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How is the FM sector coping with the recession?

15 July 2009

Whilst many sectors of the economy are suffering in the ‘recession’ the FM sector is proving to be resilient
and is expected to continue its growth trends in future, according to Barclays Commercial Bank’s Steve Francis.

Asked how FM is weathering the economic downturn, he said “FM hasn’t actually become part of the recessionary spiral. The sector remains reasonably buoyant and as one of the industries still predicting growth it will continue to remain strong – recent analysis by research firm MBD predicts that the UK FM market will experience two percent growth, on average, over the next five years. The current economic climate has meant that the rate of growth has slowed, and it is fair to say that we have seen a dominance at the larger end of the market with the major players gaining market share, sometimes at the expense of the smaller FM operators.

“If we were to see end users taking their services back inhouse it would be an indication of contraction in the sector; however we have seen no evidence of insourcing as a result of the recession. On the contrary as the FM market has evolved to multi-service bundled offerings, smarter pricing of outsourced services is considered key to cost efficiencies and providers who have been able to innovate have been largely successful, even in the current climate.

“This is evidenced in contract wins and successes so far in 2009, and companies such as MITIE and Carillion have posted great results and have clearly been able to win large contracts this year.

“Failures in the sector have thankfully been few, and such incidences have in many cases been at the small end of the market, and usually where the business is highly leveraged coupled with a management team inexperienced to deal with the downturn.

“The sector is further buoyed by the fact that although private equity investment has diminished in other industries including FM, nevertheless anecdotal evidence would suggest that in Q4 of 2008 over a third of private equity backed deals were in FM.”

“There are a number of issues at the moment - although they are more a reflection of the wider economic environment than specifically the FM sector. The key issue is margin pressure and this is being seen at the point of re-tender in particular. FM’s are having to innovate in the way that they re-design their services so as to deliver cost savings to the client whilst maintaining an appropriate level of margin.Some, who have developed a strong model for doing just this, are approaching clients mid term to offer to take further costs out by re-engineering the contract in return for a contract extension, thus providing certainty for a further term.

“Cash collection is another area which we are talking to our customers about at the moment, maintaining a healthy cash flow is critical and the convergence of delayed payments from 2/3 larger clients can have a disastrous effect, so this is rightly receiving a lot of focus within the finance teams of FM companies at the moment. There are still good deals to be negotiated for favourable payment terms.

Advance payments can be sought if your bank is willing to provide an Advance Payment Guarantee to secure the advance - something that we are doing with greater regularity for our clients.

Business finance
“The industry itself continues to remain very attractive to the banking sector. We expect to see a further degree of consolidation in FM which will lead to the creation of larger players who are able to provide a broader range of services and who are better placed to service longer term contracts. Longer term contracts allow us to see much greater visibility of earnings and with a tendency to see a shorter cash conversion cycle, this gives us greater scope for providing finance. A business with a broad range of services across a variety of sub-sectors, coupled with a good client profile, adds to our ability to fund their requirements.

Outlook
“The FM sector is still very much moving forward, and we are very happy to continue our support as a long term strategic partner and trusted advisor. FM companies have characteristics which make them very well placed to secure credit lines, even in these times of reduced liquidity in the market place. We have spent the last eight years immersing ourselves in the sector and we are comfortable with the risk profile and the ability of the sector to withstand even the most deep of recessions.

“The FM market has so far weathered the recession storm better than most, and with predictions of two percent growth this looks set to continue. This growth is partly due to a large degree of public sector activity, particularly in the NHS and Ministry of Defence – the central and local government outsourcing market has been increasing by around three percent since 2000 and will continue to grow. Other areas for opportunity in the public sector are likely to arise from the ‘Building Schools for the Future’programme, which has been boosted by the Government’s decision to bring forward £3 billion of capital spending and the EU commitment to provide long-term loan facilities to this programme.

“Despite one or two exceptions we have seen little evidence of the market shrinking and services being taken inhouse, the trend is for businesses to outsource noncore activities to improve costs and efficiencies. There are clearly market pressures for FM companies and at the smaller end, the loss of clients through insolvency, or the focus on one specific area of service provision (eg to the retail sector) has created some market volatility.This may lead to consolidation, and / or opportunity for acquisition by the larger firms who have been conserving cash in readiness for an improvement in the wider economic outlook.

“One thing that we cannot forget is that the 2012 Olympics are looming ever closer, and these will generate a bubble of opportunity for the sector. There are good reasons to be optimistic. facilities management is a successful industry and will continue to play a major role in driving the UK economy over the next few years.”
● Steve Francis is a Relationship Director at Barclays Commercial Bank. This was first published by Livingstone Partners in their FM Newsletter – FirM Foundationsin May 2009. www.livingstonepartners.co.uk


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