At your serviceÉ

If you are fed up with delivering a quality performance and good profits in the construction sector and still end up with a low share price, you might try relisting in the Support Services Sector of the FTSE - then, perhaps, all your troubles will be over.

It doesn't quite work like that of course, but the fact that Amey, Jarvis, Porterhouse and, as of Monday next week, Tilbury Douglas, have all reclassified themselves as support services firms, rather than construction and building firms in the FTSE listings, must say something.

If nothing else it does indicate the growing importance of service provision and facilities management to those working in the broad church that makes up the construction sector. Consultant WS Atkins floated itself in the services sector from the start, but although few construction firms have gone the whole hog and reclassified, facilities management has nonetheless become a hugely important business stream for many companies.

By all accounts margins in the competitive market for facilities management are not much better than construction, ranging from around 1% to 3%. So why has the construction industry piled into FM?

The answer comes down to a combination of reasons. For a start, elements of the industry have always been involved in FM in some way or other - mechanical and electrical maintenance being the most obvious.

The recession in the early nineties forced the industry to look for other business opportunities at a time when both the public and private sectors began to outsource more of their non-core activities. The privatisation of the Government's Property Services Agency in 1992 gave some contractors such as Carillion, Mowlem and Amec an entr'e into FM.

The privatisation of rail track and infrastructure companies and the creation of road maintenance super agency areas added to the FM opportunities for the construction industry. In the mid-1990s both central government and local councils began putting some of their services out for competitive tender, while the introduction of the private finance initiative offered the industry the chance to establish long-term FM contracts. During the same period outsourcing has become increasingly popular in the commercial world.

Just how big the market is now is a matter of conjecture with estimates ranging from anything between £20bn up to £130bn. While few pundits can agree on the size of the market, most would agree the market is continuing to grow, though again it is difficult to pinpoint by how much.



The drivers for this growth in FM appear to be changing according to a recent survey of business directors in the UK's top 100 companies, conducted by Amey Business Process Outsourcing.

Amey found the top three motivators for outsourcing were: to gain input from external experts; to focus on their core activities; and to achieve cost efficiencies and savings.

The report suggests the chief motivator for outsourcing in the 1970s and 1980s was cost saving: "According to a recent study by the Everest Group, Inc (1999) most outsourcing relationships created over this period were by companies that were in financial trouble and were performing particularly poorly in the areas they chose to outsource, perhaps explaining why cost savings were so important."

But Amey found that while cost savings remain an important factor, company directors are now, "identifying the need to focus on one or two things they really do well, to ensure future success". The difference is clearly marked by the fact that healthy and profitable companies are choosing to outsource as an essential part of their business strategy.

Mike Pilbeam, managing director of Amey Business Process Outsourcing, says of the 1990s: "Decision makers started to think differently, looking at an increasing list of opportunities of how to make their businesses more efficient and effective, and ultimately more successful. Outsourcing now has a high level of acceptance which is not only leading to a continuation of the growing outsourcing trend, but also to an expansion of the functions and business processes companies are willing to allow an outsourcer to provide."

This increasing level of acceptance has led to an ever-widening range of FM opportunities. The nature of the market is highly diverse, though according to Mintel International Group's 1999 FM report it can be broadly divided into eight categories: support (or ancillary support); transport; building operation and maintenance; information technology; environment management; infrastructure management; telecommunications; and property management.

Lurking within these broad categories are a whole range of specialist services such as catering, security, cleaning, landscaping and gardening, waste disposal, office services (reception, post and secretarial duties), energy management, telebusiness and management consultancy services.

It is not surprising then that the nature of FM providers reflect this diversity. As Alan Soper, managing director of Amec Facilities, puts it: "The FM market is highly competitive and highly fragmented. Providers are hugely different, there are almost no two alike."

An MBD report released in March this year suggests that FM players tend to originate from a particular speciality including, M&E and technical services companies, ancillary service providers, construction companies, specialist FM companies and a range of other companies, such as IT providers. As a result of this providers tend to operate in markets that relate to their original speciality, which in turn tends to keep the industry fragmented.

In its UK Facilities Management Market Report 1999, the Centre for Facilities Management at the University of Strathclyde, stated: "Looking at the structure of the industry, the traditional industry boundaries are still intact. For example, construction, IT and environment management still operate as separate FM markets. However, some FM companies are beginning to work across these boundaries."

Only a handful of firms have the capacity to work across a wide range of sectors at the moment. These firms include Serco, Amey, Johnson Controls, Capita, WS Atkins and Building & Property Group. Others such as Amec, Carillion, Balfour Beatty, Jarvis, Mowlem, Tilbury Douglas and Morrison are moving in that direction.

Beyond that there are a whole host of niche players, some of which are substantial companies in their own right, such as Compass, the world's second largest catering company.

The kind of contracts available are also diverse. At its simplest FM means contracting out single services such as cleaning or security, but managing them in-house. The next stage is to invite an outside FM provider to act as a managing agent for those services. FM agents negotiate a percentage fee to manage the subcontracted packages, but if the cost of outsourcing rises so does their fee.

The managing agent approach, while still used, has led to some dissatisfaction with FM among clients. The CFM report says: "However, questions are now being asked about the value of the managing agent approach - due to better developed skills in-house and disappointing results in terms of flexibility and service quality. Major organisations are asking -does this approach deliver?"



