Charlie Maclean-Bristol looks at the recent collapse of ISG and gives an insight into what we can learn about supply chain management.

 

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• • • • • • • Philip Jan Rothstein, FBCI

Nick Simms of Cornwood Consulting inspired this bulletin, by sharing recent insights into supply chain issues at Aston Martin. He mentioned, “In a strategic adjustment, Aston Martin announced it would reduce its 2024 production volume to 6,000 cars, a 14% cut from its previous guidance of 7,000. The company cited ongoing supply chain disruptions and macroeconomic challenges in China as the primary reasons for the shortfall,” and “production has been particularly impacted by the insolvencies at key German suppliers, Recaro and Eissmann.”

This got me thinking about supply chains and how we should work to prevent supply chain failures. I recently noted the collapse of ISG, which led me to explore supply chain issues through the lens of their insolvency.

The construction firm ISG, one of the top ten constructors in the UK, became insolvent on the 20th of September 2024, leaving approximately £1 billion of government and other construction contracts unfinished and around 2,200 workers without jobs.

In the past, ISG had successfully delivered major projects, such as:

• The construction of the Velodrome for the London 2012 Olympics
• The fitting-out of Google’s new headquarters at King’s Cross
• The expansion of HM Prison Grendon
• The conversion of Regent’s Quarter in London into a life sciences campus.

They were also working on 22 projects for the Ministry of Justice, including a £300 million contract to extend Grendon Springhill prison to Grendon Springhill 2, and a £155 million deal to expand three other prison sites. They were also involved in 16 projects for both the Department for Education and the Department for Work and Pensions. According to Glenigan, Figure 1 shows the main private sector contracts ISG were involved in. ISG’s collapse marks the biggest failure of a Tier 1 main contractor since Carillion’s bankruptcy in 2018.

So, what are the lessons to be learned from ISG?

• You Outsource the Activity, Not the Risk: A fundamental lesson when managing supply chains is that if your supplier fails, the risk is still yours. The Ministry of Justice, for instance, does not have its own construction arm, so it must outsource construction projects. However, when you have a critical dependency on a supplier, it’s vital to manage them closely to prevent failure—or at least have early warning of potential issues. This is especially important when an organization no longer possesses the expertise to carry out the activity internally.
• Supplier Failures Have Real Impacts: One of the halted contracts due to ISG’s insolvency was Fujifilm Diosynth Biotechnologies’ vaccine plant in Teesside, which is now negotiating with another contractor, Sisk, to complete the work. When Carillion failed in 2018, major projects like the Royal Liverpool and Midland Metropolitan Hospitals were delayed for up to seven years, with significantly increased budgets.
• Effects Ripple Through the Ecosystem: The collapse of a Tier 1 contractor like ISG has severe consequences for subcontractors, with some large and small firms going bankrupt due to unpaid bills. Media reports suggest that subcontractors are owed millions by ISG, with little chance of recovering those funds. In past cases, unpaid subcontractors have resorted to removing materials or installed equipment from construction sites, causing further delays and additional costs.
• Take Care of Your Suppliers: Construction is a notoriously low-margin sector. Anything that affects a project’s progress can have significant repercussions on profitability. ISG’s CEO, Zoe Price, attributed their downfall to “legacy issues” tied to large loss-making contracts from 2018-2020, from which they never fully recovered. They were also impacted by two major projects, Britishvolt’s £3 billion gigafactory and the £600 million Hertfordshire Sunset Studios project, both of which were put on hold. While they didn’t lose money on these projects, they left a substantial gap in ISG’s order books. It’s crucial to recognise the partnership nature of supplier relationships; both parties need to work together for mutual benefit, from pricing to project management.
• There Are Always Warning Signs: ISG’s insolvency shocked many, but there were indicators that could have provided a heads-up. For instance, despite the company posting profits, ISG was embroiled in eight litigation cases in 2024, which might have been a red flag. Reports of cash flow problems and the resignation of the CEO and CFO earlier in the year also suggested instability. Monitoring key suppliers requires more than just reviewing financial reports; it includes tracking management changes, litigation, media mentions, and speaking with company insiders to get early warning signs.
• The Sunk Cost Fallacy and Confidence: A common dilemma with failing suppliers is deciding when to intervene. Withdrawing business may worsen their financial position, potentially accelerating their collapse. Suppliers will demand cash upfront, and subcontractors will insist on shorter payment terms or may abandon the project. ISG staff reportedly hoped that problems would resolve on their own, a classic sunk cost fallacy, where they continued with the same approach, expecting a different outcome. Deciding when to step in or replace a struggling supplier is a difficult judgement call, but an essential one.

The insolvency of ISG serves as a stark reminder of the vulnerabilities inherent in supply chain management, especially in sectors like construction, where margins are thin, and the failure of a single supplier can have far-reaching consequences, this is a lesson we see repeated again and again. As we increasingly outsource critical operations, the responsibility of managing these relationships effectively becomes even more essential. Monitoring key suppliers, maintaining open lines of communication, and looking for early warning signs are crucial to mitigating risks. By treating suppliers as partners and not just vendors, organizations can build resilience into their supply chains. Ultimately, while outsourcing offers many advantages, the associated risks must be managed with vigilance and foresight to prevent disruptions that can be as damaging as the collapse of a major contractor like ISG.

 

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This article was originally published by BC Training Ltd.

Charlie Maclean-Bristol is the author of the groundbreaking book, Business Continuity Exercises: Quick Exercises to Validate Your Plan

“Charlie drives home the importance of continuing to identify lessons from real-life incidents and crises, but more importantly, how to learn the lessons and bring them into our plans. Running an exercise, no matter how simple, is always an opportunity to learn.” – Deborah Higgins, Head of Cabinet Office, Emergency Planning College, United Kingdom

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