Outside the sector, people often don’t know what facilities management is. If they have heard of it, they probably think of private finance initiative horror stories about the cost of changing a light bulb in a hospital, or an office’s outsourced mailroom.
But FM is big business. In 2013, more than £1.5bn-worth of facilities management businesses in the UK changed hands through mergers and acquisitions. Of these
deals, nine were carried out by construction contractors, including Bam Construct, Carillion, Costain and Kier.
Ask someone on the street what a construction company does and they will probably be able to tell you, in broad brush terms. But their general definition won’t include FM.
And yet since 2010, the percentage of company revenue that comes from the FM and support services sector has grown at four of the top six contractors in the UK.
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The share of turnover made up by support services at Carillion has gone from 41 per cent in 2010 to 53.6 per cent in 2012.
At Interserve, support services made up 52.6 per cent of revenue in 2012 compared with 48.5 per cent in 2010.
Cause and effect
So what has prompted this trend?
FM can offer contractors a stable source of revenue that offsets the cyclical market peaks and troughs and the project-to-project business of building.
“FM provides not only long-term visibility of pipeline and performance, but also allows long-term relationships to be built with our customers”
Katy Dowding, Skanska Facilities Services
“The core FM service offering is not necessarily an optional spend for clients,” says Bam FM MD Kath Fontana. “You can choose whether to build a building or not, you can’t choose whether to maintain, clean, operate and secure it, so FM will always be a revenue generator.”
This makes FM especially attractive when there’s a recession. “Construction businesses typically like the stability of FM, particularly during a downturn, when risk is high and margins are low in mainstream construction,” says Nash Fitzwilliams construction M&A specialist Adrian Pritchard.
What’s more, shareholders appreciate the lack of volatility - and the dividends.
Head of Deloitte’s contractors group Jack Kelly says: “If you go into the services sector or the FM market you get longer-term contracts with a greater degree of certainty and more predictable cashflows, which are appreciated by investors.”
These longer-term contracts have other benefits too, which can have a knock-on effect on a business as a whole.
Skanska Facilities Services MD Katy Dowding says: “FM provides not only long-term visibility of pipeline and performance, but also allows long-term relationships to be built with our customers.”
Balfour Beatty exited the UK FM market last year with the sale of its WorkPlace arm to GDF Suez.
“Balfour Beatty took the decision to sell WorkPlace as we simplify the business and concentrate on future growth,” says CEO of Balfour Beatty’s services division Kevin Craven. “Going forward, our focus will be on economic infrastructure.”
While the company will retain some FM capability in US contracts, Mr Craven says Balfour Beatty is not looking to re-enter the FM market in the UK.
“WorkPlace had seen considerable growth as a Balfour Beatty company, but with our focus on economic infrastructure we recognised WorkPlace’s best interests would not be served by keeping it within Balfour Beatty.”
The growth areas he identifies for 2014 include water, local authority and rail renewals.
“The trend to outsource by local government will provide additional growth opportunities for our Living Places arm as it looks to leverage its position in the highways and street lighting markets to provide additional services to local authority clients,” Mr Craven says.
Even in construction boom times, the FM market is not subject to the same volatility of materials prices and supply issues as the wider industry, as materials form a relatively small proportion of FM costs.
Another factor driving contractors’ increasing provision of FM is clients’ growing interest in the whole-life costs of an asset rather than its design and build in isolation.
This has a big effect on clients’ thinking about building maintenance, encouraging them to consider FM at the design stage.
“Construction and FM work beautifully hand in glove - when construction are bidding something we might get involved, then once the building is built we seamlessly take over the FM”
Guy Bruce, Interserve
“A lot of the work we’ve picked up in the FM business in the last 18 months has been Bam buildings, where the client has had a good experience with Bam construction and design and they want to continue that relationship with an FM contractor,” Ms Fontana says.
Interserve’s experience is similar. Managing director of industrial Guy Bruce says: “From our perspective, construction and FM work beautifully hand in glove - when construction are bidding something we might get involved to look at the longer term, then once the building is built we seamlessly take over the FM.”
