Some people have likened outsourcing to nuclear power, in that it can be used for good or evil. Unfortunately, it comes with a reputation to match. Outsourcing often engenders heated debate on both sides of the argument. The fallout from the Carillion meltdown is no different, but will their effects be felt 10,000kms away here in South Africa?
What did Carillion Do?
Although Carillion was a construction company, it also provided Facilities Management and maintenance services to the UK and Canadian Governments. At the time of its demise, it held a large number of government contracts, including for the construction of the new HS2 high-speed rail link and for the maintenance of roads.
Carillion was one of the largest providers of outsourced Facilities Management services in the UK with The National Health Service being heavily reliant on their services. Its responsibilities stretched from fixing faults in hospital buildings, to cleaning and providing meals for patients. It was also building the new 646-bed Royal Liverpool Hospital.
Carillion was also a significant provider of FM services to UK schools, including providing school dinners in over 200 schools through its catering arm. Carillion also played a similar role in the UK’s prisons, maintaining around half of the Governments estate.
What Went Wrong?
In short, the company overreached itself. Carillion just took on too many risky contracts that proved unprofitable.
It faced payment delays amounting to £400 million in its Middle East Operations, but the UK was not exempt where it had cost overruns on three major public sector construction contracts:
- The £350m Midland Metropolitan Hospital in Sandwell. The opening was initially scheduled for October 2018, but difficulties with the heating, lighting and ventilation systems forced a delay of the launch date to spring 2019
- The £335m Royal Liverpool Hospital. The new 646-bed hospital was due to be finished by March 2017, but the completion date has repeatedly been pushed back amid reports of cracks in the building
- The £745m Aberdeen bypass. It is due to open in spring 2018, but was delayed because of slow progress in completing initial earthworks.
Last year, Carillion issued three profit warnings in five months and wrote down more than £1bn from the value of contracts, which made it much harder to manage its gigantic £900m debt pile and £600m pension deficit.
The sudden and cataclysmic collapse of one of the giants of the UK outsourcing industry is being used in SA as further fuel for the #outsourcingmustfall argument. But as is so often the case ‘truth has been the first casualty of war’ in the media mêlée that has followed.
The spectacular nature of these events has naturally thrown the spotlight on problems with the outsourcing model. But like so many issues in South Africa, outsourcing has been politicised to such an extent that it rarely results in a rational debate.
But like so many issues in South Africa, outsourcing has been politicised to such an extent that it rarely results in a rational debate. Click To Tweet
If outsourcing is flawed then we need to address the issues, but the Carillion situation requires proper analysis, and the lessons learned applied.
If one reads between the lines of the plethora of column inches that have been written in the aftermath three things are clear.
- The mounting losses were confined to the construction operations. The Facilities Management operations were operating well and profitably.
- Lucrative long-term FM service contracts and high-margin work in the Middle East were used to hide low grade and risky construction contracts in the UK and to enable Carillion to report higher than average industry margins of 4%, twice the standard going rate for construction companies.
- Construction industry veterans know that when main contractors come under pressure, their first port of call is making subcontractors wait for their money. Carillion was making its suppliers wait 120 days for payment and stories in the trade press about the woes of angry subcontractors, were enough to give hedge funds reason to think that cash was tight at Carillion.
So rather than Outsourcing itself being the culprit, it was an irrational cost-cutting race to the bottom has proved the undoing of Carillion.
This is regrettable, and thousands of jobs and businesses are now at risk, but this is not a fault with outsourcing merely its application and should not be used as the prime mover in eliminating outsourcing altogether. We need to keep the baby and the bathwater safe and not confuse the collapse of one mismanaged company with the failure of outsourcing as a business tool.
UK PLC Led the Way
In the outsourcing of Facilities Management, all developmental roads lead back to the UK where the growth in the industry was predominantly driven by the public sector with the private sector initially being slow to take up the trend.
In South Africa the opposite is true. It has been the private sector has taken up the first mover advantage of outsourcing their operations to FM Service providers in the search for efficiencies.
The public sector in South Africa has been highly sceptical in its application of outsourcing. This is due in the main to the influence of the Unions and its hold over what is ironically the only democratically elected Communist Government in the world.
Our Government in South Africa have a collective paranoia regarding what they see as the hidden agenda of the private sector. Outsourcing is seen as infringing upon workers’ rights, and the Carilion debacle is being pushed as just the most recent example of this.
This means that outsourcing, as with most issues in SA, is cast as a political issue, not a business one. The undisputed efficiencies and commercial benefits are lost in political rhetoric and the archaic clamour for nationalisation.
