Connaught's sudden demise from high-flyer of the FTSE250 is both sad and highly distressing for the families of the 10,000 employees whose jobs are now under threat. It's growth over the last decade has been the product of an progressive management team taking advantage of revolution in the UK's social housing sector. Between 1995 and 2005 tens of thousands of council properties 'jumped ship' to the new housing associations and millions were lent by banks in order that the new landlords could install new windows, kitchens, bathrooms and the like. Connaught did the obvious and exploited an opportunity to benefit from the massive maintenance spend.
However, in order for Connaught to reap the rewards it needed to expand very quickly. From a small Exeter based building contractor in the early 1990's it became a huge national player by the mid-2000's, listing on the London Stock Exchange in the process. Ultimately, its rapid growth proved to be its downfall, but why?
By way of illustration, I worked with a company that underwent a similar growth profile. When I joined it had just achieved UK wide reach on the back of an expansionist agenda. Local managers would be urged to win more and more business within their patch and were offered relative freedom to negotiate around a nationally set price structure.
One morning, the head of finance reported that he'd been doing some analysis and discovered that local managers had been negotiating discounts and sweeteners to win new business. These discounts had not been fed into the central business plan and left unchecked would cripple the business within a couple of years. The problem was compounded because the company had recently taken on a loan and was now accountable to a bank for its actions.
Broadly speaking , this appears to have been Connaught's problem. In order to expand, directors would have allowed deals to be negotiated rapidly, with limited thought given to ensuring certain costs and risks were factored in. Everything would have looked rosy for a while, but when the public spending downturn came there would have been little wriggle room, both in terms of cash flow and contractual commitment. As a result, funds have dried up and creditors have lost confidence.
What did my client do to alleviate the situation? Because, the issue was spotted early, mitigation measures were put in place. A head office commercial team was set up with tentacles stretching out to the regional offices. Contracts were audited for risk and the head of finance recorded discounts as a charge against income. Most importantly a commercial accountant was appointed who applied a costing model to all new business. This allowed a robust negotiating position to be determined from which new business could be judged as being profitable or loss making.
An alternative solution? Build up a nice pile of cash and wean the business off credit - but if that was easy, we'd all be doing it.