This can work both ways. “On larger FM contracts clients will often award us [construction] projects, anything from an air conditioning unit to a new wing of a hospital or a refurbishment.”
At Carillion, the company’s ability to offer the whole range of services gives clients the option to consider the building’s operation from the outset.
“We can offer an integrated offering - we’re a construction to services business: design, build, finance, FM, support services and in a number of small ways operate as well,” says Carillion Services chief operating officer Nigel Taylor.
The BIM conversation
Similarly, more and more clients want to use building information modelling over the lifetime of an asset, improving design, build and eventual operation. “We’re seeing more clients who are asking for a more sophisticated offering - a more intelligent, sustainable FM solution and they can make that link with BIM,” Ms Fontana says.
“A contractor can’t automatically become the best FM provider; there is a different skillset and mindset required”
Jack Kelly, Deloitte
The emphasis on BIM will only increase. “The full extension of BIM through the operations and maintenance phase will be in the FM contracts going forward, as customers not only look for cost savings through efficiencies, but also ways to add value to their assets through more informed maintenance regimes and lifecycle planning,” Ms Dowding says.
So, with stable revenues, increasing interest in lifetime costs and sustainability, and more readily available technology to link design and construction to management, should all contractors have an FM division?
“A contractor can’t automatically become the best FM provider; there is a different skillset and mindset required,” Mr Kelly insists.
“The customer is different, with a different mindset. You need to invest in getting the people skilled in customer management in an FM environment.”
This is not a big leap for all firms; many of those involved with PFI contracts have been working in FM for years, particularly in schools and hospitals.
But of course, PFI has fallen out of favour, and its successor private finance 2 has yet to take off.
“The PFI market has been less vibrant in the past few years - we looked at whether we could diversify the portfolio and add value to our other clients in a similar way. In the past two to three years that’s been the focus,” Ms Fontana says.
“What we’re now seeing is the proliferation of that expectation from a client; they expect you to collaborate and be more integrated; it’s about the service they expect”
Kath Fontana, Bam
Clients are also asking for more from their service providers. “There has been growth in FM as customers have extended the remit of services they include within FM contracts,” Ms Dowding says.
“Extending from traditional to value-adding offerings such as energy/waste management and behavioural change programmes, these growth areas offer new opportunities for providers with a wider set of capabilities or a portfolio beyond traditional FM.”
As clients gain experience in the market, they are looking for increasingly sophisticated offerings from FM providers, including unbundling from a total package to procure hard and soft FM separately.
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“We’ve started to see some of the larger contracts being unbundled, with customers looking for less generic and more value-adding solutions, which allows customers to focus on better delivery of their core services,” Ms Dowding says.
Having the flexibility to offer this variety is vital. At Mitie, FM is now the core of the business. Technical FM managing director Peter Mosely says: “Any customer or any type of contract a customer wants to go into - single service, bundled services, multi-services or integrated services - we can provide that for them, which has been a major strength of ours.”
Clients’ expectations of the service they will get from FM providers have also increased.
“What we’re now seeing is the proliferation of that expectation from a client; they expect you to collaborate and be more integrated and it’s nothing to do with the risk transfer any more; it’s about the service they expect,” Ms Fontana says.
“It’s been tough for our customers too so we’ve had to support them. We’ve had to come up with clever, inventive ways of saving them money”
Peter Mosely, Mitie
“Clients want more transparency of cost because of the economic climate; property generally is the second biggest spend in any organisation, so there is a lot more scrutiny and a lot more transparency required.
“With a total FM solution you potentially lose some of that; there are lots of benefits to total FM but in tough times when companies are scrutinising every penny it’s more opaque.”
Adaptable to evolution
Providers also need to be adaptable about the services they offer as the asset evolves. “What you’ll often see is a client comes to market looking for a single service, then the next time they’ll want total FM, then a single service again,” Mr Bruce says.
“It goes in cycles over five to 10-year periods, as what the asset needs at different times varies.”
All these requirements make for an extremely competitive market. FM businesses must work hard to differentiate themselves and it can be difficult to remain both competitive and profitable.
