I recently shared my initial thoughts about the news that Carillion, the 2nd largest construction company in the UK, had gone into liquidation because it could not secure the funding required to stay in operation.
As a reminder, Carillion is a private sector firm that provided a wide array of public services across Britain. They served lunches in public schools and provided maintenance to prisons; They provided cleaning and foodservice in hospitals, and they maintained roads. Perhaps most importantly, they did all of this through a huge network of subcontractors and partners, many of whom are now facing financial difficulties in the wake of the Carillion collapse. By some estimates, up to 30,000 companies could be affected.
Beyond the lurid fascination associated with watching a giant fall, all procurement and contract management professionals should study Carillion for the lessons it offers about the real meaning – and business drivers – behind supplier relationship management (SRM).
As one of the “softer” procurement disciplines, SRM could easily be dismissed as nothing more than regularly sitting down to talk to suppliers about their past performance and buy-side expectations for the future. In the example of Carillion, this may even have happened on a regular basis. What their customers (and sub-contractors, and partners, and public officials, etc.) may have overlooked are the questions they should have been asking to better understand what was going on behind the scenes. And while these questions went unasked, the risk rose unabated while a storm was brewing on the horizon.
Unasked: How do you intend to earn a profit on the bid you submitted for this contract?
If a supplier is regularly competing for – and winning – large scale projects where price is a heavily weighted factor in the award process, procurement needs to understand how they are doing so profitably. Being satisfied with delivering a supplier that promises to come in on budget means very little if the supplier has not included reasonable risks and assumptions into their proposal.
Even without a formal maintained cost model, actively engaged procurement professionals should know when a fixed rate contract has gone into cost overruns. That may be the supplier’s problem today, but it could very well be your problem tomorrow if they run into issues with another customer or lose their line of credit. When a company has lines of business in several different industries (i.e. Carillion, GE, 3M), it is important to understand their overall financial stability as well as the stability of all their major operating units.
Unasked: How are you viewed by your partners and subcontractors?
It is common for procurement to ask suppliers for references from current and former customers. But what about their partners and subcontractors? In the case of Carillion, many stories will be told from this perspective in the months and years to come. What about your suppliers? Procurement may inquire about subcontractors from a risk perspective (think Western clothing brands and the Rana Plaza building collapse), but their point of view is rarely incorporated in 360-degree supplier feedback. Having the right level of visibility into supplier performance means understanding how they deliver the products and services covered by the contract. If suppliers are cutting corners or violating generally accepted business practices, the buyer-supplier relationship is unlikely to be a healthy one for long.
Unasked: Do I have the knowledge required to take responsibility for this supplier contract?
We trust and rely upon our suppliers because they offer expertise that we do not have in house. That might be how to build a soccer stadium and it might be how to run a facility, but we contract with them because they fill holes in our knowledge and resources. This does not create an excuse for working with a supplier in blind faith, assuming they will deliver what they have promised because we have evidence they have done so elsewhere. Just as procurement needs to have a sufficient level of understanding about a category to build effective relationships with internal stakeholders, we need to have enough knowledge to see the weaknesses – or strengths – in our suppliers, and whether they are abiding by the contract.
The Carillion story will likely be added to procurement lore as a cautionary tale. But no good will come from the company’s fall if all organizations — public sector as well as private — do not take this opportunity to examine their own supplier relationship management practices. After all, someone – more likely a large number of someones – knew this was coming long before it happened. They could have taken steps to mitigate the impact of Carillion’s liquidation, even if they could not have acted to prevent its occurrence.