a lack of investment in strategic planning by construction firms during recessionary times. Management had evolved separating it from ownership but many of the norms and traditions prevailed. Similar trends continued in the 2000-2015 period with the management of the large contractor appearing misaligned with the demand in the market. With the influx of greater mega projects in construction there is a need for greater focus on organizational capabilities supporting such activities.
Policy Recommendations
In a changed macroeconomic environment, there needs to be changes addressed to not just the financial landscape of firms but also their management styles. Professor Smyth argues that in the post 2008 economic climate of low interest rates, financial measures such as Return on Capital Employed can no longer be relied upon as a key component of the main contractor’s business model. It is hence the task of senior management at the construction firm to address and balance the full range of management responsibilities. There is also a need to reform the business model to meet the social, economic and environmental needs through investment and capacity development to support project operations. Overall, it needs to be emphasized that there needs to be an increased focus on human resource coordination and management and long-term business development. Only then would the supply chain be effectively levered and managed to meet both market and individual client needs that would foster firm growth and avoid episodes like the failure of Carillion.
