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Survival of the Fittest

Survival of the Fittest

By Jeremy Waud, Chairman at Incentive FM Group

It has been suggested that ‘the only thing that is constant is change’ – which perhaps is a fair observation for the wider facilities management and contract service industry in 2019. So what are the main influencers and disruptors of the moment?

Stability of Competitors

It cannot have escaped the attention of many that big names in our sector have got themselves into trouble over the last year. These include: Carillon’s collapse into the warm and friendly arms of its bankers; Mitie’s long spell of enforced restructuring; Interserve’s ‘Pre-Pack’ to a new owning company to avoid a complete collapse; and Kier are in the news and under the microscope. A number of smaller single service companies have also gone out of business as a result of a tough market which we consider to be largely driven by the factors below:

Politics and the Economy

The majority of our politicians have clearly never run a business and may not have ever even run for a bus! Yet, they are empowered to decide on the health and direction of our nation, whether in Europe or out and it seems to make little difference which party, or which Prime Minister is at the helm. It has been a shambolic year which has not helped businesses one iota. The lack of clarity or certainty for our clients across a wide spectrum of sectors has been an unhelpful side effect of Brexit, and is reflected in the incredulity with which we are viewed from overseas. Our customers are understandably nervous, uncertain and risk averse at every turn, which is not a healthy backdrop to try and operate in front of and to make investment decisions within.

Friend or Foe?

Another major change of the past year has been the effect of some of the major global surveying organisations diversifying into service delivery. For example, CBRE acquired skills and capability in the mechanical and electrical maintenance sector for the buildings it manages through the acquisitions of Norland and Johnson Controls GWS. These skills, now wrapped under the parent branding, are changing the way it chooses to deliver services to its managed properties and it is not clear where this will this end up.

Similarly, JLL made the significant M&E acquisition last year of Integral. These businesses are indeed friends of ours and big customers as are other major surveyors, notably Savills, who this year acquired the property management business of Broadgate Estates from British Land.  All the while these organisations buy from us in sensible volumes, we will not be entering the property management market – hence we are all friends and not foes.

Procurement Trends

We are of course a big service delivery organisation, employing more than 3,200 staff in the process. We therefore spend a large part of our time on the receiving end of procurement departments and specialists with differing levels of appreciation of what we do and what needs to be done. Buyers are largely charged with the responsibility of delivering even better value for their ultimate clients.  Longer term viability and operational reality can often be a secondary consideration. This drive comes from economic pressure, opportunism and of course good practice, as defined by corporate governance and the likes of the RICS in the challenging retail sector. Our consultancy business, along with other specialists in this sector, helps many high-profile companies with their procurement strategies and processes. Having specialist FM procurement, such as Incentive Consultancy, can help to understand and bridge the gap from ‘generic’ buying practices to a 360-degree view of the challenges from all sides.

Commercial Sanity

None of the above drivers or disruptors make for higher contractor margins, in fact quite the opposite. The result is too much risk exposure and cash management pressure being levelled on the contractors in the sector, so much so that you can almost hear the pips squeaking!

The challenge for the market going forward is to not be backed into the corner at every turn, but to deliver attractive, creative and mould breaking service delivery solutions that share risk with the clients and intermediaries.

So a final message to all those who think contractors can operate within the 5-10% gross margin space, take high risks, be paid at 60 days, employ all of the semi and lower skilled staff that are needed in their operation and then invest in all manner of skills, experts and technological advances – please get real and think again. Thank you.

IFM News –

Martin Reed shares his thoughts on the impact of Brexit to the industry

Martin Reed shares his thoughts on the impact of Brexit to the industry

Martin Reed, Group Chief Executive Officer: 

Within the service industry, there has, quite rightly, been a lot of discussion about the potential skills and people crisis that might be a result of any Brexit deal. In particular, there is much speculation on the impact it will have on finding recruits for the lower paid, non-skilled roles. There is no doubt that in recent years the industry has struggled to recruit homegrown workers and has come to rely heavily on European workers. The uncertainty does not help and neither does the fact that whatever the outcome of negotiations, there will likely be tougher immigration rules, which will make it harder for firms to hire migrant labour, and make those migrants already living in the UK consider whether they should continue living in the country.

There is another real area for concern, however, that is getting fewer headlines and that is the supply chain and its associated rise in costs, which will inevitably impact our sector. New research from the Chartered Institute of Procurement and Supply (CIPS) indicates that nearly one third (32%) of UK businesses with EU suppliers have already increased their prices as a result of the June 2016 referendum vote to leave the EU. This is understandable as they have little choice if they are to protect their profit margins and remain solvent, whilst consumers will ultimately decide if they want to swallow the extra costs or not buy.

In service sectors such as facilities management, however, I fear that it is the suppliers that will bear the brunt of these increases, which may end up being catastrophic in an industry known for its low margins. Whilst labour is by far the biggest cost for companies in the sector, we are also responsible for the purchase of a wide range of consumables, such as cleaning products and toilet paper, which can run into tens of thousands of pounds. For our mechanical and electrical maintenance service business, Incentive Tec, the cost of equipment and parts, for example for heating, venting and air-conditioning systems, is considerably higher. 

The majority of these products are manufactured in Europe, often Eastern Europe, where production costs have traditionally been lower. Whilst nothing is certain, it makes sense that these products will become more expensive and possibly subject to additional customs and tariffs.

So, who will bear these increased costs of products and people? In simple terms, it depends on the terms of your contracts. At Incentive FM, the vast majority of our contracts are ‘open book’, which basically means we charge everything at cost, plus a management fee. This essentially protects us from ‘unexpected’ increases in costs and the responsibility for this falls to the client. As a result, we will need to work closely with them to identify efficiencies to offset those cost increases.

The real impact will be on companies that offer fixed cost contracts that operate over a number of years. Generally, these types of agreements contain strict clauses about what, if any, increases in costs will be covered. A raise in UK VAT, for example, would be covered, but I doubt there are many Brexit clauses. Of course, there are some clients who will feel morally obliged to at least contribute towards this, but equally, there will be others that won’t. With margins in some sectors on low single figures, this could be, at best, damaging.

Of course, it might be possible to argue that Brexit triggered a change in legislation that could not reasonably have been predicted. Companies that are affected will probably need to look at ways to recoup this money, however. For new contracts and those being negotiated now, it is vital that companies seek to include clauses that offer them protection from the uncertainty of Brexit and protect themselves from open-ended cost increases.

In conclusion, the facilities management industry is often a key target for cost reduction during times of economic uncertainty. I think we need to brace ourselves for more contracts being re-negotiated and downwards pressure on pricing. This can be seen as an opportunity, although my experience is that during these times projects and investment are put on hold. Whatever the outcome of Brexit, I think we are in for some challenging times.

SOURCE: Ready for Brexit