Two sinking ships, one underlying issue
If you’ve been reading the business press over the last couple of weeks you’ll have seen the stories about outsourcing firm Capita, and its recent profits warning – stories asking the question, is this the next Carillion? Well, there are a couple of striking similarities, and one big lesson for us all...
Running time 3:45
Key Points:
Both Capita and Carillion had grown rapidly through acquisitions, and acquisitions are notorious for knocking good businesses off their stride; introducing complexities that can take years to unravel. But there’s a deeper issue for both businesses. Most of those acquisitions only made sense because they were in attractive, growing markets, not because Capita or Carillion had any real strengths to bring with them, that would increase the value of what they’d bought. What they ended up with, was a host of average divisional businesses, without any real competitive advantages over anyone else in those markets.
The acquisitions were in attractive, growing markets, but markets don’t stay that way forever. For example, public sector outsourcing, where both Capita and Carillion had a big exposure. had been profitable and growing for over twenty years, but five years of downward pressure on budgets from austerity has put large parts of that market into a value spiral.
A rising tide floats all boats, but when the market falls, only the best, the most distinctive businesses, the ones that add real, unique value, can hope to avoid the value spiral and keep decent margins. That's the lesson for all businesses from Capita and Carillion. You have to continually invest in developing your own, distinct advantages; you have to find ways to continually offer new value that your customers really want and that your competitors can’t match. Because that’s the only way to keep your business riding high, when all around you are sinking.