FM must quit risky business

Interviewee: Jeremy Furniss, partner at international M&A and debt advisory firm Livingstone

Issue: The state of FM

02 July 2018 | Jeremy Furniss

Jeremy Furniss, partner at international M&A and debt advisory firm Livingstone, discusses the state of the FM industry following Carillion's demise. 

In what ways has Carillion's demise changed the FM landscape?

I'd like to believe that service users will recommit to existing service providers of all shapes and sizes and value consistent service delivery over price, certainly when considering their next tender. That said, the climate that led to Carillion's downfall is still present - a combination of government agencies tendering publicly, the willingness of struggling suppliers to quote unsustainable prices and the obligation on public sector customers to opt for the lowest price possible means that history will repeat itself.… unless the prevailing procurement regime changes.

Is pricing power really going to shift in favour of outsourcers now [as Mitie's CEO has indicated and with Interserve also seeming to be on a path to recovering lost ground]?

There will likely be a short-term dislocation in FM providers' favour, particularly in public services, as a result of meaningful capacity being taken out of the public and infrastructure markets. Consequently, FM groups should be able to refocus on delivering healthier margins.

In the public FM company arena, I'd expect intensified scrutiny from investors to limit the ability of public companies to mis-price major contracts or obscure the cash-flow consequences of doing so. There is also a body of evidence building that the inherent unfairness of the many non-price terms levied on outsourcers is finally dawning on those clients. This is especially true for projects outsourced by government agencies in regulated sectors such as rail, where the penalties for non-performance on projects where KPIs are difficult to set can be particularly draconian relative to the margins being earned.

Maybe we'll see a greater understanding that the private sector does not simply exist to enable poorly managed government agencies to offset project risk.

"FM groups should be able to refocus on delivering healthier margins"

How is FM overall changing?

With the exception of some distracting company headlines, 2018 is seeing a continuation of the underlying trends of recent years: ponderous UK GDP growth, rising labour costs and the threat of skills shortages (all the more acute as a result of Brexit's shadow), combined with an uncertain infrastructure investment outlook and recovering pension scheme valuations.

What about the investment/M&A trends in the sector?

The M&A market remains busy, with a surfeit of capital seeking a home and a stable flow of interesting opportunities.

The FM sector particularly has experienced several waves of acquisition-led consolidation over the last few decades and is now defined by a scarcity of high-growth, medium-sized companies available for acquisition. The UK will continue to attract global groups seeking access to the technologically advanced and highly developed market.