If it does not deliver then the customer needs to examine what he was trying to achieve by outsourcing in the first place. Amec's Alan Soper says: "You need to identify what the customer's objective is - maybe FM won't meet that objective. The whole point of FM is that it has no life of its own. It's more driven by the principles of outsourcing. Can an FM provider do it better than the customer can itself? This is always driven by a business imperative. Namely, is the FM provider able to add more value than the customer? If so, the contract will fly. If there is a whiff of it needing to go back in-house then it's because the FM provider is not adding value."

The more common approach now is for some form of partnering using a more sophisticated type of contract. As Amey put it: "Clients expect their FM partners to take risk by active management of subcontracts, with cost savings shared back with the client, and to charge a fee which relates to performance rather than just for being there."

In short sophisticated clients want their FM providers to understand their business and how it might change over time, so that a tailor-made outsourcing solution can be provided. A client's business needs will change depending on the market it is operating in and how well it is performing. Flexibility is therefore a key consideration and mechanisms need to be built into contracts to accommodate changes affecting any client organisation.

For this to work clients need to identify their own strategic business priorities, find a service provider that can align with those priorities and business goals and which understands their business.

As Soper puts it: "It's more about tackling business issues, than just managing real estate - what are the client's business drivers, will he be able to afford to run x number of buildings at this cost if his business hits a downturn in a few years time? How do you make judgements now to build in flexibility when the real estate will last 40-50 years? Who knows what the client's business needs will be then? So the client needs space, but flexible space - it's a business need, not a real estate need."

At its best this will provide the opportunity for a total facilities management contract. PFI contracts are an obvious example of this, with the added benefit that if there is a strong element of new build, the buildings can be designed with long-term maintenance and FM considerations in mind. But many contracts will revolve around managing existing estates.



Amey cites its contract with DERA (Defence Evaluation and Research Agency) as an example of a client outsourcing all its support services covering everything from property and estates, maintenance, cleaning, payroll management and IT. This enables DERA to focus on its science and technology research programmes.

BT's £550m plus Project Jaguar is a more recent example. Carillion is undertaking all BT's FM needs for five years (with an option to extend) and is now responsible for 8,500 buildings. The contract will embrace many of the partnering ideals recommended by Sir John Egan's Rethinking Construction report.

However, as much as the industry might wish it otherwise, there are not many opportunities for large scale, long-term FM contracts outside PFI schemes.

"There is no inevitable trend towards total facilities management," says Soper. "There has to be a business imperative behind it. It's different customer by customer and depends on their objectives. If a rationalisation of providers makes sense and there is a management synergy, then a total facilities management approach might make sense. There might need to be a compliance with environmental, legal and health and safety conditions for example, that would provide a reason to rationalise FM provision under a larger single contract."

In fact total facilities management contracts or even just long-term contracts are relatively rare. Clive Groom, chief executive of Building & Property Group (B&PG) estimates that some 90% of the FM market is three-year contracts with a possible two-year extension. And this can have a detrimental effect on an FM provider's ability to add real value for the client.

"The normal three year cycle is bid the job and find out in the first year why you won it - which is all things you should have costed in that you didn't," says Groom. "You spend the second year working out what you are going to do about it - investing in IT systems, re-skilling, maybe redundancies, maybe even re-educating the client to some extent about how he uses your services and then in the third year you go into profit.

"At the end of the third year the client says: 'We love you, you've done a fantastic job, but we are a commercial organisation and we've now got to market test' and everything you've done just gets handed over to a competitor. What's the point? To me it's a no-brainer," says Groom.

Such conditions encourage firms like Amey and B&PG to target clients offering longer-term contracts. Amec's Alan Soper is more sanguine however: "Length of contract is not a critical as some people think - it's about are you any good. It's about renewal. We have an excellent renewal rate. We've been managing some buildings for 25 years now. We know more about the building than the client."

Longer-term strategic thinking among central government departments seems to be offering more opportunity for longer contracts and the new Best Value regime in local government should also help.

Clive Groom points out: "The old style compulsory competitive tendering always gave an advantage to the in-house team. The Best Value regime will create many more opportunities that will be of interest to us without a doubt."

Amey also sees this as a good opportunity observing that the transfer of skills is an important part of Best Value with local authorities looking to develop and obtain skills from the commercial sector and harness public sector skills into the private sector through strategic partnerships.

Recent examples of this include B&PG's housing maintenance contract with Liverpool City Council and Morrison's contract with Norwich City Council to take over maintenance of council buildings, houses, parks, open spaces, highways, lighting, refuse collection and street cleaning.

Further opportunities may present themselves if the concept of corporate PFI takes off. In this scenario the client organisation simply occupies the building. For example, a PFI consortium might take over ownership and maintenance of an existing estate or build, own and maintain a supermarket store, leasing it out to a Tesco or a Sainsbury.

No successful deals have been done as yet. Abbey National looked at the prospect, but rejected the idea, as it did not believe a single supplier could cope with managing its nationwide network of branches. But both Amey and B&PG believe a deal will done sooner or later. The former reckons when a corporate PFI deal is done, it will "leapfrog public sector PFI models by finding solutions to one of the key constraints on value in the PFI model, which is the potential incompatibility of long term contracts with long term flexibility".

At any rate the prospects ahead look good for the industry, especially for those firms which are geared up to provide a wide range of skills. In theory there ought to be more consolidation in the marketplace to take advantage of these larger FM opportunities, but surprisingly there has been little sign so far. Amey's purchase of Comax last year and Tilbury Douglas' acquisition of Bandt being the major exceptions.

There also seems to be little sign of foreign competition, though there are isolated examples. Where overseas FM firms do manifest themselves is in bidding for PFI schemes. But for now at least, the home market is dominated by UK players.