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A Co-Operative or Competitive Arena?



The recently constructed Co-Op Live arena in Manchester is the largest, of its kind in Europe. The arena, owned by the Oak View Group (OVFG) and City Football Group, has been beset by technical and safety problems which have delayed its opening several times.

 

On the surface, it looks like they may have been ‘unlucky’ - although it could be argued that risk assessment and scenario planning may have helped to expose the issues and allow them to pivot earlier.

 

However, on closer inspection, these problems may have been the symptom rather than the cause. The original budget for the work was £365m, the final costs are expected to be closer to £450m. The contractor, Bam, signed up for a fixed deal three years ago. It has been publicly acknowledged that “They got hit-hard, they’ve lost a lot of money on this job” – although we don’t know the exact numbers at the moment.

 

When deals like this go wrong, it’s typically for one of two reasons – either there’s not enough clarity around the scope and the details or the agreement or the power between the two parties is so unbalanced that one party is forced to take a sub-optimal deal. Either way, the result can be shortcuts and/or lack of commitment – which can later have consequences. Sometimes these two factors are not mutually exclusive…

 

I’ve seen this first-hand in an OEM/manufacturing customer/supplier relationship where the customer represented 75% of the supplier’s business (supplying a critical component to the customer). A change of ownership and branding at the customer meant they needed an additional component colour. When the supplier wanted to charge £6 per component for the additional non-standard colour, the response was ‘no increase at all’ and ‘no invoice payments made until you agree’.

 

Now the component prices already agreed with the supplier were very keen – this was somewhat offset by the fact that the agreed payment terms between the two parties were 15 days from the date of invoice.

 

With the imbalance in power between the two parties, the supplier was eventually forced to agree, but trust by this point had been eroded too almost nothing. However, what the customer didn’t know was that the supplier had cashflow issues. The supplier was trying to ensure that their own supply chain maintained their existing credit terms rather than putting them on Proforma Invoice – several of them had previously threatened this.

 

Sadly, 12 months later the payment stop, coupled with a few other factors were enough to push the supplier into liquidation. This was a complete shock to the customer who then had to endure losses of hundreds of thousands of pounds both in terms of lost sales and an expensive redesign of a new component with another supplier.

 

This cautionary tale is an example of when a win/lose deal becomes a lose/lose deal. As Benjamin Franklin observed - The bitterness of poor quality remains long after the sweetness of low price is forgotten.

 

In long-term deals, there needs to be sufficient ‘value’ within the agreement to enable both parties to commit to making it work.

 

Looking back to the Co-Op arena and Bam – it will be interesting to see if there is still a negotiating bargaining arena left to resolve and whether these two parties can and will work with each other again in the future…


Sam Macbeth, 16th May 2024



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