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Barclays: Annual FM survey results out

18 March 2013

Barclays wanted to understand how FM companies viewed economic prospects, the industry and their own businesses in 2013. Its second annual survey included 23 large UK operators, with turnovers from £10 million to £2.5 billion. Nicki Thomson (pictured), head of Business Services, says the future of the UK and global economy remains uncertain, but that the outlook is nonetheless rosier it would otherwise appear.

Thomson says indications show Britain's recovery will be delayed for at least another year and the global economy is likely to grow at a slower rate than previously forecast. However, she adds that despite the ongoing economic challenges, activity in the FM sector was generally buoyant in 2012. The current competitive environment for contracts has created opportunities for integration and services expansion, as both public and private sector clients seek efficiency gains.

It was against this background that Barclays decided to undertake its survey.

Economic outlook
Despite warnings of a slow and protracted economic recovery, the vast majority (95%) of respondents believe the UK economy will pick up within the next one to five years. 43% believe it will be within three years, and 39% between three to five years. An optimistic 13% think the UK economy will pick up in less than one year, compared to 4% last year.

''In the near term, the majority (65%) of operators believe the UK will be no better or worse a place to do business than in 2012, whereas 35% thought it would be somewhat better,'' says Thomson. ''Encouragingly, no respondents thought it would be a worse place to do business.

''In 2012, 42% of respondents thought the UK would be a somewhat better place to do business than in 2011. With economic challenges ongoing, it is perhaps not surprising optimism regarding the UK as a trading environment has since decreased.''

Industry outlook
Thomson said Barclays asked FM providers what they thought would happen to levels of outsourcing if economic growth continues to stagnate. A substantial 83% said they believe outsourcing would increase, and of those nearly a quarter (22%) said they expected a significant increase.

''This is an accurate reflection, as the value of Government contracts handed to the private sector has doubled in four years to £20bn, as the coalition seeks to drive down the cost of delivering public services. We can expect the pipeline of Government contracts to remain strong, and confirmed deals to be awarded this year include £150m to run call centres for the Department for Work and Pensions' new universal credit.''

Police forces are also likely to put some services out to tender as they look for ways to mitigate 20% cuts and there will be £400m of contracts to manage probation services. There are ample opportunities for the private sector in the NHS, as the Department of Health looks to dramatically reduce its budget.

''In terms of M&A activity in the sector in 2013, 70% thought there would be an increase, and of those, 13% thought there would be a major increase,'' said Thomson.

''This is a significant drop since 2012, when 83% of FM providers said they thought M&A activity would pick up. It would seem this year firms are more pragmatic in terms of activity levels. This marries with reality, as last year did not see mergers, although there were a few strategic acquisitions, such as Genivar's acquisition of WSP, in the consulting engineering sector.

''This year, 52% of firms said they were currently looking at an acquisition target or were actively reviewing opportunities. This is a drop from 2012, when 71% claimed the same. In terms of whether their business was likely to become a target for acquisition by a competitor, 9% said it was very likely, 39% said it was likely and 52% said it was unlikely.''

Interestingly, in last year's survey the overwhelming majority (79%) said they were unlikely to be targeted by a competitor. Only 21% admitted they were likely to become a target for a competitor acquisition.

''The shift this year would indicate FM providers are far more realistic, or open to, the possibility of being acquired,'' said Thomson. ''There is optimism in the sector in terms of expansion, as all respondents plan to expand their businesses in 2013, an increase on 96% last year. Most are eyeing domestic expansion, but after the UK, the preferred regions for expansion are Western Europe and the Middle East.''

Thomson adds that with such a commitment to expansion, it's to be expected a significant number (60%) of FM providers are also expecting to increase headcount during the next 12 months, compared with 55% in 2012. The majority, (39%) expect to increase staff numbers by up to 10% while a further 17% predict headcount growth of between 10-20%, and 4% even said they expected an increase between of 20-30%.

Further good news is that only 9% 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 increase staff levels as a result,'' Thomson said.

The optimism shared among the FM players surveyed is partly driven by the strong pipeline they built up in 2012. Capita enjoyed a robust year after gaining a foothold in UK education outsourcing and also established a new joint-venture operating model to win business from local councils.

MITIE recently announced the win of a waste management contract worth £3m with Kings Health Partners, and also retained a £4.7m cleaning contract with the East Hull Primary Care Trust. Meanwhile, in the private sector, says Thomson, Carillion was awarded a £50million five-year contract to provide FM services for Centrica. Other FM providers also reported strong pipelines.

Individual prospects
Thomson says that with respect to their own individual prospects, the overwhelming majority of FM providers stated margin pressure as the greatest concern to their business for 2013, as clients seek to minimise costs. However, they're pessimistic about their own company's growth prospects. Looking to 2013, the majority (96%) say they expect to enjoy growth next year - anything up to 20%.

''In order to meet these targets, over half (52%) of those asked said growth would largely be achieved through winning large new contracts, while 22% said cross-selling to existing clients would help achieve their businesses growth targets. Improving cost control (17%) and margin improvement (9%) were also cited for achieving improved growth. Interestingly, none of the respondents said they'd be offering more services in order to achieve growth.''

When quizzed about the biggest threats facing their business this year, Thomson points out, smaller players claimed larger companies are buying business by bidding very low margins or zero margins in the first year. ''Unrealistic client expectations, the pressure to deliver more for less and clients asking for cost reductions were also highlighted. One firm also referred to the difficult balancing act of combining energy saving with delivering high quality technical services.''

SUBHEAD: Prosper and evolve
She points out it's a positive sign all businesses are planning to expand, and the majority is expecting to increase headcount. This confidence is borne out of the strong pipeline of projects, particularly in the Government space. Shrewd providers are making smart acquisitions which will help them break into lucrative markets, for example Interserve's acquisition of Advantage Homecare, and MITIE's acquisition of Enara, enabling them to provide personal care and support services in people's homes.

Thomson concludes by saying that, with the wave of contracts seen in 2012, and which can be see in 2013, it's clear government is wholeheartedly committed to finding new, efficient ways of delivering services. ''This can only be a positive move for the sector, which is unique in its ability to prosper and evolve, despite the prevailing economic challenges.''

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