Higher margins, higher growth

Building & Property Group is scarcely recognisable as the organisation it was back in the early 1990s. Then it was bought by Amec and Pell Frischmann as part of the privatisation of the former PSA, bringing with it a portfolio of defence contracts.

Since its management buyout three years ago B&PG has expanded its client base and seen its turnover increase by 25-30% a year. This rapid growth has been achieved on the back of an growing market in facilities management and a carefully thought-out business strategy, according to B&PG's chief executive Clive Groom (left).

"Our strategy has always been to create an expanding portfolio of long-term projects. And the reason we've focused on that is because we believe it will create higher-than-average margins," says Groom.

Despite the varying market sectors and range of contracts around, Groom is clear around the sort of contract he is after: "The kind of project we are looking for will either be long term or there will be a degree of partnership with the client. There will be a degree of risk transfer or there will be some existing inefficiencies in the client's operation that we can improve on. We take those opportunities on in an integrated way.

"What we say about ourselves is that we aim to deliver flexible and tailored integrated solutions to the customer's need. What is the client's real problem? You've got to listen and provide a solution.

"What we are looking for is to stand behind our analysis of the solution to the client's problem. We don't give them advice and say 'this is what you should do and we'll have 1% of that'. We say, 'this is what you should do, this is what it will cost and we'll do it for that price and we will do it for that for 25 years if you like'."

Groom describes the company as having "a healthy attitude to risk". "We don't try and qualify all the risk out, we price it and that's where you get the high margins by taking on those situations."

For Groom the ability to offer price certainty for long-term facilities management projects is all about being able to manage risks and understanding life-cycle costing. For B&PG the importance of life-cycle costing has little to do with such fashionable concepts as environmental energy management. Instead it is about giving certainty to the client over a long period of time by being able to deliver a guaranteed price.

"There's not many people who say they are in FM who actually have that approach. Serco is the only other one at the moment, though there are others moving in that direction," says Groom.

B&PG's strategy is aimed at finding the higher-margin projects that make it worthwhile investing in those contracts. Groom says median margins swing in a range between 1.5% and 3% of turnover. The FM market is at the top end of that range at the moment because of the buoyant economy. But B&PG's minimum target is 5%. As a comparison, Groom says Serco achieves 4%.

So if B&PG was the best in its field operating in the general market, the best margin it could get is 3%, how can it achieve margins of 5%?

"The only way we get that is by being very selective about the contracts we go after. It is this focused strategy on filtering out the opportunities so that we go for the ones that offer long-term relationships, risk transfer and partnering."



In short, B&PG's portfolio is not dictated by market sector. As Groom says: "It's in the whole universe of opportunities, which ones meet our criteria? Let's go after those, whichever sector it is."

PFI is an ideal example of a business opportunity which fits the B&PG strategy. There is a partnership between the joint-venture companies that build and manage the project and there is partnership with the client. And there is a real risk transfer as the PFI consortium has to name the price to run that building for 25 years.

"How can we do that without taking on some risks that would traditionally have been the client's?" asks Groom. "In a normal procurement situation if the boilers blow up one year after they are out of guarantee, there is nobody else left to pay for it except the client. In PFI we take that risk. We have to price that risk and it's not impossible to do.

"And it adds a great incentive to us to make sure the boilers are designed, chosen, installed and maintained properly. So all the drivers are in place to lead to the most efficient solution," says Groom.

The new Carlisle Hospital PFI is a case in point. The boilers there are not the ones that would have been chosen by the NHS, but top of the range to ensure they last the 25-year concession.

Investment in long-term facilities management projects, and PFI schemes in particular, is all about making decisions based on life-cycle costs, says Groom.

"You've just got to look at the structure of PFI: it is a unitary fee. The client gets charged a fee for using the building every month or quarter. That fee represents the cost of financing the construction, the actual construction cost and the maintenance cost. And it's getting that fee to be the lowest that you are competing for. That's how you win the job, by getting that unitary fee to be the lowest."

Groom says: "So you need the lowest possible cost of finance, the lowest possible cost of construction and the lowest possible maintenance cost, but not at the expense of each other. You need a shorter construction period, because that lowers the financing cost. You need an approach to the selection of boilers, for example, because we've got to run them for 25 years. The whole process drives life-cycle costing to be a real issue, not a theoretical benefit. It is inherent in everything the joint venture tries to do."

