Subcontracting: Simple can be beautiful because big can be very unpredictable

Subcontracting: Simple can be beautiful

 

Events surrounding the downfall of Carillion and doubts that have arisen about the viability of Capita remind us that the process of public tender is not always a version of Paradise. Private companies drive their prices as low as they can in order to win public contracts and go beyond what is reasonable.

 

The longer the project involved is going to last the higher the chances of costs rising and thus driving the entire project aground and this might be one of the fundamental reasons Carillion got to a point when margins became so small or even negative that it became non viable. Whether this is the case when talking about Capita remains to be seen.

 

The British government is not alone when dealing with outsourcing services. The BBC outsources services and not only that - much of what is shown by the BBC is actually produced by private companies that sell what they produce to the British Broadcasting Corporation. The British Armed Forces outsource services. So outsourcing services is not the main issue. The issue is how those in charge of dealing with bidding processes deal with the viability or non viability of what is being proposed.

 

A company like Carillion or a company like Capita can have a wide range of projects activities happening at any given time and have market realities to deal with and not just in terms of suppliers. The exchanges and what investors think about what should be the real value of shares that directly affect capitalization in any given company can have a dramatic impact on the viability of any given company. For Capita loosing about 40% of its value in one day is a gigantic earthquake.

 

Much has been said about banking and about the need to separate ordinary banking operations from investment banking that is fraught with risks. The aim in this particular case would be to protect ordinary savers so that their livelihoods are not taken away by failing investments. The fact that share values can turn wealth into dust is not reassuring when dealing with contracts awarded by public tender.