Skip To The Main Content

Time for change in the supply chain


By Martin McTague, Policy Director at FSB

The demise of Carillion is not just down to the actions of those running the business, but a collective failure to challenge bad practices that damage the economy.

In the aftermath of the credit crunch of a decade ago, a group of economists and academics were stumped when a woman in her 80s asked them how no one had seen it coming.

The questioner was, in fact, the Queen. She eventually received a letter blaming a failure of the “collective imagination” of lots of clever people in financial services and politics all around the world to see what in hindsight was plainly a disaster in the making; they suggested that corrosive practices had been so normalised that people involved didn’t question them or recognise the danger they posed.

Ten years on and 2018 began with what should have been a very contained financial catastrophe – the liquidation of the contractor Carillion. Yet as the sheer size and complexity of Carillion and its myriad of contracts emerged, the effects of its collapse quickly spread down supply chains. 

Hundreds of public sector contracts had gone to Carillion, alongside its private work. As doubts were raised about the future of everything from building railways to serving school meals there was also that longer-term question, again: how did no one foresee it? This raises two big issues for smaller businesses.

First, there is the way a lot of bigger businesses treat their smaller suppliers and contractors. Last July, FSB wrote to Carillion to raise concerns that the company was not paying some small businesses promptly, including making a number wait up to 120 days. That should have set alarm bells ringing about the state of Carillion’s finances. Yet these practices have become so endemic in the UK, so normalised, that to most people it didn’t stand out. 

Late payments, supply chain bullying and contracts with enforced poor payment terms are debilitating for the small firms involved and even kill off 50,000 small businesses a year. In Carillion’s case, some sub-contractors were left tens or even hundreds of thousands of pounds out of pocket; a result of unpaid invoices for work stretching back up to four months. 

The second big question over Carillion is why it was handed such a large number of public sector contracts. How could so many taxpayer-funded eggs have been put in one single basket? Again, there is an element of risky practices being normalised over time, 
that is to say public procurement favouring giant corporations over smaller businesses. 

When governments, local authorities or other public bodies advertise super-sized contracts, they should stop and think whether the contract needs to be so huge and all-encompassing that only massive corporations have the capacity to bid or to provide the services for it.

If some of the public sector contracts had been broken down into smaller parts, the risk to the taxpayer would have been spread and a higher proportion of publicly funded work would have gone to smaller, perhaps local, businesses. The Carillion collapse brought misery and financial hardship to thousands of small businesses; the endemic practices highlighted by its collapse must be denormalised, ending two issues that have held back small businesses, hindered growth and productivity, and infected the economy.