Sponsored article: Many council suppliers are struggling with a risk of failure and a loss of service provision. Simon Stibbons looks at the way councils can spot a crisis coming and how they can manage the problem.
Room151: Managing suppliers is an important part of any council’s duties. Why has it become an urgent issue?
Simon Stibbons: Competition and limited local authority budgets have resulted in a large number of private sector operators entering into low margin contracts for the provision of key public services. While it has always been important to keep a constant eye on operational and financial performance of suppliers, Brexit and Covid-19 mean this has become more important than ever.
Inflationary pressure caused by supply chain issues and insufficient supply of skilled labour together with the unprecedented impact of Covid-19 have created a perfect storm for a significant number of these suppliers. Consequently, councils need to apply even closer scrutiny to their suppliers performance.
29th November, 2021
London Stock Exchange
6th Annual FDs’ Summit
Lead sponsor PFM/UKMBA
Public sector finance directors can register here
Q: Why is it important that suppliers are closely managed? What are the risks to a council?
A: Government support in respect of furlough, VAT deferrals, protection from landlords and the suspension of winding up petitions are all being withdrawn.
As suppliers continue to emerge from the impact of Covid-19, there are likely to be substantial pressures on liquidity as they play catch-up with aged creditors and face operating in a rapidly changing environment.
In my experience, when businesses are faced with liquidity issues the first place they start to cut costs relates to capital expenditure and maintenance as well as reducing their headcount. For public sector providers this can lead to deterioration in performance metrics and potentially complaints from the public.
Risk
Q: What are the risks to a council?
A: On a financial level it remains to be seen how many suppliers are facing imminent post-Covid funding requirements and how they will deal with problems when they arise.
Suppliers may be fortunate enough to have supportive stakeholders or strong balance sheets, however, in the event traditional lenders are unable, or unwilling, to increase their exposure to certain sectors and all forms of shareholder support have been exhausted, where will suppliers seek help?
The big risk to councils is that suppliers approach them as “funder of first resort” against a backdrop of the possible cessation of key public services.
It is therefore vitally important that liquidity issues are brought to the attention of councils as early as possible to allow collaborative solutions to be found at an earlier stage.
Alerts
Q: What are the warning signs and the options when it comes to managing a supplier unable to fulfil its obligations?
A: Often when a business is facing financial distress there will be a number of key indicators:
- Poor or incomplete financial and performance reporting;
- A lack of co-operation from senior management;
- High staff turnover;
- Increased levels of customer complaints;
- Creditor pressure or winding up petitions
In situations of distress prior to Covid-19, it would not be unheard of for councils, or central government, to transfer operations to a suitable alternative market operator, as opposed to being seen to be rewarding mis-management by a supplier.
However, given the widespread impact of Covid-19, the financial issues affecting individual suppliers may be faced entire sectors.
If a suitable alternative supplier cannot be sourced then the council has the option to fund (at least in part) the ongoing provision of services.
This is, however, likely to be unpalatable for councils given budget constraints, particularly if there are multiple suppliers in distress seeking funding.
It is more important than ever that indicators of distress can be identified as early as possible, and early engagement is undertaken to increase the likelihood that lenders, shareholders and councils can combine to find a solution where all stakeholders can play their role in maintaining the provision of key public services.
If appropriate advice is sought at an early stage it is also possible that the distressed supplier can work out a restructuring plan and perform appropriate due diligence ahead of approaching the council with a credible contingency plan.
29th November, 2021
London Stock Exchange
6th Annual FDs’ Summit
Lead sponsor PFM/UKMBA
Public sector finance directors can register here
Options
Q: What is FRP’s recommended option and why?
A: Our advice to a distressed supplier is that early engagement with key financial stakeholders is the best way to find a solution.
Our advice to councils is that if you suspect one of your suppliers is facing financial distress strongly encourage them to seek advice at an early stage to gain the confidence of their stakeholders by demonstrating that they are addressing the issues.
Councils can put the following procedures in place to help recognise indicators of supplier distress:
- Monthly detailed review process of financial and performance information from suppliers to “horizon scan” potential issues;
- Regular review of suppliers failing to supply contractual information or where reporting standards have deteriorated significantly;
- Monitor customer complaint metrics for individual suppliers;
- Be alert to abnormal levels of creditor pressure and / or winding up petitions;
- Regular engagement with supplier management teams..
In summary, there may be some difficult decisions to be made by suppliers and councils over the coming months to ensure continuity of key public services, and early engagement is invariably the best way of ensuring this happens. Due to the pandemic, it is inevitable that suppliers will face financial pressures and so addressing the issues head on gives all stakeholders the best opportunity to find a solution.
Simon Stibbons is a partner in Restructuring Advisory at FRP.
Simon can be contacted via simon.stibbons@frpadisory.com / 07904866650 and would be more than happy to discuss any of the issues raised in the article with you.
Photo by Constantin Wenning on Unsplash
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