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By | Sam Simpson 20th February 2014 09:04

One year on: What exactly did the 2e2 collapse teach us?

Titsup Brit IT biz offers some lessons, but is anyone listening...

Opinion “Sam, I need you in the Heathrow office early tomorrow morning,” read the panicked text from my line manager on a Sunday night.

The UK subs of 2e2 Group entered administration a year ago. I had a unique vantage point from where I sat within the crumbling company through the brutal process of administration and seeing the distress of colleagues, panic in customers and dismay in suppliers. All had much to lose.

When 2e2 collapsed, I was director of Project Services and had responsibility for delivering all programmes, projects and managed services transitions within the business. During the process I was involved heavily with the administrators to try to salvage as much as possible for the creditors and was eventually the joint most senior person to be transferred to one of the companies that acquired 2e2’s assets.

A year has now passed, the dust has settled and many ex-2e2 colleagues and customers have moved on. I think it’s a good time to reflect upon the administration from this unique vantage point and to discuss what lessons could be learned to avoid “being 2e2’d” in the future – or at least make the process less painful. First I’ll give some context for the 2e2 collapse then some lessons for employees, customers and suppliers.

How did it happen?

From its inception in 2002, 2e2 had a strategy to grow by acquisition, with the acquisitions being funded by a combination of bank debt and Private Equity. The 2e2 board had employed this "buy and build" strategy before with 4Front – they had built a business with a turnover of $250m via acquisitions and then subsequently sold it to NCR. 2e2 took a similar path – it had acquired over 15 companies. Some were bite-size purchases. Some, like the acquisition of Morse for £70m in 2010, were much more substantial.

Fast-forward to late January 2013 and 2e2 employees could see that tough times were ahead. Suppliers were refusing credit but 2e2 had been in challenging circumstances before and always managed to muddle through - usually by acquiring another company, which allowed a restructure of the funding position to obtain further working capital.

However, this was the first time that senior members of the management team were openly stating that banking covenants had been breached and that the bank could take exceptional measures to correct financial performance. We had assumed that this would involve the banks dropping in their own executive management team (they had in late 2012 in fact), by cost cutting or at the most extreme, by selling parts of the company as a going concern – this outcome was unthinkable but was actually mild compared to the action taken.

Come Friday 25 January, 2013, the 2e2 Board were with the banking syndicate to get a £20m lifeline to fund 2e2 while a more permanent financing deal was reached. The panic text from my boss on Sunday evening requesting my presence at a crisis meeting to be held first thing Monday however indicated that something had gone awry at the meeting.

On 28 January, 2013 2e2 entered voluntary administration and the interim UK MD, who had only been in place for a month, and the interim FD – who had been in place for even less time – were let go by the end of the day.

The now well-documented implosion had started: 319 colleagues were made redundant on the spot – no pay for January, no payment of long overdue commission or bonus, no notice period, no redundancy payout... Nothing. A further 627 colleagues left a week later when the administrators claimed that a sale of the complete business was impossible and certain elements of the business, such as the Business Applications and Flexible Resourcing units, couldn’t be sold standalone.

Four groups of 2e2 employees avoided redundancy during the administration process:

  • 107 individuals moved to O2 under TUPE as part of a £4m purchase by the Telefonica giant. These individuals had spent the majority of their time working for O2 Unify, a joint venture between O2 and 2e2.
  • 150 individuals moved to Daisy under TUPE as part of their £2.8m acquisition of the 2e2 Data Centre business.
  • Logicalis acquired the 2e2 offshore business for £20m – this covered the majority of 2e2 employees in Ireland, Spain, Netherlands and the Channel Islands.
  • G3 acquired the Diagonal Consulting element of 2e2 for £159k.

It is still somewhat puzzling that the banks and Private Equity firms refused to provide any more funding for 2e2. They had hundreds of millions invested but wouldn’t provide another £20m working capital to facilitate an orderly breakup and sale of the useful parts of 2e2 (the UC unit was profitable, as was the Flex Resourcing, Data Management and Security practices).

Instead they appointed a "cost effective" administrator, FTI, and walked away from their investment.

Lessons

So, what lessons can be drawn from the 2e2 experience? For me the first and most surprising lesson was that administrators have a unique and surprising ability to rip up any existing arrangements and contracts. Their ability to ignore contracts of employment, customer contracts or POs raised on suppliers was truly eye-opening.

Lessons for employees:

  • Keep your CV and LinkedIn profile up to date. Many people had worked at 2e2 for a decade or more and CVs needed to be hurriedly created from a blank canvas, which inevitably delayed the process of applying for jobs.
  • Network; get connected to people on LinkedIn. When bad things happen these connections are all potential employers.
  • Be realistic about the value of golden handcuffs. Many people, myself included, stayed with 2e2 based upon having x thousand shares. When these shares were issued in 2004 they may have been worth something but after years of dilution they were probably worth much less than I had originally estimated.
  • Claim expenses regularly. Having several thousands of pounds in unclaimed expenses isn’t clever when the worst happens.
  • Be able to survive without your next paycheck or two. Everyone assumes that even if they lose their job they would have a notice period, a redundancy lump sum and would be paid for the time they’ve worked. The 2e2 experience shows that this assumption isn’t always true.
  • Maintain a handful of good recruiter contacts. There are lots of recruiters out there and its difficult to sort the good recruiters from the time wasters when you are in a difficult spot.

