I was reading about the collapse of British firm Carillion on CNN/Money, a firm that started out in construction, but now …
The company also builds infrastructure for high speed rail and power distribution projects, and provides government services such as road maintenance and hospital management.
Merely interested transformed to fascinated by this bit:
“It has been more than surprising, possibly even negligent, that the U.K. government continued to dish out contracts to Carillion even though their future has looked uncertain for some time,” said Fiona Cincotta, a senior market analyst at City Index. “[This] is a costly mistake that the U.K. government can ill afford.”
As if the government turning a profit is top of her mind, perhaps. But here’s the thing: a wise government should not be limited to a single source of supply. As an example, in the past the United States War Department (later DoD) carefully spread its spending between many suppliers when it possibly could, for a couple of reasons, including the importance of not having a single source go under, and because competition is a good thing: It improves services and reduces costs, assuming it’s well-managed (not an easy thing in itself sometimes).
So when a government awards a contract to a struggling firm that has done good work in the past, they are extending a lifeline to a firm that, if it recovers, will provide the government with a necessary buffer against the problems that come with single sources. Companies that supply government needs are often specialized, such as battleship makers, (military and science/technology suppliers, oh my, the whole institutional knowledge thing can be far more important than in private sector land.), so finding new sources is a problematic venture.
Compare that to a company signing a contract with another company to be supplied with something. If the supplier goes under, then the first company may have a claim on the remnants of the second – but possibly only after a costly, time-consuming court battle. So it makes sense for them to evaluate suppliers’ financial conditions, along with the usual, and cross a supplier off if its financial condtion, if knowable, renders it questionable. They may still want the comforts of competition among suppliers, but the resources of most companies do not compare to that of a major Western government.
So what took my attention was what may, and I emphasize may because the analyst’s quote is extremely limited, be a misapplication of sector wisdom. It’s always worth asking that question when someone, an analyst, comments on something that may be quite out of their expertise.
