The uncertainties at Interserve has the sector on alert, reports Herpreet Kaur Grewal.
07 January 2019 | Herpreet Kaur Grewal
A lot of companies and client organisations are likely to be "considering their options" as Interserve's share price dropped amid rescue talks at the end of last year, according to Linda Hausmanis, chief executive of the Institute of Workplace and Facilities Management.
Hausmanis, speaking last month on BBC Radio 5 Live's early-morning financial programme, Wake Up to Money, told hosts that in the aftermath of Carillion's collapse in early 2018, facilities management and other service providers were able "to swiftly pick up those contracts - we have a lot of companies who work very efficiently in facilities management".
She added: "Also we saw a lot of companies deciding to take those services back in-house and they didn't rely on an outsourcing model."
As Interserve remains in discussions, Hausmanis said: "I am sure a lot of companies and client organisations are considering their options as they see these headlines and listen to the news reports - they will be concerned."
But Hausmanis pointed out that it was not fully appropriate to make a comparison to Carillion. She said: "There are similarities but there are also differences. This is a different company and there are different facts. That said, the Carillion experience will certainly have had client organisations thinking about their preparedness should anything happen to a supplier - that's just good business sense. We do know there has been action by government with close monitoring by the Cabinet Office."
After Carillion's collapse, said Hausmanis, the government had launched a digital and analytical platform, "which captures spend and contract information across government".
"This is a better data capture and analysis [than before]. There were obviously lessons learned, it was a very painful experience to allow a company such as Carillion to go down. The last thing the government wants is the fall of a such a large company which employs a vast number of people."
She added: "I am sure the board at Interserve and professional advisers are spending many hours ensuring they can rescue this company."
Interserve in rescue talks
Meanwhile, Interserve and its lenders have spent recent weeks "in constructive discussions regarding the agreement and implementation of a deleveraging plan", according to a company update published in December.
On 23 November, Interserve's board said it was working with its advisers to look at all options to deliver the optimum capital structure for the group to support its sustainable development.
The deleveraging plan announced in the recent update "would deliver a strong balance sheet with Interserve targeting leverage of approximately 1.5x net debt/EBITDA".
The discussions also involve proposals to amend the group's financing agreements, including the extension of the maturity dates and repayment profiles of the existing facilities.
Although the form of the deleveraging plan remains to be finalised, it is likely to involve the conversion of a substantial proportion of the group's external borrowings into new equity, an element of which may be sold to existing shareholders and potentially other investors.
If implemented in this form, the deleveraging plan could result in material dilution for current Interserve shareholders.
Interserve intends to announce its finalised deleveraging plan, which would be subject to shareholder approval, early this year.
Debbie White, CEO of Interserve, said: "Our lenders are supportive of the deleveraging plan, which will underpin the long-term future of Interserve. Our refinancing in April of this year contemplated the development of a deleveraging plan in consultation with our stakeholders and the liquidity injected at that point also gave us the funding to execute our business plan. Our discussions with our lenders are a positive step in the process that was agreed as part of the April refinancing. The Cabinet Office has also expressed full support for the work we are doing to implement our long-term recovery plan.
"The fundamentals of our business remain strong. The deleveraging plan will give Interserve a strong long-term capital structure and provide a solid foundation on which to build the future success of the group."
In a statement a Cabinet Office spokesman said: "We monitor the financial health of all of our strategic suppliers, including Interserve, and have regular discussions with the company's management. The company successfully raised new debt facilities earlier this year, and we fully support them in their long-term recovery plan.
"We do not believe that any of our strategic suppliers are in a comparable position to Carillion."
Poor procurement practice
Speaking on the BBC's Breakfast Show in December, Chris Moriarty, the IWFM's director of insight, said: "What is clear is that a drive for low margins combined with poor procurement practice has led to an over-reliance on mega-businesses such as Interserve and Carillion. Add to this the tendency to regard facilities management as a cost centre to be cut instead of a factor that can add value, and you have a recipe for risk.
"Putting social value at the heart of procuring and delivering services is key in getting from lowest cost to best value. A uniform framework is essential to help public service delivery and set the tone for the rest of the supply chain, and we welcome government efforts to work toward this.
"This was our message when asked by the BBC to comment on the Interserve news. Here we restate the case for a value-based approach (see box, right)."
Future of procurement
'Place social value at heart of procuring'
Chris Moriarty, director of insight at IWFM):
In a way, outsourcing has become a victim of its own success because it has been good at providing a rationalised and efficient service which for years has provided great savings. But when there is no fat left to trim, and margins are targeted, problems arise.
This is not to vilify outsourcing per se; there are many examples of outsourcing firms delivering excellent services driven by value. And these firms are bringing added worth to client businesses such as access to expertise, technology, innovation and information management, delivered efficiently by high-quality people.
As we said at the time of Carillion's fall, putting social value at the heart of procuring and delivering services is key in getting from lowest cost to best value. This won't happen overnight, but it is essential that a uniform framework is embedded, and government works with suppliers to achieve this. It will also set the tone and create the space for the rest of the supply chain, especially in the public sector.
There is no one approach to restoring public trust in the outsourcing model. But here are six guiding principles that might steer us in a good direction*
1. A value-driven approach, incorporating quality and social value, which delivers for all stakeholders.
2. Enabling realistic margins.
3. Upskilling for professionalised procurement processes, with shared objectives, shared data where possible, and a partnership approach.
4. Consistent prompt payment.
5. Wide-ranging minimum standards underpinned by a code of conduct.
6. Transparency about the service delivery, which enables trust between partners. The role of technology and data-driven innovation should be promoted here.
It is encouraging to see government departments recognising these principles and starting to implement a value-based approach by giving more weighting to the quality element in bids, requiring the social value element to be evaluated in contracts, providing more opportunities for small suppliers and extending the time limits for tender applications. We need to see these principles incorporated widely.
*These principles have been distilled from discussions between senior FM professionals on both client and service delivery side as part of gathering evidence for post-Carillion parliamentary inquiries.