Navigating the risks of neglectful due diligence: “What’s the worst that can happen?”

In our sector, at the end of every service being delivered is the customer, a customer who expects a continued and high-quality service from their landlord. We understand that customer expectations are continuing to rise, and at the same time the operating environment continues to stretch landlords, both financially and in the services delivered.

Needless to say, the role of thorough, careful and thoughtful due diligence is one of the most significant, yet understated, risk management tools to ensure your strategic suppliers are able to deliver for your organisation and customers.

Think of it as your guiding star to help you navigate the complex landscapes of compliance, financial stability, and risk assurance. Overlooking this essential aspect of governance can result in serious repercussions, as demonstrated by the downfall of Carillion.

On 29^th September 2017, Carillion’s second profit warning alarm was raised, and the damage limitation began with the announcement of selling shares to bolster the company’s balance sheet. At the same time, on the surface, Carillion gave the appearance of a thriving business, winning a number of multi-million-pound long-term contracts for several months before the inevitable collapse in January 2018.

The role of ongoing due diligence combined with meaningful engagement with strategic suppliers cannot be understated. Effective due diligence is your North Star, illuminating your path towards responsible, ethical, and sustainable practices.

Carillion’s Collapse: A Cautionary Tale

Carillion’s collapse in 2018 serves as a stark reminder of what can go wrong when due diligence is ignored or inadequately performed. At the time of its liquidation, Carillion was the second-largest contractor in the UK, employing 43,000 people globally and was a symbol of corporate success.

A critical appraisal reported by the National Audit Office (NAO) made clear the five key areas associated with the government’s involvement. Amyas Morse, the head of the NAO, underscored the importance of gaining insights into the financial robustness and sustainability of your major suppliers, a perspective that transcends the confines of specific contractual arrangements.

“When a company becomes a strategic supplier, dependencies are created beyond the scope of specific contracts. Doing a thorough job of protecting the public interest means that government needs to understand the financial health and sustainability of its major suppliers and avoid creating relationships with those which are already weakened.”

Looking back, the collapse of Carillion triggered a significant re-evaluation of corporate governance practices and the role of Boards in upholding the interests of all stakeholders. It is ultimately the responsibility of Executive Teams and Boards to monitor and assess strategic risks, including due diligence assessments on strategic suppliers as well as commercial literacy and thinking more broadly.

The question is, have we listened to the tale and made adequate changes already?

The perception of Carillion as a successful company, coupled with the failure to interrogate information commercially, is how the organisation was able to continue to operate precariously without a long-term sustainable vision.

There were a number of red flags that should have been raised with the right commercial insights and questions about the organisation’s financial and business data. The interpretation of such data would have revealed a pattern of inherent risk and uncertainty in its operating position, allowing affected organisations to identify the early warning signals of business failure.

As we look to the future, what lessons can we learn from the past?

As we reflect on the years that have past, the lessons we’ve taken from events such as the Carillion collapse have prompted us to rethink how we approach due diligence. The tale of Carillion’s downfall is a reminder that our traditional ways of managing risk may no longer cut it.

Over the past five years, due diligence requirements have evolved significantly, driven by the voices of residents, governmental and regulatory direction, and increasing customer expectations, where standards expect more than just efficient housing management.

In today’s world, where information spreads at lighting speed, and our actions are under constant scrutiny, the reliability of the data we use for due diligence has become absolutely critical.

With the increasing uncertainty in today’s operating environment, you cannot prevent your strategic supplier from failing. People run businesses and people make mistakes with consequences. However, the lessons from Carillion remain as relevant as when the situation first occurred and can help your organisation manage the likelihood and impact of any future business failure.

We must prioritise comprehensive information to make informed decisions; we must adapt to these changing dynamics by incorporating more robust, technology-driven approaches to due diligence. These measures are not merely a checkbox for compliance; they are vital in addressing the unique challenges we face within the sector and meeting the heightened expectations of our residents and communities we serve in this new era of scrutiny and accountability.

Adapting your current due diligence practices to ensure analysis is thorough, sufficient, and comprehensive will provide assurance and an ability to proactively mitigate crisis points and ensure that service delivery and customer expectations are not negatively affected.

There are several factors to consider when looking at what we can learn from the Carillion collapse, but these five remain the most crucial today:

Lesson 1: Comprehensive due diligence is absolutely key.

To ensure the long-term success of social housing, we must adopt comprehensive due diligence processes, meaning that we need to carefully assess financial stability, project viability, and contractual obligations. Any warning signs should be dealt with immediately and proactively in order to prevent a crisis from occurring further down the road.

Lesson 2: Transparency and accountability is what matters most.

It is imperative that organisations remain transparent and accountable, maintaining open lines of communication with all stakeholders. Regular reporting and updating on project progress, financial health, and compliance with regulations are essential for building and preserving trust.

Lesson 3: Using diversity when allocating funding sources.

If you put all your financial eggs in one basket, as Carillion did with government contracts, then you leave yourself vulnerable. Diversifying funding sources can help mitigate risk, ensuring that financial stability isn’t at risk if one source falls through.

Lesson 4: Harness technology and embrace smarter due diligence.

We are in a golden age of technology; we use the tools that have been developed to assist your due diligence. Advanced data analytics, AI, these tools can help assess risk more accurately and investment in these technologies seek to enhance due diligence capabilities.

Lesson 5: Reflect on your organisation’s culture of diligence and ethical governance.

Carillion’s collapse wasn’t just a failure in terms of due diligence; it was also a failure of corporate culture and ethical governance. We all need to nurture a culture of diligence, integrity, finances, and project management, as well as commitment to the well-being of our communities.

Ultimately, we know the collapse of Carillion will forever be a stark reminder of the consequences of inadequate due diligence on your strategic suppliers and the relationships developed.

At Altair, we can support your organisation in implementing effective due diligence frameworks and processes, as well as undertake due diligence checks using our in-house methodology and raising awareness through briefings and training at Board and Executive levels.

Effective processes are only part of the solution. A culture of commercial knowledge is about asking the right questions and identifying risk patterns. This needs to extend across the organisation and not be the responsibility of a particular Board Member, Executive or Finance/Procurement department. Raising the level of commercial insight and understanding for your entire Board through to the rest of the organisation is crucial.