11 September 2015 | Graeme Davies
Being a smaller player in a big pool such as the European outsourcing sector is tough.
Smaller operators have to either rely on specialist skill sets to pick up contracts or try to undercut larger operators in a game they are unlikely to prosper at for long.
Recent market trends suggest that smaller players may be holding their own, although in the UK a big challenge to margins could be looming.
The latest data from the Europe, Middle East and Africa region suggests that the value of outsourcing deals has surged in recent months with the value of deals in the second quarter of this year up by 23 per cent, driven primarily by a strong UK market during the period.
Within this, the number of contracts themselves rose by around a third to 169, with a value of 2.2 billion (£1.6 bn), suggesting that the growth has been provided by smaller contracts, which is likely to have benefited specialist providers more than the industry's heavyweights.
Information Services Group, which compiled the research, points out that in the first half of 2014 a total of 293 contracts have been awarded with a combined value of 4.1 billion (£3.0 bn) compared with the first half of 2008, just before the financial crisis took hold, when 5.7 billion (£4.2 bn) worth of business was spread across a third fewer contracts.
This suggests an increase in smaller and often shorter-term contracts that are being picked up by specialist providers.
But although this is a potential boon for the UK's smaller players, especially given the acknowledged strength of the domestic market, a potential cloud has emerged on the horizon for the whole industry that could threaten margins in the years to come.
The government's pledge to increase the minimum wage significantly over the next five years has led many to speculate on its effect on people-heavy sectors such as support services, outsourcing and FM.
Specialist skill sets
Indeed, only this month Interserve warned investors that the first hike in the minimum wage, from £6.50 to £7.20 from next April, will slice between £10 million and £15 million from its profits next year with the potential for a further hit to come in the following years as the minimum wage rises further.
This is a particular problem for employers such as Interserve, Serco and others who employ large numbers of predominantly low-skilled workers. Interserve reckons that around 10,000 of its UK employees will see a significant uplift in their wages.
For smaller operators, who are less able to spread their costs over a wide base or cut unwanted fat from operations, the impact of the minimum wage could be significant, especially in terms of their ability to compete on price.
But many smaller players compete on specialist skill sets rather than large-scale deployment of low-skilled workers so they may be less likely to be hit by minimum wage hikes than their larger competitors.
Nonetheless, for the industry as a whole, the minimum wage could pose some tricky problems in the years to come - especially as margins across the sector tend to be rather thin anyway.
Graeme Davies is digital editor at Investors Chronicle