As the Carillion disaster unfolds, the recriminations begin.
There is a cafe not far from where I live. It is in a beautiful spot, beside a lake in a park. It used to be incredibly popular, but then last summer, the local council decided not to renew the contract with the management team that ran the cafe and awarded it to another company.
Presumably, this other company was offering to pay more money for the rights to run the cafe.
The first thing the new company did was slash costs by firing staff and employing students on the minimum wage. Then they slashed costs by being less ambitious with the menu.
The result: the popularity of the cafe has diminished such that whereas previously you had to queue around the building for a table now you walk in and see a deserted cafe.
The new new look cafe may entail a bigger sum of money going to the the local council, but if this is not sustainable - which seems highly likely - then the money accruing to the local council will dry-up, eventually.
And that takes us to Carillion.
It is clear that the company made big errors - why was it simultaneously paying out large dividends, high remuneration to senior management while it issued profits warnings?
But drill down and it turns out that things are not so simple.
At heart, it seems the core problem is not so dissimilar to that witnessed in the aforementioned local cafe.
The process for pitching to the government is tough, government procurement has become very effective at screwing companies down.
Carillon’s biggest problem relates to the tight margins on government work and the financial penalties if things go wrong.
The company suffered a catalogue of woes, but things always go wrong, the trick is having sufficient margins and diversification to be able to ride the disasters.
But then again, you might ask, why did the company allow itself to get caught up in such risky work?
Maybe it was seduced by the allure of government contracts - the kudos they entail and the potential profits. Maybe Carillion was like Odysseus, called by the sirens of government work, but lacking the foresight to ensure it was first tied down, unable to respond.
Maybe Carillion was guilty of short-term thinking.
But there is another narrative - that to operate in the area Carillion operates in, namely government contract work, you simply have to bid for the big contracts, that unless you are willing to work on the risky stuff, you don’t have a chance of winning the lucrative contracts.
If that is the case, maybe the problem is that government procurement has become too good. Rather than seeing this debacle as proof that public-private initiatives don’t work, maybe we should see it as proof that government procurement is very effective.
Then again, sometimes procurement can be too effective.
We live in the age of collaboration - when companies work together, a realisation that there are common interests - but government procurement is maybe too old school, applying ideas that the US President might call the art of the deal - and maybe that’s the problem.
