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Ray O'Rourke: 'I see a change in our industry'

Exclusive: Despite a first loss in 15 years as Laing O’Rourke, its founder and CEO is far from down and out. In a rare interview, Ray O’Rourke reveals to Construction News his long-term vision for the industry and why the time is right to pave the way for his successor.

On the walls of Laing O’Rourke’s Dartford office boardroom, framed Irish, English, Australian and All Black rugby jerseys hang side by side.

One Irish jersey is signed by the Six Nations grand slam winning team of 2009. Another, a memento from the All Black’s World Cup winning team of 2011. They are a reminder of success, of teamwork and competition.

Following December’s announcement of a first loss in 15 years of trading as Laing O’Rourke, one can imagine these jerseys have witnessed some almighty boardroom battles in recent times.

But as I’m led from the boardroom into Ray O’Rourke’s office, the atmosphere shifts. Pictures of family and a doting father and grandfather take pride of place.

He’s a rugby fanatic and a family man, but a third part to his character is a passion for the construction industry and what must feel like a lifetime of trying to do things a better way.

A reluctant but engaging interviewee, Ray O’Rourke is anything but downtrodden by recent events. While softly spoken, he is firm and steadfast about the company’s future. Indeed, he appears to be relishing his next challenge: one more shot at changing the sector before he walks away.

“It’s time we got rewarded appropriately for what we do. People will stop this race to the bottom”

“I see a change in our industry,” he tells me. “When I look at organisations like us that have had a bad financial performance in the last few years, they’re saying, ‘We’re not doing it to ourselves anymore’.

“It’s time we got rewarded appropriately for what we do. People will stop this race to the bottom.”

In a letter to clients and staff last December, Mr O’Rourke wrote about the “humility” he felt on announcing Laing O’Rourke’s £245.6m loss.

A Canadian hospital PFI and problems with UK advanced manufacturing jobs contributed to the losses. But to get a sense of why these things happened, Mr O’Rourke says you have to consider the context of the business in the last decade or more.

Trades to technicians

His first attempt to change the industry started more than 10 years ago, as Laing O’Rourke put its faith in moving the traditional process of construction towards advanced manufacturing – from “trades to technicians”, as he puts it.

Having put vast sums of both his and the group’s money into the Design for Manufacture and Assembly (DfMA) approach through facilities in Steetley, Laing O’Rourke felt its strategy represented the cusp of an industry revolution.

“What happens is our industry reverts to lowest cost and everybody beats each other up in a race to the bottom and that’s what happened”

“In 2005 and 2006 we knew we couldn’t continue to build the projects we had in our pipeline in a traditional way and so we made the investment in pre-assembly. At the peak of Heathrow’s Terminal 5, we had a workforce of 4,500. Before that we had done the structure for Terminal 3 at Dubai [Airport] and there we had a workforce of 13,000. That’s not sustainable – this goes to the main point of the industry.”

But in 2009/10 following the financial crash, events conspired to deal Laing O’Rourke’s plans a hammer blow. When the coalition government came to power in 2010, Francis Maude’s swingeing PFI cuts saw the £55bn Building Schools for the Future programme culled as well as a £14bn Ministry of Defence plan to bring its facilities together on one site at St Athan near Cardiff.

That project alone, he ruefully admits, would have kept the advanced manufacturing facility Laing O’Rourke had built going on its own. Instead, the firm was left with a £2.7bn hole in an order book for which the advanced manufacturing facilities had purposefully been built.

Laing O'Rourke_Two Fifty One

Laing O’Rourke_Two Fifty One

The firm’s work on Two Fifty One is an example of DfMA in action

Before those cuts, the contractor had entered into a joint venture with Abu Dhabi developer Aldar in 2006 to oversee the US$22.5bn Al Raha Beach programme. It would have required 750,000 workers to deliver it in the “tried and trusted” way construction operates, Mr O’Rourke says, so the UK methodologies being implemented in the East Midlands at Steetley around advanced manufacturing were to be exported for the Abu Dhabi programme.

The Aldar JV itself collapsed in 2009, with the cuts in 2010 compounding the shortfall in its pipeline.

“We made the investment and then everything dried up,” Mr O’Rourke says. “What happens is our industry reverts to lowest cost and everybody beats each other up in a race to the bottom and that’s what happened.

“Contracting in general is a very narrow margin business, 1-1.5 per cent margins [on average]. We had a model that would complement that by doing investments into PFI/PPP and by the time you could recycle those, you’d maybe get up to 3.5 per cent EBIT margins, which would be an extraordinary return for the capital employed in the industry.”

Instead, Laing O’Rourke was forced to look elsewhere as opportunities at home dried up.

