Was Carillion’s Collapse the Beginning of the End for UK’s Outsourcing Sector?

Two large British outsourcers are also on the verge of collapse, and the vultures are circling

Two large British outsourcers are at risk of following in the doomed footsteps of Carillion, the infrastructure and services giant that collapsed in free-fall fashion in January. Between them the two firms, Capita and Interserve, employ roughly 150,000 workers worldwide and are responsible for delivering a dizzying array of vital public services in the UK.

Both are in deep financial trouble. Fears are growing that Carillion was not a one-off episode but rather the swan song of a dying business model. Until two months ago Carillion was the UK’s second largest construction firm. Now, what remains of its corporate corpse is being picked apart by employees of PricewaterhouseCoopers (PwC), which was hired to liquidate the company.

There’s unlikely to be much to liquidate. Big outsourcers like Carillion generally have relatively few tangible assets and borrow against intangibles — such as contracts or the value attached to an acquired brand name — which may have little value if a business fails, Adam Leaver, a professor at Sheffield University Management School, told the Financial Times.

For years Carillion was able to mask the true state of its financial health by delaying payments to subcontractors. By the time it collapsed, approximately a third of the company’s £1.5 billion debt to banking partners was made up of “reverse factoring” — a popular financing arrangement whereby banks pay a company’s invoices to suppliers as a form of temporary lending. Part of the attraction of reverse factoring is that companies are not required to disclose the money owed in their financial reports, and can thus conceal the full extent of their debt liabilities

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