Learning from Carillion’s collapse

For many in business, Carillion’s collapse came as a bit of a surprise. It was a well-known large UK company with no obvious problems but it went bust in a little more than a year. HPS believe that with proper Project Controls and Analysis many of the difficult circumstances faced by Carillion could have been flagged and therefore avoided. Its pretty obvious, the directors had little or no visibility of the true state of their investment projects, if they had they might have been able to do something. HPS would not be surprised if we see other firms fail or issue profits warnings as they fail to manage their investment portfolios.

As can sometimes be the case with huge organisations with so many projects to manage it is hard to keep tabs on everything. It would seem that even Carillion’s company’s directors had no idea about what was happening nor had oversight as what was about to happen. They signed off a “viability” statement in the annual report published in March 2017, saying there was no reason to think the company would have financial difficulties in the next three years!

So why had investors begun betting against Carillion shares as long ago as 2013. Perhaps with hindsight, things are easier to see but if things look too good to be true, they probably are. Carillion had reported average margins of about 4%, twice the normal going rate for construction companies. While some of this could be explained by the company’s mix of business, with potentially lucrative service contracts and high-margin work in the Middle East, it seemed suspiciously high to some investors.

All companies that have long-term contracts have to face some tricky question of when the revenue and therefore profits should be recognised in the accounts. Using the actual flow of cash from deals would make the financial results lumpy, with big losses early on followed, hopefully, by profits in the final years. If a portfolio management system was in place the actual returns can be measured against forecast, forecasts can be adjusted in terms of quantum and timing. This oversight is simple to perform given you have the right tools if all you rely on is your ERP system, good luck!

The accounting rules are changing, with a new standard (IFRS 15) coming into force this year. It will force companies to be tougher, matching reported profits much more closely to actual cash flows. The only way to really make things work across the board is with fully integrated portfolio project controls systems.

We can all work on the beauty of hindsight but this really is a case where proper project portfolio management with structured forecasts aligned with organisational goals and objectives could have avoided this disaster. If you would like to gain control over your business why not give our expert team of Portfolio, Project and Project Control Managers a call on +44 203 174 0070.


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