Is FM ready for the recovery?

28 October 2009

A debate between bankers and FM professionals explored the origins of the current economic downturn and the impact on the FM sector now and in the recovery

The debate, sponsored by PFM magazine and Barclays Commercial Bank, follows an article published in PFM’s July 2009 edition and on its website entitled ‘How is the FM sector coping with the recession?” in which Barclays Commercial Bank Relationship Director for the Business Services, Steve Francis, argued that the FM sector was weathering the recession well. The round table last week was the next step and examined the challenges and concerns faced by a range of FM business leaders and clients as the economy begins to recover.
Dr Clark, Sector Analyst, Portfolio Management, Barclays Commercial Bank, explained the roots of the current economic downturn before discussion turned to the impact on the business services sector, particularly FM. Displaying a long list of events leading up to the ‘credit crunch’, he explained that “most of these events would, in isolation, have caused severe turbulence in financial markets. But these events, occurring all together and in such a short space of time, gives you some idea of the magnitude of what we faced,” he said.
“This has resulted in the UK’s worst post-war recession, with one of the steepest falls in GDP growth in the modern era. We lost 2.5 percent of GDP in the first quarter of 2009 – that’s the equivalent to the output lost during the whole of the 1990s recession which lasted for five quarters.“
He described the measures undertaken by the IMF and governments across the world to stabilise the financial system including the massive injections of liquidity. The situation has stabilised but uncertainty remains he said, and interest rates are likely to remain at 0.5 percent (the lowest rate in the history of the Bank of England, which was founded in 1694) for a while longer.
Barclays Commercial Bank Head of Business Services, Mike Daniels, explained that Barclays is already looking to the future recovery. “Business services have been experiencing a reasonable time. We have moved on from a year ago when we were talking to clients about strategies to deal with the economic challenges, to now where we are examining with them short term strategies and opportunities to enable businesses to keep competitive and respond to opportunities. Barclays has remained open for business throughout the downturn which has allowed us to support fully our customers.
In a business and political environment where in both the public and private sector cutting costs is a key strategy for survival, Dave Wilson, Director, Agents4FM wondered how FM suppliers could respond. “Many service providers have had to halve their margins to meet the needs of contracts in recent bids. When existing contracts, won at higher rates before the credit crunch, come up for renewal, suppliers may be left with almost no margin. This not only raises issues around the sustainability of relationships, but also creates a potential structural issue in the FM sector, particularly surrounding smaller FM companies who are susceptible to cash flow problems, and new entrants who tend to ‘buy businesses. How they will cope with this recession?” he asked.
David Adams, Head of Treasury at BaxterStorey, concurred saying that ‘short termism’ can be taken to extremes in any industry resulting in margins that are so low that suppliers can be put out of business, and this can impact back onto the client’s own business.
Stuart Lawrie, Chief Executive of the Four Seasons Group, pointed out that FM services are necessary. “You can't choose not to maintain your HVAC equipment without falling foul of regulatory compliance," he argued. "Budgetary spend withheld in 2009, will come through in 2010 and supplier businesses will experience increased demand. Funding working capital will be a key challenge for businesses experiencing a return to growth with banks still de-risking balance their sheets. Post recession businesses are now looking at only 4 main lenders again to support them.”
Nicki Thomson Relationship Director, Barclays Commercial Bank, concurred saying, “Top of the list in conversations with Finance Directors and Chief Executives who have already trimmed the costs and kept the business steady, is they are mindful that when they come out of recession there will be opportunities and they must be in a position to take advantage of them.”
The cost of borrowing has been an issue for businesses in all sectors. The UK’s banks have come into public criticism about their apparent lack of willingness to lend to consumers and business alike.
Mike Daniels explained that the LIBOR rate is falling now which is feeding into falling prices for lending. However, as Dr Clark noted, lending capacity is also being constrained through the withdrawal of overseas banks and niche players– from the UK. This was an important factor, since they had been particularly active in the UK in the run up to the financial crisis. Mr Daniels added that this has left a gap in UK lending capacity leaving its four main clearing banks and the Spanish bank, Santander, to pick up all the demand in the marketplace for the next few years.
