How the FM sector will ride out spending review cuts

28 October 2010

David Ascott, Partner at Grant Thornton UK LLP predicts that in the next 18 months, FM providers will be hit by rough and ready measures to cut spending across the public sector

Following the Chancellor's Spending Review, Facilities Management in the private sector need to ride out initial cost cuttings before they can benefit from the opportunities created by the reform of public services and the adoption of best business practice in procurement. David Ascott, Partner at Grant Thornton UK LLP predicts that in the next 18 months, facilities management providers will be hit by rough and ready measures to cut spending across the public sector. By 2012, we expect the public sector to refocus on delivering quality services and getting value for money. Providers that can deliver cost effective services may even be able to benefit from this transition.
In his Spending Review, the Chancellor indicated how departments will be affected by total spending cuts of £81bn and average real budget cuts of around 19 per cent by 2014-15.
Local government appears to be one of the real losers within the settlement with cuts of 26 percent over the next four years. However, simplification of financial controls and removal of ring-fencing of grants should allow for a more flexible and agile financing regime to be adopted, but will place responsibility for many of the hard choices on local government.
Quite how far the reduction in local government spending may go will not become clear until the business plans for the departments that fund it are published next month. Only then will we get the detailed information about how the overall package of support to local government is made up.
Defence: Facilities management firms catering for defence contractors will be concerned about the announced 8 percent reduction in the defence budget and the recent cancellation of the £14bn Defence Training Rationalisation project. At the same time, the savings target of £350m associated with running the defence estate may provide incremental business opportunities for facilities management providers.
Schools: The Spending Review provides a mixed outlook for facilities management providers catering for schools. The capital spend on schools is set to fall by 60% with the cancellation of much of the Building Schools for the Future programme. This does mean that many schools may face increased operational costs, which could benefit some FM providers. Moreover, the protection of spending on schools by the maintenance of Dedicated Schools Grant and for pre-school children by the protection of Sure Start will ensure that early years provision and education will remain at the heart of local provision.
Sentencing & rehabilitation: In terms of new opportunities, the Spending Review announced a reform of the sentencing framework, which is good news for private sector providers offering to run programs that reduce reoffending. These may provide new opportunities for facilities management service providers.
There are potentially some positive developments including opportunities for scale and niche providers. The fact that finance directors in government departments are increasingly defining strategy for delivering savings should make it easier for providers of facilities management solutions to identify who to approach with solutions that deliver such savings.
The public sector clearly needs to adopt best business practice in procurement if it wants to achieve efficiency savings while providing the quality services expected by the taxpayer. This should particularly benefit large facilities management providers with the ability to provide economies of scale.
In that context, we would also expect the facilities management sector to continue to consolidate in the coming years as companies strive to capitalise on opportunities generated by the pressing need for the public sector to cut costs.
Meanwhile, smaller facilities management providers can benefit from a move to decentralization and localism, particularly if they are either highly specialized or innovative enough to deliver services at lower prices.