A competitive environment is forcing FM service providers to use their brand identities as a way of differentiating themselves in an increasingly noisy sector. Graeme Davies reports
11 September 2017 | Graeme Davies
The FM sector faces challenges on several fronts, from an uncertain economy to the further tightening of budgets in local and central government to the looming withdrawal of the UK from the European Union.
The decade began with an economy enfeebled by the financial crisis and a coalition government seeking to bring the UK's ballooning budget deficit under control through wide-ranging austerity measures. But FM, with its ability to offer both the public and private sector more efficiency in their operations, was actually in a reasonable position.
So it has proved with more government outsourcing playing into the sector's hands and the wider economy staging something of a recovery. The 2010-2015 coalition government tried to encourage more diversity in the sector by encouraging government departments to award contracts to smaller operators and not-for-profit organisations.
However, with the return of single-party government under the Conservatives, the drive for diversity fell under the radar somewhat and, as in the private sector, we have seen a gradual shift towards larger multi-disciplinary players winning more catch-all contracts. The bigger prizes on offer in the UK have also led to the increased presence of overseas players in the UK market, first growing in sectors where they had built their reputation - such as Sodexo in catering - then expanding into other areas. We have also seen the growth of integrated models provided by global businesses such as JLL and CBRE that focus more on property services but can bring their brand power into play.
The UK's reputation as a fertile growth market for FM in recent years has created both a highly competitive and potentially hugely lucrative market. The challenges of the next few years with economic uncertainty, continued austerity and Brexit to contend with are likely only to intensify the competitive nature of the market, with margins remaining under intense pressure. And this pressure can have both positive and negative consequences. Firstly, it can sharpen minds and business practices and encourage firms to adopt more efficient working; but secondly, it can prompt some operators to cut corners and pare back on service standards in the short term to maintain profitability, which can affect sentiment towards the sector as a whole.
Recent travails suffered by some of the biggest names in the UK market - profit warnings have seen share prices in major players such as Capita, Carillion and Mitie slump - have also hampered sentiment. But their problems have been individual rather than systemic, with one company's difficulties potentially another's opportunity. This variety in fortunes also allows opportunities for those outside of the norm, potentially opening the field to more second-tier service operators and new overseas competitors.
Indeed, there are plenty of such companies able to take on the stricken bigger players for contracts as long as the poor publicity around the sector does
not further affect the confidence of buyers. But as Derrick Tate, leader of FM advisory at PwC points out, sometimes problems suffered at the top of the industry don't always lead to opportunities for rising rivals.
"The instability in the sector at the moment could work against the second tier. Customers may dictate to the market that they want alternative delivery models such single source contracts, integrator or managing agent contracts or they may stick with incumbents or continue to deliver services in-house. So overall there might be a smaller pot of new contracts coming to the market."
Since the 1980s the FM sector has grown to become an integral part of the UK economy and, increasingly, our everyday lives. For the first 20 years of that period it rather flew under the radar as its role of providing outsourced services to other organisations has worked against firmss developing their own brand identities. But in recent years, as the FM spend has become more recognised in both public and private sector life, brand identities and recognition have begun to grow. Increasingly, be it in the office, on the way to work, or at a major sporting event, service providers are being recognised as brands in their own right.
The competitive environment has required these companies to boost their brand identities as a way of differentiating themselves in an increasingly noisy sector. And for those who have developed their reputation in one area of the market this increasing brand recognition has helped them to branch out into new areas and take advantage of the shift towards a smaller number of multi-disciplinary providers eating up ever more market share. This trend has also led to larger players spinning off 'sub-brands' within new areas of the market in an attempt to grab market share.
As Alan Williams of ServiceBrand International puts it: "ISS seems to have had more success than many in being able to move away from their 'roots' and position themselves more as a company delivering excellent service. Their focus on their purpose and values above their service offering may be a lesson for other players. Rentokil Initial comes to mind as a company that has not been able to move away from its beginnings, at least as perceived by 'Joe Public'. The provision of integrated services is still the holy grail, but it seems that the reality of operational delivery is still to catch up with the story given in the sales pitch."
Pitfalls of brand awareness
But the recent woes experienced by some of the largest 'names' in the UK sector have also shown the pitfalls of elevated recognition. The past year has been pockmarked by high-profile problems at key players in the sector, especially larger quoted companies such as Mitie, Capita, Interserve and Carillion. Being a publicly quoted company brings many benefits in terms of recognition and profile that can help when tendering for contracts, but it also shines a harsh spotlight on companies when they run into difficulties. The profit warnings suffered by a number of key players over the past year have resulted in sharp falls in share prices and prompted significant action by management in the form of strategic reviews, the sale of underperforming businesses and, in some cases even seen executives fall on their swords in reaction.