This paranoia is schizophrenic in its application. As with many political ideologies, Government’s objections to outsourcing is highly selective. It is roundly condemned in public when it suits the politicians and secretly endorsed when the political wind changes.
The recent #feesmustfall demonstrations came with a secondary but equally vociferous demand to reinstate outsourced workers in the #outsourcingmustfall social movement. At first, this was roundly opposed by the SA Government. But University campuses became Syrian like war zones, resulting in the SA President Jacob Zuma ignoring the recommendations of his own Commission of Enquiry into Higher Education and Training and backtracking by acceding to the majority of the student’s demands.
Contrast this with the SA government’s initiative to promote the outsourcing and offshoring industry in the country. The Business Process Services (BPS) incentive scheme has been successful in creating over 9 000 jobs in three years and has now been extended through to 31 March 2019.
The creation of jobs should be applauded in a country that sees unemployment rates hovering around 25%, but because this would the support the outsourcing agenda, this is not publicised by the Government.
The truth, of course, is that for many companies to survive and continue to employ people, they need to drive efficiencies and continuously improve their overly manual ways of doing business.
Continuing to driving efficiencies may result in job losses, whether those improvements are executed internally or by an outsourced provider. Notwithstanding this, there are many more employees that get retrenched annually because of company failures than job losses caused by efficiencies through outsourcing.
I used to work for a company that was the outsourced provider appointed to undertake the Facilities Management for Telkom, the state-owned fixed-line telephone operator.
At the turn of the millennium, Telkom outsourced their facilities, property and project management functions along with 1400 permanent staff. The outsourced provider, TFMC, (now Bidvest Facilities Management) was 50% owned by a local South African company whose founder and Chairman at that time was Cyril Ramaphosa. Mr. Ramaphosa has just succeeded becoming our South Africa’s new State President.
In all outsourcing deals in South Africa transferring employees, rights are protected by legislation enshrined in section 197 of the Labour Relations Act. By 2009 TFMC had achieved over 60% in the operational savings, yet had managed to maintain the original employee count, with no retrenchments.
In South Africa transferring employees, rights are protected by legislation enshrined in section 197 of the Labour Relations Act. Click To Tweet
In contrast, over the same period Telkom had reduced their payroll from approximately 66,000 employees to 19,000. If ever there were an example of an outsourcing good news story this is it.
The Botswana Strategy
South Africa’s northern neighbour Botswana has a pro-outsourcing agenda that exists in stark contrast to South Africa. The Botswana Government is throwing its weight behind a vision that sees the Facilities Management of all Government premises being outsourced to the private sector by 2026.
With its historically stable economy and political system, Botswana has long been a primary beneficiary of Foreign Direct Investment (FDI). The economic growth that has been brought about by The African Renaissance in the last decade has seen the competition for FDI in the southern African region intensify dramatically. Consequently, Botswana is now merely one of many possible investments destinations.
The Botswanan Government sees quality infrastructure as an essential component in attracting FDI. They are seeking to develop critical infrastructural facilities, intended to provide services to the citizens, and also, as a strategy to promote private sector investment that is necessary for growth and employment creation.
The decline in revenue from its most lucrative natural resource, diamonds, compounds the issue and means that Botswana needs to maintain its infrastructure more than ever.
The Government recognises that the expertise, capacity and capability exists in the private sector and are far more progressive than their Southern Neighbours in partnering with FM providers.
A New Dawn
Recently I was involved in advising the South African Facilities Management Association (SAFMA) on a nationwide survey of the FM industry. Two of the high-level findings from that survey was that approximately 87% of companies in South Africa still retain their facilities management in-house.
Secondly, outsourcing was forecast to grow at double-digit rates for the foreseeable future, echoing the needs to drive efficiencies within our economy.
South Africa’s public sector reluctance to outsourcing is in contrast to its success in the private sector. Outsourcing public services would I believe be hugely beneficial to service delivery to a hugely deprived nation as well as making our notoriously ineffective and corrupt civil institutions more efficient.
This scenario represents a ripe environment for outsourcing to flourish in-spite of, rather than despite the Governments historic opposition to the philosophy.
Recent seismic political events of our own involving the removal of our corrupt President means that there appears to be a new dawn rising over the country. Our New President has experience as a trade unionist, an entrepreneur (not tenderpreneur as some of his peers) a businessman and a consummate politician. He appears to have the confidence of the business sector, and so far he seems to have made the right moves. All of this bode well for the future of outsourcing in South Africa with Cyril Ramaphosa at the helm.
This week’s Question “Should the SA government follow the example of Botswana and outsource its FM to the private sector?” Leave your comments in the section below, and I will respond