Stuart Lawrie recognised that banks are still focused on de-risking their businesses rather than lending. But, he pointed out; “As things stabilise the demand will be for working capital in 2010. It is at the top of my challenges to make sure that our business has working capital to support growth when it happens, but the choice is limited to the four main lenders.”
Mike Daniels explained that as bankers, Barclays was aware that when the economy picks up, new capital is required by businesses. “In other recessions, a lot of business has failed just when they can see light at the end of the tunnel,” he said. “We need to be aware of the needs of the supply chain and how we can protect them. It will be a problem for every sector and we have to find ways of managing this. We can’t get through the next 12-18 months and then see a backward experience as a result.”
Eleanor Wilkinson of Livingstone Partners pointed out that private equity and high net worth individuals could be sources of investment for the FM sector. She explained, “Many have been burned by the stock market and like the idea of investing in businesses where they can see their money being put to work. The FM sector is interesting in this respect because it is more recession proof than some sectors. The low margins which have put investors off in the past are reassuring now because they reflect the relatively low risk nature of FM businesses.”
As Dr Clark pointed out that, while the private sector recession has already happened, public sector cutbacks are yet to come. The discussion then turned to the public sector and the expected significant spending cuts likely to be implemented by whoever wins the next election. Everyone agreed that deep spending cuts would be required to reduce public debt and that these would result in service cuts and potential labour disruption. However, Dr Clark noted that private sector agreements to freeze pay and reduce hours in the short term over the past year could be a sign that labour relations had changed and that this need not necessarily lead to a repeat of the experience of previous decades, when restructuring had been accompanied by significant and widespread industrial action.
John de Lucy, Head of Estates and Facilities at the British Library, wondered whether the expected cuts could be found that could actually impact the debt when so far all other efforts to do so have been so ineffective, and when, as looks likely, health and education services might be exempted. Dr Clark responded that even in departments such as health, where there is likely to continue to be some limited growth in spending, it would feel like real cuts because an ageing population would increase demands on the health service, while costs of supplies such as drugs would continue to rise. It was generally noted that the Government had already flagged actions such as asset sales, outsourcing, low wage growth and wage freezes and cuts in the workforce, but the burden of public sector pensions was the one issue that needed to be tackled.
Andrew Large, Chief Executive, CSSA, agreed that public sector pensions were a significant issue but highlighted the ‘catch 22’ situation with public sector pensions and outsourcing. He said, “Unfunded public sector pensions are a barrier to outsourcing because the price of the pensions commitment is uneconomic for the contractor. At the same time the contractors bidding for work in the Department of Health, for example, say they can deliver 14 percent savings which the Department needs because it wants to keep a high level of cleaning but to pay less for it. If you don’t solve the pensions issue you won’t get the savings from outsourcing. At the same time cuts in public sector pensions will create industrial relations issues and frustrate the outsourcing process.”
Dr Clark acknowledged that some commentators had identified a risk that continued high levels of public sector debt in the economy could see the country’s debt rating fall below its current AAA rating. However he stressed that this was extremely unlikely, but it did emphasise the need for a tangible and coherent exit strategy that would allow the government to rebalance the public finances over the medium term, without undermining the recovery.
Whilst the outlook remains uncertain - other than the certainty that margins for FM services contracts will be squeezed – there is some optimism for the future and a determination to learn from the lessons that caused the problems in the past. Compared to earlier recessions, FM’s role in the British economy has become more embedded to the extent that “you can’t do business in the UK without FM”.
Participants:
Dr Brian Clark, Sector Analyst, Portfolio Management, Barclays Commercial Bank
Mike Daniels, Head of Business Services, Barclays Commercial Bank
Nicki Thomson, Relationship Director, Barclays Commercial Bank
Steve Francis, Relationship Director, Barclays Commercial Bank
Sujay Shah, Relationship Director, Barclays Commercial Bank
Dave Wilson, Director, Agents4FM
David Adams, Head of Treasury, BaxterStorey,
John de Lucy, Head of Estates & Facilities, The British Library
Andrew Large, Chief Executive, CSSA – Cleaning & Support Services Association
Stuart Lawrie, Chief Executive, Four Seasons Group
Eleanor Wilkinson, Director, Livingstone Partners