There is never a good type of bankruptcy, but the fall of the UK’s second largest construction giant, Carillion, is a lesson for all risk managers in the dangers of pushing margins to their limits.
WORST BANKRUPTCY: CARILLION
A duty of risk managers is to assess counter-party stability. If a trading partner goes under, the results can be traumatic: unpaid invoices, supply chain collapse, reputational damage, and more.
The starkest example of 2018? The collapse of British construction giant Carillion.
Carillion’s fall offered three obvious lessons. First, margins matter. Carillion operated on wafer-thin 1.6% margins. This meant a single bad project could push the balance sheet into the red. A lo, a £845m write down of contracts pushed Carillion into oblivion.
Rupert Soames, grandson of Winston Churchill and boss of rival Serco, famously keeps a toilet brush on his desk to remind himself not to bid for work lower than a cleaner’s 5% profit margin. Carillion ignored this rule to win contracts.
Second is the threat of invisible risks. An Aberdeen road bypass project was delayed by public protests, bad weather and political interventions. Costs soared, and Carillion took a hammering. Risk managers simply hadn’t factored in these potential threats.
Third: the illusion of size. Carillion was seen as too big to fail. It wasn’t, and 30,000 SMEs are estimated to have lost around £2bn as a result of assuming that a blue chip couldn’t go under.
LESSON: LEAN MARGINS MULTIPLY RISK.