Here’s an article I produced for the recent issue of THIIS Magazine
Playing the numbers game and getting it wrong…badly wrong
If you are bidding for business that comes with wafer thin margins, then you better know what you are doing.
The demise of Carillion is, without doubt, one of the biggest business news stories for some years and there are sure to be a number of lessons learnt after the dust has settled.
The facts and figures are pretty impressive. Carillion was the UK's second-largest construction company and in 2016, it had sales of £5.2bn. However, it also had a whopping £1.5bn debt pile too and ran out of cash owing more than £1.3bn to its banks.
The company employed 43,000 people worldwide, 20,000 in the UK, and had 450 contracts with the UK government. There are an estimated 30,000 smaller firms which have been working on Carillion projects in the private sector.
So, what went so badly wrong?
One of the suggested reasons for the collapse has been that the company took on too many risky contracts that proved unprofitable.
Taking on contracts that generate very small margins is clearly a risky business. Some companies are very good at it. They are super-efficient, extremely good at what they do, know all the tricks of the trade to run an incredibly lean machine and they do well. In short, they understand fully the risks but back themselves to deliver the contract and still make money.
For others, it’s not the same story. Get the numbers wrong, even a little bit wrong and it can make a massive difference. It’s a sobering thought for any company looking at pitching for a big contract right now.
It seems that some businesses are taking a more realistic look at what they are committed to. For example, in the care sector, we are seeing a trend of companies deciding that they just cannot continue to struggle on tiny margins.
A BBC Panorama programme recently highlighted the fact that 95 UK councils have had home care contracts cancelled by private companies struggling to deliver services on the funding offered. It suggested that, as a result, a quarter of the UK’s 2,500 home care providers were at risk of insolvency, with some 70 closing down in a three month period.
Putting pressure on companies to bid at levels which isn’t sustainable will only result in one thing and it isn’t very pretty.
Whether you are a one-man band, a growing outfit or one that has been around for years and with a sizeable workforce, playing the numbers game when there isn’t a great deal of meat on the bone needs to be done very carefully indeed.
For retailers, the online marketplace is probably the greatest challenge. When you see some of the prices posted online, you do wonder whether some of the margins are going to be enough to make it work long-term.
Customers have always wanted to get the best deal of course – it’s only natural. There’s really no difference than sitting across the table from someone responsible for awarding a multi-million pound contract to sitting with a customer looking to buy a product in the showroom. They both want to pay you less than you would like them to.
A salesman I used to work with had a standard response when he was asked for a discount by a customer. He would simply ask them, “Which part of my service don’t you want me to give you?” They would look at him bemused and he would add, “Would you prefer me not to check the product properly before we deliver it, not deliver it properly, not set it up properly or not get back to you if you need me in the future?”
They would usually get the point and he would usually protect his margins.
Many years ago I sat and listened to someone in our industry speak at a conference and warn that discounting your product and service to a level where you couldn’t actually do the job properly was a one-way street to disaster. His message to the people who were handing out the big contracts was simply that you get what you pay for.
It’s a simple message, but it doesn’t seem to be getting through.