THE OC&C 2010 FM INDEX

SHOW OF STRENGTH How the Facilities Management sector is facing up to the recession Published with FM World

Introduction Twelve months ago we compiled an Index evaluating 50 of the leading FM businesses in the UK, aiming to spark some debate, particularly as FM is rarely seen as a coherent industry – even by many participants. Vivek Madan, Partner

Our view is that there are more similarities than differences between Soft FM, M&E and the other sectors, and that examining the strategies and performance of a wide set of business can be instructive about which of them are likely to be the long-term winners.

We are updating the analysis now in order to take stock of the industry and to see what differences are emerging between the largest players. Specifically, we have used some financial analysis based on published accounts as a starting point for some investigation of the trends likely to define the market over the next 2-3 years (see Appendix for details of the calculation method used).

» For any further details contact Vivek Madan ([email protected], 020 7010 8115) or Nigel Stirk ([email protected], 020 7010 8004) www.occstrategy.com Nigel Stirk, Associate Partner

Bringing out the best

is likely to continue even when the UK timing of annual accounts (meaning Facilities Management (FM) economy returns to growth, (2) The that several of the companies examined has not been immune from pattern of margin pressure has been here have not yet reported full data for the effects of the recession. across much of the sector, with no 2009), but also because many contracts consistent link to company size, work are only now coming up for renewal, espite the hopes of type or client vertical; what that and some pretty tough negotiations some commentators, indicates is that surviving (or even are likely. What we hear on the who saw hope in the increasing profitability) in the current grapevine is that buyers have defensive qualities of environment is in the hands of the FM maintained a tough stance on price into the industry and the companies themselves, and (3) There 2010 prospectsD for increased outsourcing, it are some practical actions that most FM has been a tough 12 months in almost businesses can take to improve their When we evaluate the financial every sector of FM. In several respects chances of outperforming, even in a performance of 50 of the UK’s leading though, the impact has been to recessionary or low-growth FM businesses, it is revealing to see accelerate the maturing of FM, and to environment, and, we believe, things that although the stronger performers highlight the strengths and weaknesses that can be learnt by looking at the recently come from a wide range of of the different businesses. Across FM, success stories in FM, whether they sub-sectors, and are a mix of very large there are three messages that emerge come from hard FM or soft FM. and smaller players, there is a common

PHOTOLIBRARY from the analysis: (1) Margin pressure, thread: they are pursuing which had been emerging for some Of course, what we are showing here is differentiation in an area that time before the recession took hold, an early read on the impact of the customers value, and that cannot has become widespread across FM, and recession, not just because of the easily be replicated by competitors. Cover photography: Cover 02 FM Index Published with FM World

Reflections on 2009 The last year has seen a breathless sequence of recession- related events compounding many of the competitive changes and buy-side trends already underway .

ll sectors of FM have had to because of the trade-off likely to come Overall there are four major market continue maturing in some of with purely cost-driven contracts – trends: Athe toughest market margin pressure – but also because we • More outsourcing conditions imaginable, and if there believe that as a rule, negotiating • Increased scrutiny by corporate of was ever going to be a rigorous test of primarily with procurement their spend on FM – a greater volume the strategic and operational qualities departments is not the right answer of work might be outsourced but the of a business, then 2009 was it. At the for FM businesses; attractive as a procurement exercise is likely to be start of the year, some commentators revenue boost might be, in the long demanding were still optimistic that even in term FM needs to be positioned as a • Greater sophistication in buyers’ recession, FM players could thrive, value-adding activity where the thinking about bundling, where a since corporates’ drive to reduce costs provider has some form of discount will be demanded unless FM would lead to more outsourcing, and differentiation other than cost, companies can make a compelling therefore more revenue. We were otherwise margins will only trend case sceptical about this view, partly downwards. • Fundamental shifts in public sector

Largest 10 attitudes to FM, where after years of EXHIBIT 1 more talk than action, it appears that a sea-change is underway and some Revenue and profit growth in the top 50 UK companies PBT Margin by size of company major opportunities are opening up for private-sector FM players

150 4.7% All of these are likely to continue after 11-25th largest Ranked 26+ the recession, so recognising them and adapting business models to take Largest 10 4.4% advantage is essential. These trends have already had an impact on the financial performance of 7.1% the UK’s FM companies – taking the 50 26-50th largest Top 10 included in our Index as a group, we 6.2% can see two very distinct patterns: the 150

All 11-25th largest first is that revenue growth continued Ranked 26+ Top into 2009, at very similar rates to l Al 11-25 previous years, meaning that existing 120 2.2% contracts being renewed at lower prices were more than offset by the 012345678 2.2% scope of those contracts being 26-50th largest expanded, plus additional work Top 10 Previous year Latest year coming to market; the second trend is that margins have been squeezed, All 5.7% and while the top-line growth means Top l Al that the aggregate profit pool is 11-25 4.8% roughly the same size as the previous 120 year, most businesses are having to 012345678run hard just to stand still, and for 90 those already on thin margins the 2006 2007 2008 2009 Previous year Latest year stakes are increasingly high.