“The challenge is ensuring it’s not a low-profit business. Because it’s very competitive you can be seduced into competing on price all the time,” Ms Fontana warns.
“We’ve tried to differentiate by FM being a value rather than a cost proposition. We’re about the value rather than the cost of what we do.”
Mitie says it has adapted to changing customer needs to remain competitive. “It’s been a good but challenging couple of years,” Mr Mosely says.
“It’s been tough for our customers too so we’ve had to support them. We’ve had to come up with clever, inventive ways of saving them money.”
One sector where the company has had to be particularly innovative is retail, as retailers try to lure shoppers from the internet and onto the high street.
“Ever-improving technology will ensure higher levels of engineering compliance, intelligent asset management and a greater flexibility in the management of assets”
Katy Dowding, Skanska Facilities Services
“We’re working closely with our clients to create better shopping environments and encourage people into the stores,” Mr Mosely says. “We’ve had a lot of work refitting stores and different lighting schemes to draw people into the shops. That’s been quite a growth area for us.”
Indeed, growing in the FM sector is not simply about picking up more contracts, especially in an extremely competitive market. For many contractors’ FM arms it’s about being able to prove you offer something unique.
“The FM market has a very optimistic growth profile,” Ms Dowding says. “This will be driven by not only a continued trend to outsourcing, but also an increase in the scope of works incorporated in such contracts.
“Ever-improving technology will also ensure higher levels of engineering compliance, intelligent asset management and a greater flexibility in the management of assets.”
Ways to grow
At Carillion, there is also scope for growth through offering extended services to existing clients.
“Because we’re already a large, mature and stable business, over three years we will see steady growth progress and there are good opportunities in all areas. We’re also focusing on more strategic areas where we can really add value,” Mr Taylor says.
“The big change in the past 12 to 18 months is to offer more innovation to clients”
Guy Bruce, Interserve
For Interserve, growth in the FM market will come from both organic customer-based growth and acquisitions. “We have a great client base; we’ve successfully grown it through additional products and service lines.
“It’s a reflection of the clients’ experience after tender - we have plans for each - our ‘customer promise’,” Mr Bruce says.
“The big change in the past 12 to 18 months is to offer more innovation to clients - we have a head of innovation that looks to take best practice across the whole business and generate new ideas.”
BIM, sustainability and whole lifecycle analysis are just three of the themes that are driving the FM industry forward and taking contractors with them.
The construction process is becoming less linear and transactional, and more collaborative and symbiotic, causing the lines to blur between ‘construction’ and ‘FM’.
As a result, interest in the FM sector will continue among contractors and specialists.
The market remains highly fragmented and the current trend of mergers and acquisitions is expected to continue throughout 2014 and beyond.
FM is big business today and will be even bigger business tomorrow - even if the public doesn’t really know what it is.
M&A activity rockets as foreign investors enter
M&A activity in the FM sector has been on the rise in recent years, with a particular interest from overseas companies targeting the UK market.
“Looking at recent M&A in FM, we see two themes: rapid consolidation of the industry - for example, Kier/May Gurney or Carillion/John Laing - and acquisitions by multinational consolidators into the UK market - such as CBRE/Norland, Bilfinger/Europa or GDF Suez/ Balfour Beatty WorkPlace,” says Nash Fitzwilliams M&A specialist Adrian Pritchard.
This movement suggests the market is attractive for investors, but what does it mean for companies already working in the sector?
“We’re very mindful of competitors coming in from overseas as well as the ownership of existing UK companies changing into and out of private equity,” says Interserve MD of industrial Guy Bruce.
“What it reflects for me it that the market remains interesting from an absolute size point of view and a growth point of view, and it’s going to remain challenging.
“We want to remain ahead of the game and to some extent that will become a function of size over time.”
Some of the M&A activity has the potential to make big changes to the wider market. “The most interesting market development for me was CBRE buying Norland - that’s flipping the FM model on its head,” says Bam FM MD Kath Fontana.
“For a company like CBRE, that has traditionally subcontracted all those services, to now bring a significant amount of it in-house is interesting.”