The facilities management sector is one of the brightest stars in the UK’s corporate firmament. It weathered the financial crisis well and has since grown at an average rate of 3.8 percent per annum despite the UK’s economic doldrums. In 2017, the UK’s FM sector was worth approximately £120bn, contributed an estimated 8% of Britain’s GDP and employed 10% of its workforce.
The UK’s FM sector is mature by international standards and somewhat concentrated. It is dominated by a handful of very large firms, which are surrounded by a large satellite ring of smaller companies and independent contractors. This has coincided with the rise of public sector contracts, which are typically large, high-profile and can have significant social impact. Early in 2018, prospects for the FM sector looked good. Deloitte’s Business Services Outlook for 2018 said the FM sector’s market potential “is estimated to be significantly above its current market size, which highlights the potential for future growth.”
The collapse of Carillion, followed by restructuring announcements from Capita and Interserve, cast a shadow over this bright outlook. But despite this, the sector remains crucial to the UK economy. A study by the TUC after the fall of Carillion stopped short of recommending that all public sector contracts be taken back in-house, arguing that the decision whether or not to outsource should be considered on a case-by-case basis.
Post-Carillion, customers are becoming more dictatorial about contract terms and managing contracts more actively. This may make contracts harder to win, but it could prove beneficial for FM providers. If contracts are more accurately specified and customer-FM provider relationships closer, contract risk should be lower and cash flow more certain.
Integration & concentration
The FM landscape is changing. Deloitte observes that “growth opportunities lie mainly with services that are still provided by multiple small vendors, or that are managed in house.” They say that “encouraging clients to integrate multiple smaller contracts into bigger ones or contract out new elements of facilities management could help reduce costs for them and potentially make the delivery of services more effective.”
For FM providers, integrating contracts enables them to deploy teams more effectively and manage resources across disciplines, while customers benefit from seamless service delivery, common standards and a single point of contact. CBRE estimates that using a single FM provider could boost value to customers by up to 45%.
However, as well as risking the reduction of service quality through a tendency to focus on cost rather than value, integrating contracts tends to increase concentration in the UK’s FM marketplace – reducing competition. Increasingly, large firms dominate customer relationships and project management, while smaller suppliers are engaged by large firms to deliver services. For large FM providers, professional management of both customer expectations and supplier performance is now a critical part of the business. Procurement has become a profit centre.
Productivity & performance
Despite its rapid growth, the FM sector has historically been low-tech and labour intensive. Much of the FM sector consists of services, which are notoriously resistant to technologically- driven productivity improvements. Even in ‘harder’ disciplines such as construction, working practices relying heavily on manual labour have proved difficult to change.
Customers tend to expect FM providers to deliver labour-intensive services such as cleaning at a significantly lower cost than would be achieved in-house. In 2014, the Invisible Workforce report from the Equality and Human Rights Commission observed: “Clients saw cleaning and facility management contracts as an easy way to find cost savings, but did not consider the impact on cleaning firms and workers when contract values reduced but they expected the same level of service.” When a company doesn’t employ its cleaners, and its managers never see them because they work in the early morning and the evening when the office staff are not there, it can be simply unaware of the impact on those cleaners of determined downwards pressure on costs.
FM providers have tended to achieve necessary cost reductions by reducing wages and adopting flexible employment practices, rather than investing in technology that would reduce the need for labour. Partly, this is because service delivery automation requires complex technology, much of which has only recently become commercially available. But it also arises from the financial structure of FM firms and the structure of the UK’s labour market. FM firms are cash-flow sensitive and may lack significant assets against which to borrow. Investing in technology is a large up-front cost that places further strain on their balance sheets. It also reduces short-term returns to shareholders. Thus, while there is a plentiful supply of low-skill, low-paid labour, much of it from outside the UK, to deliver the cost benefits that customers expect, there is little incentive for FM companies to invest in labour-saving technology.
Three developments now threaten the sector’s labour-intensive, low-tech model:
- The Government’s National Minimum Wage, National Living Wage and apprenticeship levy
- Low unemployment
- Reduced immigration due to Home Office restrictions and the prospect of Brexit
There is no doubt that higher wages in the FM sector due to Government regulation and a tight labour market will raise costs. The insurance company Aviva discovered that migrating its FM suppliers to a ‘Living Wage’ somewhat above the Government’s NLW raised costs by 4.42%. Aviva absorbed the cost itself, but not all customers would be so generous. Deloitte’s survey of procurement in 2017 found that 77% of procurement leaders in Europe were looking for cost reductions. In the highly competitive FM sector, continuing to win contracts as wages rise means absorbing higher costs. To maintain profit margins, FM firms will need to raise productivity.
Technology & skills
New technology offers FM providers a golden opportunity to raise productivity significantly.
In service delivery, technological developments are exciting. Advanced sensors enable cleaning and security services to be delivered by unattended robots, reducing the need to maintain heating and lighting outside office hours. Difficult and dangerous jobs, such as high-level cleaning, can be done by machines, while camera-equipped drones can be used to inspect roofs. Automatic guided vehicles transport supplies around large buildings such as hospitals in a safe, hygienic and efficient way. Even reception services can be automated, with robots being used to meet and greet, take visitors to rooms and help them with travel information.
On the construction side, ‘smart’ buildings and the Internet of Things promise to transform workplaces. The CBRE estimates that by 2020, there will be 25 billion connected things – a fivefold increase since 2014. Linking lights, sensors, windows, HVAC units, doors and CCTV into a network that responds automatically to end-user stimulus reduces the need for human management, freeing up customer and FM staff for more productive activities. It also enables data to be gathered about facilities use, enabling process redesign to deliver cost efficiencies and improve service delivery.
As technology advances, workers increasingly need technical skills. This is a challenge for FM providers. Currently, 51% of blue collar workers make little use of technology in their work. Upskilling even a proportion of their number to meet the need for tech-savvy workers in the future will require substantial investment in training and development.
Failing to meet this challenge would be a mistake. FM customers are aware of the benefits of technology. They are already using smart buildings and automated services, collecting and analysing big data to help them identify process efficiencies, and training people in technical skills. In the future, winning contracts will mean FM firms must exceed, not simply match, the pace of technology advance and skills development at their customers.
There is another reason to invest in skills, too. An increasing proportion of the workers of the future will be over 50. Many will lack the technical skills needed in tomorrow’s workplaces. The FM sector needs to lead the way on reskilling older people and integrating them into multi-generational teams.
The FM sector is already finding it difficult to attract and retain skilled workers. Relying on workers underwriting their own training is unlikely to ensure a sufficient supply of skilled staff in the future. FM companies need to actively seek out talented individuals and support their training.
For public and private sector alike, FM continues to be a lower-cost and more efficient alternative to in-house services. Customers benefit from economies of scale within the FM sector which can drive down costs, while professionalism in service delivery and enhanced access to technology and skills can bring real benefits to customer organisations and their end users.
The FM world is threatened by rising costs, but technology creates an opportunity to raise productivity. FM firms need to abandon the low-pay, labour-intensive model of the past and invest in advanced technology and skills, spearheading development of new working practices and driving process improvement and efficiencies to deliver real value for customers.