What went wrong in Canada?

Overseas, the Laing business had successfully maintained a presence in Australia and the Middle East for many decades, but oil and gas work was finite and when PPP work wasn’t taking off at the rate Laing O’Rourke had hoped for, the group started to move into the Canadian market, with blue-chip clients asking them to bid schemes.

“If we had to do it again we probably would have done a different risk analysis about how difficult it is to work in a new territory”

“Out of nowhere,” Mr O’Rourke says, they were invited to bid the Centre Hospitalier de l’Université de Montréal PFI project, on which they reached financial close in 2011.

Laing O’Rourke was invited to join Spanish partners OHL on the deal, which it didn’t have to bid. The connecting dots came from the financier Innisfree, a company that had worked with Laing O’Rourke on UK hospital PPP schemes in the past.

“We were the leading hospital provider in the UK pre-Francis Maude in 2010,” he says. “When it became clear OHL needed to beef up the delivery side, it was perfectly understandable that Innisfree would reach out to us and we engaged.”

Laing O'Rourke_Centre Hospitalier de l’Université de Montréal_CHUM

Laing O’Rourke_Centre Hospitalier de l’Université de Montréal_CHUM

The Centre Hospitalier de l’Université de Montréal drove the group’s first loss in 15 years

The contract value to the JV was around CAN$1.8bn, to be divided in a 50:50 joint venture over four years. This wasn’t considered a major undertaking, Mr O’Rourke admits, especially when compared with work the firm was undertaking elsewhere, including in the Middle East.

But joint ventures on these jobs can be problematic, he says, in that the special purpose vehicle set up to oversee the project is in charge. Responsibility is delegated, and in hindsight, he admits, the risks involved were too great.

Sources told Construction News of hundreds of millions of pounds of M&E work being ripped out and started again.

And while Mr O’Rourke claims commercial confidentiality as a reason not to delve further into the problems on the job, he admits lessons have been learned on the culture of working in French-speaking Montréal.

“The mantra is that good jobs get better, and less-than-good jobs get worse. That’s a feature of our industry”

“We looked at the cost plans and felt they were appropriate and I still do. However, if we had to do it again we probably would have done a different risk analysis about how difficult it is to work in a new territory and we probably would have taken another view, but that’s hindsight.”

The joint venture has yet to complete the first phase of the 22-storey hospital, with a second phase including demolition still to come on what is a 30-year concession. But Mr O’Rourke insists phase two is “not nearly as complex” and that once complete, the scheme will be held up as a standard-bearer for hospitals worldwide, with clients from similar-sized Chinese projects already taking note.

JVs are complicated, he says, and Laing O’Rourke would “in an ideal world” rather be working on its own. Now, it is a question of working to correct its mistakes, including the Laing O’Rourke CEO becoming “very close” to OHL chairman Ignacio Botella Rodriguez.

“Generally JVs can be difficult but if you go about them in the right way at the very start…. I think that’s probably where we didn’t get as much done as we should have.”

“Look, I don’t want to say I wouldn’t work in Canada anymore, you can’t. Obviously we would bring lessons learned and make sure we had better risk assessments”

He adds: “I don’t want to talk about this in negative terms, but it would seem the project managed to get behind and it wasn’t picked up in reporting signals. It’s very difficult to get projects completed if they’re in difficulty. The mantra is that good jobs get better, and less-than-good jobs get worse. That’s a feature of our industry.”

While the group is already pulling away from Canada as it closes deals, Mr O’Rourke is reluctant to say it won’t work there in future.

“Look, I don’t want to make a statement that I wouldn’t work in Canada anymore, you can’t. Clients turn up and say they have projects. Obviously we would bring lessons learned and make sure we had better risk assessments, different leadership roles.”

Australian frustration

The group will return to profit this year, he says, and that will be reflected in its next set of results. It also appears, though he won’t confirm it, that the planned sale of the Australian business, which attracted four serious bidders, is now on the back burner.

Asked whether he ever really wanted to sell the Australian business, he bristles slightly, frustrated perhaps at the suggestion he might be forced to do something beyond his will.

“I’m not renowned as being a sell-out but you have to make sure you do the right thing so your business is stable”

“You have to understand, we’re a privately owned business. Unlike publicly owned businesses, we have to cut our cloth to suit the day. When you run into difficulty you have to make sure you have sufficient liquidity to deal with the issue.

“I’m not renowned as being a sell-out but you have to make sure you do the right thing so your business is stable. Our obligations are to our employees and creditors and debtors.”

The group was unable to agree terms with any of four serious bidders, each of whom wanted something different, including some who wanted to buy the group and used talks over the Australian arm as a stalking horse.

