McDonough: why cuts will be good for Carillion

Not many chief executives would reply “very good” when asked to describe 2009, writes Tom Bill.

But John McDonough, 58, whose nine-year stint as the head of £5bn-turnover support services giant Carillion recently won him the KPMG-sponsored Chief Executive of the Year gong at the Building Awards, is also the man who recently called the prospect of public sector cuts “exciting”.

He says the cut-backs will be a good thing because they will open the door to more large-scale government outsourcing deals, something Carillion has become a specialist at under his leadership.

But first back to the “very good” 2009, an assessment few in the Square Mile would argue with where Carillion is concerned.

The company has a whopping £18bn order book and despite warnings of a slowdown in public sector spend and more trouble ahead in the Middle East, where the company has a joint venture with Al-Futtaim Group, the firm was at the top end of its financial expectations last year.

Turnover was up from £5.2bn to £5.4bn and pre-tax profit climbed from £116m in 2008 to £148m. He says in matter-of-fact Lancastrian tones: “I was very pleased with the numbers and a key highlight was for us to get back into a cash position (£25m as opposed to net debt of £227m in 2008).”

Under McDonough, Carillion has gone from a low-bid contractor to a firm that gets half its turnover and two-thirds of its profit from services-related business. It officially shook off the construction tag when it was rated as a support services stock in June 2008.

More notably, it made two of the largest acquisitions in the sector in recent years, with the £291m deal to buy Mowlem in February 2006 and the £561m purchase of Alfred McAlpine two years later. They were not without risk or teething problems but the City has not found much to complain about over their strategic logic.

In terms of further acquisitions, McDonough says the firepower is there but adds: “We’re not looking for more ‘transformational’ acquisitions but we will look at bolt-on deals in support services in the UK and Canada.”

I was very pleased with the numbers. a key highlight was to get back into a cash position from £227m debt in 2008

As one analyst said this week: “Given his services background, his vision right from the outset was to transform the company away from pure construction. He is just about there now. Further shifts will be mostly organic.”

But McDonough is not blindly optimistic about the future and given his links to the government as chair of the CBI’s Construction Council, he is a realist about the pain to come. He highlights an expected £20bn cut in public spending on construction, saying: “I don’t think the worst is behind us. Things will be tough for another three to five years, with spending cuts inevitable.”

But the flipside for Carillion, he quickly adds, is the increase in government outsourcing. Research by the CBI has found that the public sector could outsource contracts worth £30bn a year in a drive to cut costs, which is good news for its support services operations across the defence, health, education and highways sectors.

On procurement, McDonough is convinced a new “son of PFI” model will emerge that will enable greater flexibility within shorter timeframes and he cites the Local Education Partnerships (LEP) model under Building Schools for the Future as an example. He says: “Under LEP you still have a 12-to-15-year model, but there is greater flexibility in terms of what goes through it and what is procured with PFI.”

And how has he found dealing with the Labour government? “It depends what part,” he replies tactfully. “In the last couple of years there has been a real willingness to connect with construction, including the appointment of Paul Morrell as chief construction adviser.”

Peter Mandelson, in particular, impressed him. “He has represented the UK extremely well and batted very strongly.”

He no doubt hopes that if there are new incumbents in the cabinet by the end of this week, they will take a similarly favourable view of the industry.

Either way, he seems to have his bases well covered.