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27 January 2012

Forecasting is far from an exact science at the best of time but, the unprecedented economic events of 2011 have made predicting what 2012 might hold even more challenging. Mike Daniels uses research from Barclays Corporate to give a clearer picture.

Through the annals of history, 2011 will not go down as a vintage year but will certainly be remembered, possibly for the wrong reasons. The default of Portugal in May 2011, preceded by Ireland’s default in November 2010, did not lay the foundations for a stable macro-economic climate. The loss of the US’s AAA credit rating status early August, followed by on-going emergency meetings on the Greek debt situation have pretty much stalled the economic recovery.

The uncertainty created by the on-going European sovereign debt crisis continues to affect businesses’ decisions on investment, expansion and hiring, a trend which is likely to permeate the landscape until there is a clear sign that Europe has a firm grip on its financial difficulties. Back in November, the Bank of England cut its 2012 growth forecast for the UK economy to around one percent. The good news is that the Bank of England expects inflation to come down in 2012, although when this will happen is unclear.

Against this backdrop Barclays Corporate was interested to understand how facilities managers viewed the prospects for the economy, the industry and closer to home, the outlook for their own businesses in 2012. So we carried out a survey of facilities managers which included seven of the UK’s top ten largest operators. Half of respondents (50 percent) report annual sales in excess of £500m and a further 21 percent of respondents report sales of between £250m and £500m a year. This is what you told us: 

Economic outlook
Despite the ongoing European sovereign debt crisis and predictions of a slow and protracted recovery, facilities managers are encouragingly upbeat about how long it will take before the UK economy picks up. More than half (54 percent) expect the economic climate to improve within three years, while another 33 percent predicted a pick up within the next three to five years. In the near term, the majority of operators believe the UK will be as good a place (50 percent) or a somewhat better place (42 percent) to do business in 2012.

Industry outlook
When the Comprehensive Spending Review (CSR) was announced in October 2010, it created excitement in Britain’s outsourcing and FM industry on the back of perceived significant outsourcing opportunity from local and central Government. A number of large Government contracts have since materialised including the Land Registry appointment of Carillion to deliver such facilities management services. At the same time, Mitie was awarded one of the first contracts by the Ministry of Justice within a new framework agreement and has a pipeline in excess of £1 billion with the Ministry of Justice. G4S is now managing public prisons on behalf of the Government.
A year on from the CSR we asked FM providers what they thought would happen to levels of outsourcing if economic growth continues to stagnate. A substantial 84 percent said they believed outsourcing would increase and of those 21 percent said they expected a significant increase.

The optimism shared among the FM players surveyed is partly driven by the strong pipeline they have built up in 2011. Mitie recently reported an order book £8 billion for the period ending September 2011, a growth of 17.6 percent compared to the previous half-year. Other FM providers have also reported strong pipelines.

Despite the collapse of G4S’ transformational £5.2 billion merger with the Danish cleaning company ISS at the end of last year, 83 percent of FM providers believe 2012 will see a pick up in M&A activity. Half (50 percent) said there was a good chance they would be looking to make an acquisition and were actively reviewing opportunities while a further 21 percent said they were currently looking at an acquisition target. Interestingly, the overwhelming majority (79 percent) said they were unlikely to be targeted by a competitor. Only 21 percent admitted they were likely to become a target for a competitor acquisition.

2011 saw a reasonable volume of FM related M&A activity, driven by a number of factors such as the search for higher-growth markets outside the UK but, also the need to add service lines to offerings in order to provide a one-stop shop service to clients. For example by acquiring the energy-saving company Eaga, Carillion entered the UK-energy efficiency market while it continued to build on its integrated FM offering by adding another fast-growing FM service to its portfolio. Compass Group plc acquired Integrated Cleaning Management Ltd.

Many FM companies also expanded overseas to add scale to their offering as clients increasingly demanded the ability to service multi-country, pan-European or even global contracts. Inviron was acquired by Imtech NV, as was Smith Group UK, in order to increase Imtech’s presence in the British market but, other UK-based FM companies have acquired abroad. G4S has also made several acquisitions to bolster its geographical presence or service offering locally.

An overwhelming majority, 96 percent plan to expand their businesses in 2012. Most are eyeing domestic expansion but, after the UK, Western Europe and North America were the preferred regions for expansion with a 38 percent and 21 percent share of the votes respectively.

With expansion, whether it is through an acquisition or organic growth of an existing footprint, high on the agenda FM providers are expecting to increase headcount during the next 12 months. 42 percent expect to increase staff numbers by up to 10 percent while a further 13 percent predict headcount growth of between 10-20 percent. 33 percent expect staff numbers to remain the same and the good news is that only eight percent of those asked said they planned to cut jobs during the forthcoming year.

The survey results are indicative of the confidence the FM industry has in achieving growth in 2012, and the intention to increasing staff levels.

Individual prospects
When it comes to their own individual prospects, FM providers agreed that while new outsourcing opportunities may still materialise from efficiency seeking in both the public and private sectors, they expect a continued tightening of margins on contracts as clients seek to minimise costs.

However, this does not mean to say they are downbeat about their own company’s growth prospects. Looking to 2012, the majority (54 percent) say they expect to enjoy some growth next year – anything up to 10 percent. A further 25 percent of FM providers asked say they expect between 10-20 percent growth during the next 12 months. In order to meet these targets, nearly half (46 percent) of those asked said growth would largely be achieved through winning large contracts, while an additional 29 percent said cross selling to existing clients would help achieve their businesses growth targets. Improving margins was also a focus for achieving improved growth.

Notwithstanding the headwinds of the macro economy the FM sector appears buoyant about the prospects of the UK economy and this clearly shows in the survey results. This is partly driven by the increased opportunity of outsourcing following the CSR in October 2010 but also FM companies looking to capitalise on opportunities within the sector, i.e. the requirement to offer holistic FM contracts as well as the multi-country or pan-European dimension. Many FM companies have adjusted well so far through the recession and are effectively “match fit”. Yes, there remain significant challenges in the business environment as we move into 2012, but they see now as being the time to shift the mind-set from cost-cutting to expansion/investment. This bodes well for the sector as a whole and 2012 could in fact prove to be a promising year for the FM sector.

Mike Daniels is Head of Business Services and Recruitment for Barclays Corporate

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