When I ask whether the group is for sale, Mr O’Rourke is unequivocal – on more than one occasion. “With construction companies, it’s difficult to fix the value – they’re a moving piece. Of the five or six who were interested in Australia, four were very keen but each of them wanted something different. One or two said we’d like to buy the group, and the group is not for sale.”

DfMA 70:60:30

None of the bids would have allowed Laing O’Rourke to fund the second phase at its Explore Industrial Park at Steetley, he adds. The company wants to build a second plant there, despite having been forced to delay its final investment decision last year when it became apparent the group faced major losses.

Mr O’Rourke sells the vision for offsite manufacturing as “DfMA 70:60:30”. The concept being that if you can pre-assemble 70 per cent of the project, you reduce your workforce by 60 per cent and the schedule by 30 per cent.

His first attempt to convert the industry into a new way of working hit the brakes in 2010, in part due to a series of events beyond his control, but also troubles with making the costs and designs work on some of the advanced manufacturing projects themselves. But clients are showing a renewed interest in backing Laing O’Rourke’s operating model, he says.

DfMA – ‘an extraordinary way’

Ray O’Rourke is currently working on a 2025 vision for Laing O’Rourke.

He wants this to align with the Construction Leadership Council’s plans, but its principles will come from advanced manufacturing – specifically Laing O’Rourke’s DfMA 70:60:30 concept.

Laing O'Rourke_Yorkshire schools_Samuel Lister interior

Laing O’Rourke_Yorkshire schools_Samuel Lister interior

This, he explains, is the concept that if you pre-assemble 70 per cent of the project, you reduce your workforce by 60 per cent and the schedule by 30 per cent. Examples of where performance has met or exceeded this include a £120m batch of seven Yorkshire schools (pictured, above), being carried out at zero margin for the Education Funding Agency.

An internal document shared with CN shows that by using a DfMA approach for 68 per cent of the frame and MEP systems, rather than an insitu solution, the weeks spent delivering the schools were 1,460 compared with 3,724, saving 40 per cent on the programme time and reducing labour by 60 per cent.

“We took the Yorkshire schools at zero margin but we’re delivering it in an extraordinary way,” Mr O’Rourke says. “Now the DfE is talking to us about whether we’d be prepared to work with other parts of the industry, give them the product set and systems and the answer is yes.”

At Two Fifty One, a 41-storey residential tower in Elephant & Castle, London, 70 per cent of the frame and MEP systems are designed for offsite manufacture. There has been a 50 per cent cut in worker hours and a 33 per cent reduction in the programme time.

Mr O’Rourke says: “If we can find a way to transition from trades to technicians… we could get to a German model of 35 very productive hours a week.

“At the moment we’re working 65-70 hours, we’re pretending it is safe and we’re getting about 30 per cent productivity, maybe less.”

While the company is in no rush to start construction of the second plant, which is fully designed, Mr O’Rourke admits the group is fielding enquiries from interested parties looking to take an equity stake in the facility, as well as clients looking to back the process with long-term orders.

“It’s a huge investment. Like any, you have to make sure you have the demand side. If you haven’t got the demand side you won’t be able to fund the capex required to make the decision.

“Everybody sees that this is the way of the future. It’s a case of who is going to take a step forward”

“We have the facility fully designed, we have scaled and determined the level of automation required. We’re in conversations about a number of offtake agreements.

“This is an instrument used in the oil and gas industries where organisations would be persuaded to sign up to take a quota of product on a per annum basis over a five to 10-year period.”

Though he won’t mention names of clients who might partake in the offtake agreements, Laing O’Rourke’s blue-chip clients read like a who’s who of industry giants with long-term order books. All of them want cheaper, quicker and smarter construction – from Heathrow and Hinkley Point C to housing and High Speed 2, for which Laing O’Rourke has already won an enabling works deal in joint venture with Murphy.

It will also be expected to bid for HS2 station works and has previous experience of putting work for high-profile rail schemes through its Steetley facility, having built the component parts for Crossrail’s Custom House station there, before assembling them on site in east London.

Laing O'Rourke_Advanced Manufacturing Facility CGI

Laing O’Rourke_Advanced Manufacturing Facility CGI

Mr O’Rourke said there were parties interested in backing expansion of its advanced manufacturing facilities

“Everybody sees that this is the way of the future. It’s a case of who is going to take a step forward. We have had a number of parties interested in joining the funding [of the Steetley facility], including two parties who could take an equity position.

“I’ve never seen the market so full. Nuclear is a 25-year horizon. HS2 is an 18-20-year programme. Heathrow is a 10-12-year programme. Government wants to build another million homes, supposedly in a five-year programme but probably more.

