Much has been, and will be, said about the collapse of Carillion, the UK’s second largest construction company and major provider of facilities management services to both the public and private sectors. In this blog, I aim to specifically to discuss this from an OM perspective, albeit there are significant strategic, financial, and human resource issues too.
The company was a typical example of the servitisation strategy. It is an operator that made or built things (roads, infrastructure, hospitals, schools, houses and etc.) that got into services related to what it made (facilities management, cleaning services, catering, and etc.). I’ve discussed this before, but the rationale for this is basically that revenue generated from product sales can be erratic, whereas sales from services tend to be more stable, especially if they are provided on a relatively long-term contract basis. The ‘lumpy’ nature of revenue is especially true in the construction industry which is very project based. So adopting servitisation as a strategy appears to be a wise move, except….
The challenge of servitisation is that managing production and managing services are very different and hence finding the right management team or teams is essential. In Carillion’s case, this should not of been too much of a problem as it it expanded into services largely through the acquisition of other companies, who should have the necessary expertise in their field.
But Carillion faced two specific challenges not necessarily faced but all operators adopting this strategy. First, both the construction industry and the facilities management sector are relatively low margin businesses. Both have to be managed extremely well if profit is to be made and sustained, with tight control over costs (see previous blog). Second, both are based on a contract business model i.e. the operator bids either for specific construction projects or for service management contracts. This is one of the reasons that margins are so low (i.e. high competition), but it also means that managing operations is conducted in a climate of uncertainty about any future level of demand. This results in trying to manage the workforce as flexibly as possible. In the construction industry, this is largely through a complex web of sub-contractors; whereas in the service arena it is through adopting practices associated with the so-called gig economy. All of which limits the opportunity for both economies of scale and economies of scope. In other words, being big is not necessarily advantageous – and especially so now that the firm has gone into liquidation.