Lessons for customers:

  • Cloud isn’t a panacea. There are a new set of risks that need mitigating or at least acknowledging. What if your cloud provider shuts down overnight, for example? Can you ensure continuity of service to your business? Do you have offsite backups of data that can be moved to another provider easily?
  • Do you have contingency plans in place if key suppliers working on your projects and programmes disappear?
  • Don’t run live and DR services hosted with the same supplier. This seems obvious but several notable customers did just this with 2e2 and were completely at the mercy of the administrators. If 2e2 had ceased data centre operations then it would have taken months for these customers to restore service.
  • Don’t believe that contract clauses covering “termination for administration” will be honoured or will assure prompt access to your equipment and Data. The 2e2 debacle demonstrates that you will likely face a protracted battle to gain access to your equipment and data if the worst happens even if you appear contractually covered.
  • Include "step-in rights" in hosting / cloud contracts but don’t rely upon them.
  • Don’t think a business is viable just because it makes a net profit or positive EBITDA. 2e2 made a healthy £20m operating profit in 2011, for example, but the interest on a bank loan of £157m plus other exceptional charges meant they made a heavy net loss and as a result had significant working capital challenges.

Lessons for suppliers:

  • Credit insurance is invaluable. Make sure that it covers your full exposure, has a suitable limit and percentage of the debt is covered. One hopes that the distributor Arrow ECS had full cover over the 2e2 account – 2e2 owed it over £12m at the point of administration.
  • Don’t rely upon a single customer – several recruitment agencies went bankrupt directly as a result of 2e2 entering administration when the company made up a high percentage of their turnover.
  • Regularly check a company’s credit status – not just during the process of creating a new account.

Lessons for the 2e2 executive team, and anyone else running a similar business:

  • Don’t underestimate the complexity of a businesses that has grown via acquisition.
  • Don’t try to reorganise a 2000 employee company by moving heads on an org chart alone. 2e2 had previously done this at the start of 2012; they moved from a technical practice “Business Unit” structure, where each BU consisted of a BU Head, Sales, Operations, Pre-sales and finance to a "vertically aligned" industry sector focus. In hindsight this reorganisation was ill considered, badly planned and poorly executed and caused very significant operational and financial challenges through 2012.
  • You may indeed know best…but it’s probably worth listening to your management team who have been in the business eight years longer than you and have lived and breathed the business at a process and people level.
  • Cash is king. If you reorganise your business then it’s worth validating that each line of business (fixed price projects, flexible resourcing, product, annuity and ad-hoc PS) is owned and being tracked and invoiced.
  • Running a £350m company with no managing director and a hands-off group board isn’t sensible. 2e2 had removed the previous MD in Jan ’12 leaving the company without an accountable head who could hold the individual functions of 2e2 (sales, operations, pre-sales) to account.

Lessons for private equity Firms and banking syndicates loaning large amounts of money:

  • Investors should put someone who is "active" into the business. In 2e2’s case these individuals were noticeably absent. They sat on the group board, they received sanitised management reporting but until they assigned a special advisor in late 2012 they had no real insight what was happening in the business.
  • Exit for a realistic valuation - don't be greedy. There was industry talk that several trade buyers, including Dell, had made a reasonable offer to purchase 2e2. In hindsight this would have been an amazing deal for both the banks and employees.

What now?

On 7 January 2014, 2e2 moved from being in administration to liquidation and the administrators have issued a final report. In line with standard process of administration the administrators have also submitted a report to the Department for Business, Innovation and Skills regarding the conduct of 2e2’s directors but unfortunately this report will not be openly published.

It is disappointing that a significant and much loved organisation ended in such a distressing way – with single parents breaking down in tears in the office because they couldn’t pay their rent in two days, people with large bills after Christmas and no January pay packet, people who had worked in continuous employment for 25 years terminated without justification or notice.

A year down the line, most ex-colleagues have settled into new organisations and the demise of 2e2 was a much-needed nudge to take their next step in their careers.

Most employees made redundant during the collapse are now working in the far reaches of the industry – many were snapped up by Computacenter, Logicalis, SCC, CGI and numerous other well-known names in the industry.

My career has taken a different turn – myself and three other ex-2e2 employees acquired a dormant company, Roc Technologies Ltd. Roc is now an infrastructure services business and we managed to offer jobs to many people made redundant by 2e2 and in the process kept customers’ projects and systems running. After a year, we’ve doubled the business without debt or acquisitions. ®

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