Just how resilient are ‘Living wills’?

In the wake of the costly collapse of Carillion, the Government has launched new proposals to oblige key suppliers and outsourcers to prepare plans for the continuation of critical services should the business fail. But can these so-called ‘living wills’ work in practice, and should Government be more proactive in monitoring the performance of key suppliers and outsourcers, to ensure it is ready to step in should the situation require it?

The drawing up of these proposals to introduce ‘living wills’ seems to be the recognition the Government needs to look closer at the terms of supply contracts, and put in place robust fall-back plans. These contingency scenarios, should they be given the ‘go-ahead’, will allow the Government to take control of critical services, bringing them under direct management or transferring them expeditiously to other suppliers. By taking this action, it will be possible to minimise disruption and protect the interests of taxpayers in the event of a supplier experiencing financial difficulties.

The Spectre of Carillion

Menzies microscope iconWhen discussing these new proposals, it is impossible to ignore the collapse of Carillion earlier this year. Its collapse caused serious operational challenges for many UK schools, hospitals and Government departments. In the ensuing media frenzy, widespread criticism was levied against the Government for its handling of the crisis, including its perceived failure to effectively monitor and spot signs of overtrading in suppliers and outsourcers. The proposals are also likely to have been triggered by ongoing concerns over the financial position of Interserve, which provides a range of public sector services, and recent profit warnings from key suppliers including Capita, Serco and Mitie.

Testing for the future

business growth on laptop graphicIn principle, the introduction of ‘living wills’ could be a positive step; helping to decrease risk in Government procurement by introducing a solid ‘exit strategy ’in the event of a supply partner collapsing. Whether the move will be effective in practice however, remains to be seen and a greater focus on monitoring supplier performance will be essential.

Alongside a period of stress-testing for these contingency plans, the Government needs to implement a more cohesive method of ensuring the resilience of contractors. Rather than focusing solely on costs and commercial terms, it will be important to weigh up possible risks on a contract-by-contract basis, considering a variety of possible scenarios and issues that could occur. Maintaining close relationships with key suppliers and outsourcers after contracts have been awarded and monitoring their performance delivery, the Government should be able to step in, if required, before vital public services become compromised.

Assurance should be key

There have been discussions in regard to publishing information about the performance of critical contracts. Greater collaboration between procurement agencies and prospective suppliers before, during and after the awarding of contracts could also be a further requirement. The strength of bidders’ contingency plans should also be a consideration before signing a contract, rather than simply favouring the lowest price. All of this will help underpin the financial sustainability of contractors.

As well as ensuring contingency measures are included in contract provisions, insolvency practitioners should be engaged to stress test any plans, as to ensure they are robust enough to protect taxpayers’ interests and the provision of public services from any unexpected circumstances that could occur.

By forming part of a wider drive to shift procurement towards the delivery of positive social outcomes, it is clear that ‘living wills’ could play a key role to help prevent a similar crisis occurring as happened when Carillion collapsed. For these plans to truly prove effective, however, it is vital a culture of collaboration is endorsed, alongside an ongoing commitment to monitoring suppliers and outsourcers.

Simon Underwood - Menzies AccountantBy adjusting from a cost-centric approach to award procurement contracts and closely review levels of compliance and delivery, the Government can help to ensure the continued operation of essential services and protection of taxpayers’ interests, even if events take a turn for the worse.

For further information in regards to living wills please contact Simon Underwood our insolvency partner by email or +44 (0)20 7465 1932

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