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90 2006 2007 2008 2009 Published with FM World

EXHIBIT 2: Latest year change in profitability

Latest year PBT% Point Change Johnson Service Group• 12 Average revenue: £0.6bn Average revenue: £1.6bn •AMEC PHS Group• Average growth: +11% Average growth: +20% OCS• 2 •T Clarke Aggreko• Avenance• 1 Rentokil FM • Compass Volker Wessels • • Apollo Baxterstorey Interserve •Haden • • • Integral Keir Support Services • Spice Connaught • WSP Previous • MITIE•• GS Hall • Keepmoat• -15 -14 -13 0 1 2 3 4 • 5• 6 7 8 9 10 11 18 year 0 Rotary Group WS Atkins Carillion• • PBT % G4S• •Bunzl -1 •Balfour Beatty Lorne Stewart• •Mears Places for People -2 • •Turner FM McLaughlin & Harvey• •Amey -3 Davis Service Group Jarvis NG Bailey • •• •ADT •VT Group -4 Average revenue: £1.3bn Average revenue: £1.4bn Bullock Construction Average growth: 0% Average growth: +15% • -7 • Mouchel Industry Average c.4%

PERFORMANCE OF THE LEADING And the CURRENT Winners are… Note: Taylor focus on clients interested in Woodrow and FM COMPANIES he strongest performers financially differentiated high-quality catering Land Securities ot all FM Companies are equal. tend to be those with a clear Trillium are • GS Hall, somewhat smaller but proving There have been some very Tstrategy that they are pursuing included in the that M&E work need not be low margin, different responses to changes efficiently – regardless of which area of FM averages but not by deploying technology intelligently N shown above as in the economy and the nature of they operate in, or the scale of their and finding ways of differentiating itself results were customer demand – and as a result, business. In most cases, a distinct point of outside of the from competitors (crucially, in areas that some swings in the performance of the differentiation can be identified, eg: scale presented matter to their clients) businesses we’ve examined. • AMEC scores highly for the clarity of its above • MITIE, already one of the The chart below shows some of the strategy, and as well as having heavyweights of FM, spanning Soft and financial performance of the companies demonstrated an ability to trade Hard FM activities, steadily improving we analysed, with the group of 50 successfully in a difficult year, it has a cash above-average margins by making the divided into 4 groups, depending on pile that should help it make acquisitions transition from multi-service to genuinely whether they increased margins or not, where useful to reinforce its market integrated FM propositions and whether they started from above- or positions The pattern here is not about scale, or below-average profitability. The • Aggreko, who have consolidated an working in specific areas of FM, but much breadth of the scatter is itself revealing, already high margin position by latching more about how these businesses go to of an industry where performance varies onto the structural trends in power market – the more successful ones have considerably between competitors. requirements (both in the UK and overseas) not just traded well through a difficult Several other points emerge: quite a few and areas where customers value high- period but have also been more tightly FM companies showed increasing quality service; in parallel, the business is focused on finding ways to stand out margins, against the wider trend; those exploiting scale economies that are clearly from the crowd in offering a clear value- who increased margins are not radically contributing to margin improvement- add to their customers, and in targeting different - in terms of size or type of • BaxterStorey, a small insurgent in certain types of contract where that work – from those who showed weaker Catering only a couple of years ago, up value-add translates into more attractive performance. The drivers of against some much larger competitors terms. Conversely, there are several FM outperformance seem to be the quality with scale advantages and well-recognised Cos who have fared less well, and whose of strategy, and its execution, not scale brands, but a business that has continued recent performance reflects some advantage or a legacy of presence in a its very strong revenue growth trajectory difficulty in convincing customers that particular sector of FM. at the same time as maintaining a clear they are more than commodity providers.