“If you have an operating model that demonstrates that you improve the schedule, quality, health and safety, and wellbeing of your workforce, all while doing it 30 per cent faster with 60 per cent fewer people on site… It was a compelling proposition in 2006, it’s a compelling proposition today and it’s getting embedded.”

End of an era

As for his own future, after an engaging hour in his company, I’m stunned to hear him say he will walk away from the group he created with the famous £1 acquisition of John Laing’s construction business in 2001.

“There’s a danger with founder leaders that they are past their sell-by date. You can’t be a ghost walking around, I have seen it in other organisations and it doesn’t work”

“I am 70 years of age, I’m in good health and I have committed to delivering the next three trading periods. Between now and April 2020 the intention is to have a robust succession plan in place.”

Over the next six months, a succession leadership team will determine the next phase of the business, he says, which could see the group changed utterly. “It may stay as it is, maybe there’ll be an IPO if we get the manufacturing to a stage where it would be attractive in the marketplace.

“I’m determined that my preference would be to stand down from Laing O’Rourke whenever the trading year is closed in 2020. There’s a danger with founder leaders that they are past their sell-by date. I started succession planning in 2006, but you have to get out of the way – you can’t be a ghost walking around, I have seen it in other organisations and it doesn’t work.”

Ray O'Rourke 2014 3

Ray O’Rourke 2014 3

Days after the interview, MD and former Kier chief executive Paul Sheffield’s departure is announced. He is one of many senior leaders to have come and gone since Mr O’Rourke stepped back in as chief executive after Anna Stewart was forced to stand down due to ill health in 2015.

He fixes me with a steely grin, when I ask if he is difficult to work with, and whether he ever doubts his vision for the company.

“Conceit is not something I put a lot of store in. You can find that in corporations, that conceit and stuffiness. Corporate life can be nonsense”

“I don’t think I’m difficult. Some people do. The only thing I can say to counteract that is there are people who have worked with me for 40 years. I like to work hard. Conceit is not something I put a lot of store in. You can find that in corporations, that conceit and stuffiness.

“It’s my style. I have contemporaries in the marketplace that would be the same. Corporate life can be nonsense. The bottom line is: this office is not the centrepiece of Laing O’Rourke, it’s out in the projects and it’s a great leveller when you go out there at 6am and people are getting ready to go to work in snow, rain and hail.”

Days before we meet for the interview, Ireland had fallen to an unexpected defeat in the Six Nations rugby championship’s opening game in Scotland.

As I’m walked to the door following our meeting, the Scotland defeat still fresh in the mind, he slaps me on the shoulder and says: “I think we’ll win the Six Nations.”

Ireland have since recorded back-to-back wins over Italy and France. On this kind of form, would you bet against him?

Ray O’Rourke on…

His working day “I’m good to go at 5 in the morning. I always have been, I believe in it. If you haven’t got your work done by 6pm in the evening there’s something wrong.”

Brexit “I think it will be a good thing, a catalyst for positive change. This is a great country, it always will be, but I think [the referendum] is making people look at things differently. Things needs to change, the industry can’t rely on cheap labour coming from Eastern Europe.”

H&S “We all have obligations to move the industry forward. People say we want health and safety. Why not get the designers to think about it? Why don’t they worry about the health of our workforce and stop all this manual intervention, because it’s medieval.”

Living in Jersey “Yes, I live in Jersey. It’s a lifestyle thing. Later in the year it will become clear why. At the moment we’re headquartered in Cyprus, maybe we won’t be in future. I can be [in London] in an hour and 15 mins.”

Workforce “When I came to England in 1966 it was accepted that us Irish people were the grafters to do the manual work. Look how their lives have ended up, crippled with very little to fall back on. In the 21st century if we’re really serious about transforming the industry we have to grasp the fact that the engine room of our businesses are the projects and the real engine is the workforce.”

Traditional building “We’re doing a residential building. You go down there and it is -2 deg C, people can’t get to work on scaffolding. It’s cold, bricklayers are not able to work, productivity isn’t great and the quality isn’t great. It has to change.”

Financing infrastructure “I had dinner with the CEO of one of the big insurance mutuals recently. He was explaining he has £46bn of liquidity he can’t put to work. We have to find ways to put that cash to work. For him to get a 2-3 per cent return, it would be an extraordinary day at the races.”

Bumps in the road “Business goes through cycles, you move on. We have a dynamic team of people. They’re committed, they’re excited. We have a stable government, it’s unlikely to change in the next five years or even longer and that helps.”

His peers “I’m not directly speaking to [other] CEOs but I am making my feelings known. I love the support Andrew Wolstenholme gives at the Construction Leadership Council. They tell ministers that this is ridiculous, we have to change the procurement approach.”

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