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Strategy Execution Derailment

Yesterday, Carrillion plc went into liquidation with debts of at least £1.5 billion ($2 billion). The 43,000-person construction and support services company operates in the UK, Middle East, Caribbean and Canada and provides a wide range of services grouped under three key areas of capability:

Support services

  • facilities management
  • facilities services
  • energy services
  • rail services
  • utilities services
  • remote site accommodation services
  • road maintenance
  • consultancy businesses

Project finance

  • Investments in Public Private Partnerships

Construction

  • building
  • civil engineering
  • development

Although not a household name, the company is involved in the lives of millions, whether through cleaning hospitals, financing prisons, laying rail tracks or building bridges. Many will recognise the names of companies that formed Carillion or were acquired by it: Tarmac Construction, Wimpey Construction, Mowlem and McAlpine to name a few.

The company pursued “sustainable, profitable growth” through a three-pronged strategy, proudly stated on its website:

  • Winning high-quality contracts in our chosen markets
  • Delivering contracts safely, sustainably and to best-in-class standards
  • Developing and attracting excellent people and capabilities

Delivery of our services and strategic objectives continues to be driven by our customer-focused culture, integrated business model and centralised operating platform, which enable us to combine all our skills and resources so that we can compete successfully to win and deliver high-quality contracts.

This strategy is no less robust than those articulated by most similarly large and complex organisations. In spite of profits warnings over the last six months – and without the benefit of today’s hindsight – many stakeholders (including numerous shareholders and government customers) seemingly saw the company as a having a reasonable chance of recovery. The 2016 results reported steady dividend growth, earnings per share rising, profits increasing, revenues up 14 percent, £16 billion of orders and probable orders, and a pipeline of opportunities worth over £41 billion. Other leading indicators were divulged which similarly did not spell disaster: a +22 percent Net Promoter Score and a 73 percent employee engagement score.

However, it all went wrong very quickly and Carrillion has provided another stark case of strategy execution failure. Suggestions are already being made as to the high-level reasons for the demise. The company operated in a highly competitive environment, with government contracts in particular often bring awarded to lowest cost bidders, other considerations being weighted lightly. There is little room for pricing or contractual mistakes. Carillion has also been highly acquisitive since its creation and has reportedly struggled with the integration of its newly owned businesses. This should not come as a surprise: the evidence is that such struggles are extremely common and a fairly small minority of acquisitions go on to create additional value. The company’s cash flow problems were reportedly intensified by slow payments from some customers; payments on contracts that were some of the business’s most profitable (on paper). There is also the likelihood of bad luck or bad management affecting cash flow through the phasing of income; Carrillion’s is a lumpy business.

It will be most interesting to see what further underlying strategy execution problems the company faced, as the dust settles and investigations inevitably commence. A  strategic review of the company, summarised in an investor presentation a few months ago, provides some clues:

  • Short term focus
  • Too much complexity
  • Insufficient transparency
  • Too much data and a lack of meaningful information
  • Large Group overhead

The company recognised the need for transformation and had recently tried to refocus on “core strengths and markets” – although of course, in a business like this one, such refocusing takes time: it’s a ‘tanker’ not a ‘panther’. The business indicated a three- to five-year horizon for its transformation. A different leadership team, new operating model and de-layered structure had been introduced alongside various cost-cutting measures. The business also wanted to improve “line of sight accountability” and transparency.

It’s worth reflecting on the list of services above. For any business to offer such a broad range of services through so many routes to market and to customers in multiple industries and regions, there needs to be an extremely strong resource-side logic that binds critical activities together, focuses resource allocation efforts and uniquely positions the company to outperform others. I’m not certain what that logic was; it certainly isn’t pinpointed in the strategy statement above. “Large Group overhead” may be a reference to the difficulties and costs of trying to manage effectively such a sprawling empire and create economies of scale. It reflects a belief I have held for some years now: that by modern standards, companies really don’t have to become that big and complex, to become highly risky from a strategy execution perspective.

It will also be intriguing to learn more about the problem of short-term focus. With revenues increasing much more than profit and failing to generate sufficient free cash, our suspicions should be that performance measures, targets and/or contingent reward may have been misaligned and driven myopic self-interested decisions and actions. Again, research clearly shows how easily this can happen, and it will be a real shame if so many people’s lives have been affected by what is essentially an avoidable problem. The aforementioned investor update references construction contracts being agreed despite highly uncertain assumptions and their success depending on the performance of parties outside Carrillion’s control. It will be unsurprising if the interests of the firm’s ‘hunters’ and ‘farmers’ were deeply misaligned. I leave you with ‘The Banker’s Mantra’:

Revenue is vanity.
Profit is sanity.
Cash is king.

Five Cs for Successful Strategy Execution

Author

Andrew MacLennan
Strategy Execution Ltd MD

Publisher

Cambridge Marketing Review

Date

Winter 2015

Dr Andrew MacLennan outlines five key principles that are essential for successful strategy execution, and illustrates these with examples including Ford’s new generation of its best-selling F-150 truck and the extraordinarily profitable low-cost airline Ryanair. The article includes a case study on the ‘Rolls Royce’ of Scotch whisky: The Macallan single malt.

(If you would prefer a version of the article without the whisky case study, please follow this link.)

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