People, place, process and technology - it's the sheer variety in what FM provides that serves to make pinpointing the sector's value to UK plc something of a challenge. But, says Graeme Davies, it's considerable - and growing each year.
12 May 2017 | Graeme Davies
Facilities management as an industry has its roots as far back as the 1970s in the US and the 1980s in the UK and Europe. Today the FM industry has grown considerably and in the UK alone is said to be worth more than of £120 billion a year.
As FM has evolved and become ever more sophisticated and diverse its contribution to the UK's GDP has become significant but also increasingly difficult to pin down. In stock market terms, facilities management is lumped in with the wide-ranging and diverse 'support services' sector, which itself falls within the wider services sector for GDP calculation purposes. Indeed, the services sector is so broad that it accounts for as much as 75 per cent of the UK's economy - dwarfing other sectors such as manufacturing.
So it is little surprise that FM's contribution gets somewhat lost within such a large sector classification. There are those in the industry who argue that FM's total worth is still undervalued owing to the fractured nature of the services FM businesses provide. Given that only a proportion of total FM business is overtly servicing third-party clients and a significant percentage is more subtle in-house services and also given the major split between public sector and private sector end clients, assessing the true value of FM's contribution to the UK economy is difficult.
As the head of facilities management at advisory firm BDO Satvir Bungar sums up: "The UK is the most mature and most competitive FM market in Europe where the UK government's commitment to outsourcing as a means to drive efficiency has created long-term demand, but the private sector still accounts for the larger FM market share."
Most estimates put the 'value' of the UK's facilities management sector in 2017 at something north of £100 billion and maybe as high as £120 billion after many years of steady growth as the sector has embraced shifts in contracting towards total FM deals that are seeing FM providers becoming ever more embedded in the operations of their clients. But once again, this simply raises more questions over what the 'value' of the UK's FM sector means. Is it the total value of its contracted business, and does this account properly for in-house work which is genuine FM business but gets overlooked?
According to Professor Per Anker Jensen of the Centre for Facilities Management of the Technical University of Denmark, who has authored several reports into the European FM sector, facilities management services typically account for around 5 per cent of GDP in a mature economy such as those of most Northern European countries. Professor Jensen also points out that some commentators reckon the advanced state of the UK's FM sector could even mean FM accounts for up to 8 per cent of GDP. In terms of breaking down the FM sector into in-house and outsourced services, Professor Jensen says that in most developed economies outsourced services account for around two-thirds of FM's total worth.
City analyst Guy Hewett of stockbroker finnCap has followed the sector in the UK through its period of maturing to the point where it accounts for a significant chunk of the country's GDP. He says: "The sector has progressed from a burgeoning high-growth sector as the first stages of outsourcing occurred to a more mature market where larger providers with a spread of services could generate good growth by taking market share off smaller competitors who were successful in the first wave of outsourcing but hadn't progressed their model. Then to a properly mature market where price competition ruled and the offering was largely commoditised. This led to the spate of warnings we have been seeing - the growth aspirations were still there but undeliverable due to the competition."
Hewett notes that much of the rapid growth may now be behind the sector as it has matured and it will increasingly be characterised by sharp competition and stronger players potentially buying in growth rather than chasing it organically. Perversely, this period of maturation may help the sector to gain more recognition in terms of its contribution to wider GDP than during a period of rapid growth when measuring its contribution more accurately can be challenging. A recent report by business analysts at PwC estimated that the mature FM markets of Northern Europe would only grow at an average compound annual growth rate of around 1.1 per cent over most of the rest of the current decade.
What Hewett identifies as the most interesting question for sector-watchers is 'what next?' Where does the next growth spurt come from, or is the sector condemned to years of staid and unexciting growth? He identifies 'technology and the Internet of Things' as being most likely to 'shape where the market goes' in the years to come as they offer progressive operators, and their end customers, the ability to offer far greater efficiency in terms of total facilities management and could prove to be the root of the sector's next big leap forward.