04 FM Index Published with FM World

Outlook

he UK FM industry is at an • Few dominant scale players For any further development path is unlikely to be important point in its (particularly when viewed internationally) details contact smooth, and most likely there will be Vivek Madan Tdevelopment. Concerted pressure • A history of relatively unsophisticated (vivek.madan@ something of a shake-out. We expect on margins has emerged, and is likely to delivery, leading to a plethora of single- occstrategy.com, some – but not all – of the present persist wherever buyers perceive that service or single-site contracts that can 020 7010 8115) or leaders to expand significantly, and they are paying for commodity services. be consolidated Nigel Stirk (nigel. suspect also that there will be some stirk@occstrategy. No part of FM is immune from that, but Boards must have clarity about the smaller players who rise to prominence 4 5 6 7 8 9 10 11 18 com, 020 7010 some businesses are better able to propositions they are offering, and the 8004) – www. in the next 3-5 years. defend their position, or even to grow strategic marketing plan that will occstrategy.com Although the world looks like a margins, and most players in FM communicate the right messages to the different place to 12 months ago, our (regardless of size or sub-sector) would market. Underpinning this – and not to view is that the decisive factors for benefit from taking a close look at how be forgotten – is excellence in service success in FM have not changed. that is being achieved. When delivery. Moreover, however important price management teams review their business We are bullish about the long term appears to be, we are convinced that plans, they can assess the robustness of potential of FM, in that there should be – for virtually all FM businesses - their ambitions partly by which parts of scope for profitable growth achieved competing primarily on cost is not an their business serve markets with at least through differentiation that is based on attractive long-term option. Much more some of these qualities: genuinely customer-centric solutions. defensible, and profitable, positions will • Scope for value-add by solving some The market is maturing fast, on the buy- be reached by concentrating on tailoring reasonably complex client problems (eg side as well as the sell-side, and is propositions to specific customer needs, carbon footprint management) … gradually gaining a higher profile in delivering consistently, and finding areas • … scope to deploy technology as well board-level discussions and amongst of differentiation that cannot easily be as blue- and white-collar workers financial investors. H owever, the replicated by competitors.

activities included in fm Multi Site Integrated Management (Transport Networks, Hospitals, etc)

Whole: Life Asset Value

Environmental Management Value Added Services and Technologies Relocation Management

White collar Facilities/Equipment Monitoring (On site or Remote)

Asset Management and Billing

Service desk Service Desk Facilities Service ManagementService Facilities Operational Management Sub-Contractor/Programme Management and Budget Control

Soft FM Hard FM Environmental Services Integrated Services FM Cleaning M&E maintenance Waste control Laundry HVAC Building energy management Catering Gas services Health & safety provision Security Building fabric maintenance Blue collar Service Delivery Transport Plumbing Courier Fire & security FM ServicesFM Reprographics Pest control VerticallyBundled Gardening

Horizontally Bundled FM Services

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Appendix

which companies are evident in other – and more readily included in the index? comprehensible – measures. Our view hat one person would call remains that the ideal FM company will an FM company is a builder demonstrate both strong financial Wor consulting engineer to performance (in both P&L and balance someone else. We have decided to sheet terms), and strategic focus on players with exposure to a differentiation. What we have tried to spectrum of blue- and white-collar highlight this year is that some of these work in hard FM and soft FM. We themes are particularly evident in the believe construction and engineering companies that have maintained (or companies face very different market even improved) above-average conditions – but this is not an exact profitability. science as a large range of players consider themselves to be participants How did we score the Index? in the FM market. ur aim is to be as objective as On this basis we have excluded possible, judging all the businesses that work predominantly in Ocompanies considered against consulting, engineering or construction the same set of criteria, and basing the CONTACTS (and pure play BPOs). We include scores on publicly available Vivek Madan, Partner companies regardless of whether their information. In a few cases, where [email protected] customers are in the private or public group-level financials do not separate 020 7010 8115 sector. To keep our analysis consistent, the FM parts of the business from other Nigel Stirk, Associate Partner our focus is the UK, and on businesses activities, we have left that company [email protected] with over £100m in revenue – roughly out. 020 7010 8004 50 in total. Applying these parameters There are of course some differences www.occstrategy.com generates a list of companies from in financial year-ends, and rather than various parts of the FM universe: make assumptions about run-rates, we Catering, Cleaning, Security, have not adjusted reported figures to Mechanical & Electrical, Social Housing align better with a calendar year. In a and Multi-service FM. handful of cases, where there has been Having used a composite scoring a delay in filing full accounts, we have system last year, calculating a score for again excluded that company rather each company’s Strategic Position and than make a comparison between Financial Performance, we repeated entirely different periods – particularly that analysis, but chose not to show it important when we are trying to assess here given the interesting patterns the initial impact of the recession.

All of the opinions and material about the facilities management market contained in the FM Index reflect the views of OC&C Strategy Consultants and do not necessarily reflect the views of the BIFM or of FM World nor should such opinions be relied upon as statement of fact. While all due care is taken in writing and producing the FM Index, neither the BIFM or FM World (Redactive Media Group) accept any liability for the accuracy of the contents or any opinions expressed herein. The findings shown here are based on publicly-available sources that OC&C believes to be reliable, and informed by OC&C perspectives derived from prior project experience. However, it has not been independently verified and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. The research may not be reproduced, redistributed or copied in whole or in part for any purpose.

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