Mark Whitehead 11 December 2018

Tough times for creaky outsourcers

The immediate crisis over the fate of Allied Healthcare has been averted for now with its sale to another company. But problems over the giant outsourcers which have become a part of the local government landscape are continuing with fears over the future of global oil-and-gas to school dinners corporation Interserve.

With a warning of impending doom from the Care Quality Commission still ringing in their ears, the bosses of Allied Healthcare took the easy option: they sold up and pulled out of the market.

It was not exactly a clean exit. The company had advised its 150-odd local authority clients to find alternative providers and many were in process of doing so when the bombshell was announced. The episode cannot have engendered a whole lot of confidence in leaving such important and sensitive care services to the vagaries of the commercial market place.

But following the collapse of giant outsourcer Carillion early this year, leaving a huge bill for taxpayers and forcing local authorities to find alternative providers, the fate of other major players has come under the spotlight. Nerves are somewhat jittery over the precarious position of several construction and services companies.

The risks of further disasters is so serious that the UK Government – whose doctrine usually tends towards 'leave it to market forces' – has ordered them to draw up 'living wills' setting out how they would ensure continuity of service if they were to go under.

Attention turned recently to Kier construction whose share price plummeted after it announced a rights issue to raise cash to reduce mounting debts. Chief executive Haydn Mursell said the fall was merely a 'mathematical adjustment' and the share price would return to much healthier levels once the effects of the rights issue played out towards the end of the year. The weeks to come will see if his faith is justified.

The challenges faced by Kier, however, do not stop at the company boardroom's door. A ripple effect has heightened already existing instability affecting several companies in the construction sector.

Mursell claimed at least four other major UK contractors would struggle to get credit as financiers tightened their purse strings. He said the firm’s banks and lenders had 'changed their position' rapidly after deciding to cut exposure to the entire construction sector.

The growing crisis led to the challenging headline in the house magazine of the share-dealing community, Investors Chronicle: 'Are more outsourcers set for the scrapheap?'

All eyes are now on debt-laden Interserve, thought to be the weakest of the major players and an important provider to local government customers, as its share price hit an all-time low and millions were wiped off its market value.

Does any of it matter? When Carillion collapsed taxpayers were left with a huge bill to pay and local authorities were forced to find alternative firms to complete ongoing projects. In the case of Allied Healthcare, councils were forced into hurriedly signing up new contracts to provide services for elderly and vulnerable people before the company changed tack and announced its sale.

Observers know that markets operate on the basis of confidence, and when it reaches the point that banks and investors no longer believe a company can continue to be viable – indicated by its share price – its fate is sealed.

Hopefully there will be no more market failures among the big outsourcers with untold repercussions for local authorities and the communities they serve.

But the continuing uncertainties will raise further questions over the outsourcing model and Whitehall is watching carefully.

In the meantime councillors, local authority staff and managers, unions and community representatives would do well to keep an eye on the state of their private sector partners.

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