Ineffective risk management

and the difficulties experienced by Interserve

 

COMMENTARY

By Dr. Robert Chapman

United Kingdom

 


 

Risk management failings

As reported on 15 March 2019 both in the press and on its company website, the parent company of Interserve plc, the British multi-national company, has applied to enter administration[1]. At the time of the announcement Interserve plc was an international support services, construction and equipment services company headquartered in the UK and listed on the Financial Times Stock Exchange (FTSE) share index. They had been engaged by public and private sector clients in more than 40 countries, with a workforce of circa 68,000 people worldwide[2]. While not an exhaustive list, the company has been employed in the aviation, defence, education, energy, highways, marine, nuclear and pharmaceutical sectors.  In summary, at the time of applying to enter administration, it had at least 50 active contracts worth £2.1bn with the public sector, predominantly with central government[3]Prominent contracts included one to clean the London Underground and one to manage the Ministry of Defence’s estate in the UK[4]. Interserve advised that if administrators were appointed, in all probability they would immediately sell Interserve’s business and assets to a new company, to be controlled by Interserve’s lenders.

This article follows the previous PM World Journal article entitled “Ineffective Risk Management and the collapse of Carillion”. Regrettably a number of parallels can be drawn between Interserve’s current problems and the collapse of Carillion plc, a former competitor of Interserve. As with the demise of Carillion, the examination of failed companies provides valuable insights into failed corporate processes. These lessons are important not only for executives but also for lenders, shareholders, construction managers, project managers, risk managers and advisers. At the heart of Interserve’s difficulties has been an acute lack of understanding and management of risk by both the UK government[5] and Interserve itself [6]. As Interserve Chairman Glyn Barker disclosed in the 2017 Annual Report for instance, while Interserve was impacted by external events, poor performance predominantly resulted from “self-inflicted mistakes of the past”.

Background

The UK Government had been Interserve’s largest customer for many years, and at the time of writing, Interserve was one of its largest suppliers, retaining its pan European contract with the Foreign & Commonwealth Office which they have held for over ten years. In addition, Interserve had successfully secured new key accounts such as UK wide contracts for the Department for Works & Pensions, the Department for Transport and the Ministry of Justice. Public sector contracts had accounted for 70% of Interserve’s turnover[7]. These new and retained accounts had supported the longevity of the company. The new face of Interface, its organisational structure and its financing have yet to be revealed.

Parallels between Carillion and Interserve

Interserve had struggled with a number of critical issues for over a year. These included: being over leveraged resulting in crippling debt; structured as a federalised organisation exacerbating decision making and accountability; poor corporate governance; inappropriate reporting of goodwill and goodwill impairment; engaging in contracts with very low margins; struggling with securing payment on Middle East contracts; poor performing ‘energy from waste’ projects; the burden of high board salaries; and inadequate risk management. All have all undermined bottom line performance. There are a series of striking parallels with Carillion plc before its demise, as set out in Table 1 below. As reported in the press, on 15 January 2018 Carillion plc, the British multi-national company declared insolvency and the Official Receiver started to liquidate its assets and contracts. The company predominantly operated in low-margin industries[8] within highly competitive markets with inherent risks[9]. A large element of Carillion’s contracts were government construction and facilities management contracts.

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How to cite this article: Chapman, R. (2019). Ineffective risk management and the difficulties experienced by Interserve; PM World Journal, Vol. VIII, Issue III (April).  Available online at https://pmworldlibrary.net/wp-content/uploads/2019/03/pmwj80-Apr2019-Chapman-ineffective-risk-management-by-Interserve.pdf

 


 

About the Author

Robert J. Chapman, PhD

United Kingdom

 

 

Robert J Chapman is an international risk management specialist and Director of Dr Chapman and Associates Limited. He is author of the texts: ‘Simple tools and techniques for enterprise risk management’ 2nd edition, published by John Wiley and Sons Limited, ‘The Rules of Project Risk Management, implementation guidelines for major projects’ published by Gower Publishing and ‘Retaining design team members, a risk management approach’ published by RIBA Enterprises. He holds a MSc in Construction Management and a PhD in Risk Management from the University of Reading and is a fellow of the IRM, APM and ICM and a lapsed member of the RIBA. He has provided risk management services in the UK, the Republic of Ireland, Holland, UAE, South Africa, Malaysia and Qatar on multi-billion programmes and projects. Robert has passed the M_o_R, APM and PMI risk examinations. In addition he has provided project and risk management training in Scotland, England, Singapore and Malaysia. Robert is an external PhD examiner.

Dr. Chapman can be reached by email at riskappetite@outlook.com

 

[1] Building (2019) “Interserve formally applies for administration”, By Will Ing, 15 March 2019

[2] https://www.interserve.com/

[3] Sky news, UK, (2019) “Interserve faces administration but all jobs are to be saved in sale”. James Sillars, Friday 15 March 2019

[4] Tussell.com (2018) “Interserve in crucial funding talks with banks” https://www.tussell.com/insights/interserve-in-crucial-funding-talks-with-banks.

[5] Parliament UK (2018) The Public Administration and Constitutional Affairs Committee report, “After Carillion: Public Sector Outsourcing and Contracting”.  https://publications.parliament.uk/pa/cm201719/cmselect/cmpubadm/748/748.pdf  /09 July 2018.  The report stated “Our report finds that government ineffectiveness has contributed to the problems that Carillion and other companies have faced. The Government has deliberately promoted an aggressive approach to risk transfer to the private sector – often even attempting to transfer risks that the government itself has completely failed to analyze or to understand”.

[6] Glyn Barker, Interserve’s Chairman, stated in the Interserve 2017 Annual Report “The circumstances that resulted in the challenges faced by the Group during 2017 were, in my view, due in part to weaknesses in the corporate governance framework of Interserve over several years”. 

[7] Building (2019) “Interserve formally applies for administration”, Will Ing, 15 March 2019.

[8] Financial Times (2018) “Unravelling a web of failures at UK outsourcer Carillion”, https://www.ft.com/content/37f63372-58f3-11e8-b8b2-d6ceb45fa9d0,  May 16 2018.

[9] UK Parliament (2018) House of Commons Hansard. Carillion. 12 July 2018. Volume 644. https://hansard.parliament.uk/commons/2018-07-12/debates/2D8B6F0E-B8C0-47C6-B9D0-D274EC5D72DD/Carillion