While none of the bigger companies is facing an existential crisis their troubles have opened up opportunities for others and could potentially have a transformative effect on the wider sector.
PwC's Derrick Tate said: "As widely reported in the press, a number of larger providers have suffered recently from market volatility. This may be seen as an opportunity to grow market share by the more globally diversified businesses and the integrator service providers. It may also be seen as good news by second-tier and single-service companies."
And this is where we could see the real power of brands coming into play. When a sector is in flux buyers often coalesce around established names and this is why integrated managing agents such as JLL and Cushman & Wakefield are doing well. Also even where a company may not have the longest track record in a certain sub-sector, a reputation built in an adjacent sector or industry can engender confidence. We have seen this with the likes of Sodexo and Vinci, which entered the UK market with strong reputations in catering and construction respectively and are now taking each other on in their respective core area of operation. Indeed, Sodexo recently won a five-year £60 million-plus contract with the Department for Work & Pensions to provide an integrated asset and estates management service - a far cry from serving sandwiches.
Other examples of this sort of crossover can be seen in G4S - built on security and guarding - winning a total facilities management (TFM) contract at the Hinkley Point nuclear power station project, and construction specialist Kier winning a TFM contract with Capital City Colleges.
Indeed, Kier's contract win offers an interesting insight into a trend of recent years that has seen traditional construction firms park their tanks on the lawns of the FM sector players by launching sub-brands to compete for service contracts. It's partly a natural progression and partly a reaction to tightened government budgets and weaker economic growth hitting the construction sector. Such players saw the chance to bid for management and operational contracts on projects once the construction phase they were involved in wrapped up.
As ServiceBrand's Alan Williams pointed out: "At the same time as stories in the press about the hard time being had by some large companies such as Carillion and Mitie, others such as Sodexo and Interserve continue steadily and some smaller companies like Gather & Gather and BaxterStorey are experiencing strong growth. From discussions with colleagues in the sector, the key to success is a strong client/service partner relationship at an operational level."
Companies more renowned for construction, such as Kier and Carillion, have either launched service provision brands or bought up smaller competitors - witness Kier's acquisition of Mouchel and May Gurney in recent years - to establish themselves through brands with recognition in the sector. In theory, this strategy is sensible as often management contracts are handed out years ahead of completion and the incumbent construction company already has a relationship with the client and is able to offer the complete package from build through to multi-year operations.
In practice this has proved to be the case for many players with the likes of Carillion, Kier and Vinci building up significant FM businesses alongside their more traditional operations. But it has not always been a success when FM providers have tried to expand into other sectors.
Take the example of Mitie, which has suffered some high-profile problems over the past year primarily associated with its ill-fated venture into the care sector. It ended up with the care business being sold off for a nominal figure after incurring some hefty accounting write-downs.
Mears Group has also suffered following its move from its core social housing business into the care sector just as budgets were being pared back in government austerity measures. Mears is persisting in the sector, but has heavily rationalised its operations. Mitie, which grew on a culture of founding and growing business under a wider umbrella, has had more success with its Gather & Gather brand, which has taken the company into the food service sector.
The FM industry is likely to remain in a state of flux for some time. But brand power will play an increasing role as the sector continues to evolve. The major players will likely recover although in the intervening period they have opened the door for rivals to steal some market share and those who already have a solid name and reputation are best placed, even where they are fairly new to the area in question. This is why overseas players with strong brands like ISS, Sodexo and Vinci have made such inroads in the UK in recent years and others have their eyes on the nation.
Threats to the major players will also come from the emerging brands of the second tier, especially those able to harness new technologies to enhance their offering. Technology is already becoming a huge enabler in the sector and having a huge influence on how FM companies can more fully embed themselves in the operations of their clients. Newer brands such as Cloudfm are able to frame themselves as technology-driven players that are able to outflank more traditional rivals through their ability to harness technology.
The future of FM
The rise of brands like Cloudfm proves that technology will have a growing role to play in FM, the data it generates likely to bring huge benefits to suppliers and clients alike through better monitoring of contracts, performance, energy efficiency and return on investment, all of which will potentially help to make client-supplier relationships more 'sticky'.
Derrick Tate of PwC believes technology will enable some companies to overcome the threat of rising costs. "Increased cost pressure will drive greater use of technology and require companies to become more productive through the use of technology. FM companies will become smarter, more intelligent and lead to increased productivity, which will ultimately offset costs. The big question is the investment required and who pays for it."
Those firms that harness technology most effectively are likely to continue making inroads at rivals' expense.
Costs are likely to rise for employers as the weakness of sterling puts workers off relocating to the UK while businesses operating out of Europe are likely to see the cost of doing business in the UK rise with increasing red tape after Brexit. Whether this will open up another route for domestic second tier companies to make inroads where the overseas players have previously done so remains to be seen. But brand power will continue to play a big role in the sector's evolution.