What Does The Balfour Beatty Profit Warning Tell Us? The Cost Of Failing Governance
On January 22, Balfour Beatty issued a £70M profit warning following a review by KPMG of its UK construction business. This warning followed an earlier incident in 2014, when the company issued a warning of the same magnitude.
What caused the situation?
According to the KPMG report there are 3 main concerns.
- First, bidding at low margins with unrealistic assumptions on expected procurement savings and inadequate provision for risk.
- Second, unrealistic assessment of actual contract performance and, again, an overly optimistic assessment of contract risk.
- Third, insufficient visibility in actual project cost, which leads to inadequate decision making. If you add this all up it´s not difficult to understand that reporting on project progress may, on average, have been too optimistic.
Another case, of even larger proportions, is Imtech. This Dutch technical service provider miscalculated its project results and risk positions – including plain fraud - by several hundreds of millions of Euros, leading to a dramatic drop of shareholder value as expressed by the decrease in share price from €44 to less than €4 within 12 months.
What can businesses learn from this?
The question is, what can these companies can do about it and actually the answer is fairly simple. The key words are governance and control, starting with the tender process and extending into project execution. With projects sometimes worth hundreds of millions of euros or pounds, companies simply can´t afford to be complacent and take things for granted. Thinking that you are in control is not enough, you have to know.
So, how do you get the information to ensure that you are in control? In other words, how do you know?
1. Make Governance Control a top priority
It´s imperative that there is a sense of urgency within management that governance and control is a top priority. Although it´s not the sexiest part of doing business, the cases of Balfour Beatty and Imtech clearly demonstrate that neglecting this part of the business cycle may cost millions in shareholder value, and leave the company with a damaged image.
2. Use the right technology
Use sophisticated tools to deliver a framework for controlling your projects. With today´s technology and project-ERP solutions available there is simply no reason to miscalculate in tenders, to not know your project margin, to not know your estimate-to-complete and earned value. Furthermore, by deploying authorisation hierarchies and workflows these solutions support your governance procedures. This will enable you to drive decision-making at the right level of responsibility and accountability within your organisation.
3. Use a ‘single company, single system’ approach
Leverage these procedures throughout the entire organisation. Many of the companies I work with have adopted the ´single company single system´ approach, allowing them to share best practices across all parts of their organisation. Having multiple systems in place simply means that you will have to replicate your control mechanisms in each deployment, and that changes to the control structure need to be maintained in many different places, and in my opinion this is almost a guarantee for non-compliance. As Balfour Beatty and Imtech demonstrate, this is a luxury that you just can´t afford.