This is a theory also expounded by Satvir Bungar at BDO, who says that FM is evolving from a "people" business to a "people and data" business where "relationships are becoming more strategic and less transactional, which presents opportunities for investment to innovate and drive change".
He says: "Green was a mega-trend of the last 10 years and while it will continue to be important, there will be a shift towards data analytics and intelligent and connected products. There are examples in our client base where technology is undoubtedly having a greater impact on motivation to outsource for the first time."
In a prime illustration of how gathering data on the sector is challenging, Bungar points to research by IBIS which forecasts that the UK FM sector will grow by a compound annual growth rate of 3.2 per cent over the next five years, which will leave it valued at £139 billion by 2021 - figures that contradict other forecasts, such as those from PwC, for more prosaic growth rates for the sector.
FM providers' changing identities
As Bungar points out, the entry of companies from many other sectors into the FM sector over recent years has blurred the picture when trying to pin down just what the FM sector is in terms of contribution to GDP. He points to a recent GlobalFM report conducted by Frost & Sullivan* on the global FM sector that valued global companies involved in FM as potentially as high as $1.1 trillion in total and attributed a 51 per cent share to the provision of in-house services. Illustrating the breadth of what can be described as FM services, he cites the report's inclusion of IT and telecoms services businesses as part of the FM landscape.
"The definition of FM continues to evolve and stretches into an increasingly broad range of services including compliance," says Bungar. He points to disruptive technology companies now involved in FM, such as SMS Assist, which has set up a multi-site property management model using a network of affiliate subcontractors across the US.
As technology has an increasingly significant impact on the FM sector it is likely to see more left-field entrants, which will make identifying a 'typical' FM company ever more strenuous. The traditional FM operator will have to react to the growing use of technology in the sector by either buying in expertise through mergers and acquisitions, which adds execution risk to the equation, or through developing such specialisms in-house, which takes more time. Time is something publicly quoted companies have less of because they have to satisfy the expectations of both City analysts and shareholders in an era when any slippage in terms of meeting expectations will be punished by the markets - as has been seen by several significant London-quoted FM operators in recent months.
According to Bungar, merger and acquisition (M&A) activity will remain a dominant trend in the sector, with the UK's impending departure from the EU only supporting this trend as overseas operators look for a part of the UK market while the pound is weak and UK operators look to secure a position in the EU single market that they might otherwise lose. Bungar says: "Many UK transactions were completed by serial acquirers in 2016. On the international scene, it is encouraging to see continued M&A in the UK underlines foreign buyers' appetite and investor support for British businesses after the UK's vote to leave the EU. We expect foreign companies in FM to be looking to increase their UK foothold through acquisitions over the immediate future."
FM is a diverse sector and, as such, shoehorning its many different operators into any sort of coherent classification is only likely to get more difficult as the sector continues to evolve. Thus, the challenge of accurately quantifying its contribution to GDP will continue to be tricky.
How to improve FM's standing
As FM currently flies under the radar somewhat in terms of the visibility of its contribution to wider GDP performance, how can the industry as a whole improve its showing? One way, according to Professor Jensen, is for more industry standards and benchmarks to be created.
He points out that there are currently two ISO standards associated with FM with a third in the planning that could be introduced next year, which "could give an increased impetus to raise the profile of FM". The fact that this latest standard has been in the making since 2014 illustrates how attaining such industry-wide codes can take considerable time and should not be regarded as an instant panacea for the industry's profile.
Nonetheless, wider industry standards and a common language are all part of the sector's growing maturity and can only help improve the visibility of the sector's contribution to GDP in the long run.
But with such a significant proportion of FM work still done somewhat under the radar in terms of in-house provision of services - and with a diverse range of new entrants pulling its reach in different directions - defining FM's contribution to GDP in clear and concise terms will remain a tough task.
*The Global FM report can be downloaded by BIFM members at: bifm.org.uk/bifm/about/facilities