The pubic sector has woken up to the benefits of designing and constructing buildings with life-cycle costs in mind: PFI and the MoD's prime contracting initiative being the best examples. The big question now is will the private sector go the same way? There is some evidence that it is starting to do so.

Groom believes in the concept of corporate PFI, because he thinks PFI will bring about such huge benefits in the public sector it is impossible to conceive that those benefits cannot be transferred to the private sector.

"It's all about finding the balance on the risk transfer, the true cost comparators to use," he explains. "For example, on a 25-year lease, when you want to move out you have delapidations. You have to pay to put the building back into the condition it was when you moved in."

The problem at the moment is that although private-sector clients budget for their rent, rates and running costs, they do not include delapidations and other liabilities. But contractors price in those risks and naturally their prices come in above the costs as perceived by the client.

Groom's view is that corporate PFI won't really happen until private clients look at the true costs in the same way as the public sector does for PFI. This means factoring in not just the budget to build a new project under traditional methods, but taking into account possible overruns in budget and time. These risks have to be fed into the comparator.

"We've got to get the private sector to the same sophistication in its modelling. Nobody's done it yet, but there will be a first one and that will break the dam," says Groom.

Understanding and being able to price life-cycle costs is just one factor in making an FM contract work successfully. Another, perhaps the critical factor, is people management. B&PG prides itself on how well it is able to handle the transfer of large numbers of staff to its organisation when it wins an FM contract.

"A lot of our competitors have been very reckless and ill-informed about how they take over workforces and what they've then done to them and they've created suspicion," says Groom.



In Groom's experience workforces are generally pleased to be moving out of the bureaucratic public sector into the private sector, but are very nervous that their terms and conditions might be altered without consultation.

"We've always found that the employees are the only resource we have got and they know best how to deliver the services in the most efficient way. If you unshackle them, give them the skills and tools they need, then the productivity improvements you get from that outweigh anything you make by chopping their terms and conditions," argues Groom.

Looking after its large operational staff is a key consideration in what Groom calls the productivity equation. "The workforce, particularly in health projects, is generally low paid and badly treated," says Groom. "Look at the terminology - caterers, porters, cleaners - they are called ancillary workers, they are not core to anything, their views don't count. But we turn them into our core staff because that is all we do.

"Managing that and getting their views to be freely expressed is a critical factor to us in the productivity equation. How can we do it for less than the public sector does it without attacking their terms and conditions? That equation is the key to what we do and there are a lot of people out there that don't know how to manage that process and make it harder for us as a result because they create the fear and suspicion of what is going to happen," says Groom.

Investment in training and equipment is a key factor in making the productivity equation work, but the contracts need to be long enough to provide time to get a return on that investment. This is one of the reasons B&PG tries to secure long-term contracts.

But Groom estimates that about 90% of the FM market is still locked into the idea of three-year contracts with, at best, a possible two-year extension. Groom's view is that no one can properly invest in that context and the aim is to make just a nominal profit.

In contrast B&PG's whole focus is to try and win contracts where it can afford to take the risk of investing in its workforce.

B&PG's challenge to new staff is that terms and conditions will not be altered without agreement, but in return staff have to find more productive and efficient ways of operating to make the whole commercial proposition work.

"If you are very open with people about that, the ideas come. But we've got to have the time to reap the benefits of doing that," states Groom.

The strategy seems to be paying off and Groom anticipates more of the same in the future. "We are obviously doing something right. We will expand the business by sticking to our strategy of finding the higher-margin opportunities and managing them successfully," he says.



BOXTEXT: Forward orderbook: £1.7bn

Turnover at 31 December 1999: £200m

Number of employees: 2,522

Principal clients: Metropolitan Police Service; Liverpool City Council; Railtrack; Ministry of Defence; various NHS trusts including Carlisle Hospitals NHS Trust; Foreign & Commonwealth Office

PFI contracts operational: The Cumberland Infirmary, Carlisle Hospitals NHS trust; The Oxford Clinic, Oxfordshire Mental Healthcare NHS Trust; Leeds Community Units for the Elderly, Leeds Community and Mental Health Services Trust; The Inland Revenue Newcastle Estate at Longbenton

PFI contract that has reached financial close: West Lothian College of Further Education

PFI contracts at preferred bidder stage: Dudley Group of Hospitals NHS Trust; University College London Hospitals NHS Trust; Saint Genevieve's High School, Belfast; Health & Safety Executive, Buxton; Lymington Community Hospital; Thames Gateway Hospital, Sheppey