SUMMARY OF REPORT CONTENTS

Since the early 1990’s there has been substantial growth in corporations and public sector organisations outsourcing non-core functions, with the aim of reducing labour costs and management time on low-priority areas, thereby improving operational efficiencies. During the 1990s and early 2000s, FM outsourcing experienced rapid growth exceeding the average GDP growth rate in the UK economy. This growth has been primarily underpinned by a buoyant corporate sector and the emergence of Public Private Partnerships (PPP), in particular the Private Finance Initiative (PFI).  A key trend in facilities management (FM) outsourcing has been the trend towards 'bundled' service delivery and ultimately Total Facilities Management (TFM).

This report focuses on the market for outsourced 'bundled' services and TFM. Within the context of this definition, it is estimated that in 2005 the market for outsourced FM services was worth around £12.9bn, and is expected to continue to show steady growth until 2009

Since 2000 growth has been sustained, though at slightly lower levels than previously, as client organisations have grown more confident about outsourcing. Overall growth has been relatively steady at 3-6% during the period, though in individual sub-sectors of the market performance has been more varied.

In general, the key positive market drivers since 2000 have been:

• Continued increase in outsourcing of non-core services in both the public and private sectors, with particular growth in the defence, home affairs and retail sectors.

•  A buoyant construction market, providing opportunities for new contracts.

• The recent growth in PPP/PFI DBFO contracting, with long term FM concessions offered as part of a package with construction services.

• Increased levels of public sector investment in the education, health and police sectors in particular.

• Higher contract values, as a result of increasing use of bundling and batching of contracts, particularly in the public sector, and increased labour costs

• Higher contract values, as a result of increasing use of bundling and batching of contracts, particularly in the public sector, and increased labour costs.

• Trend away from single service to higher-value TFM contracting.

However, this trend has also led to reduced market potential for smaller FM contractors and has encouraged the current high levels of acquisition in the market, thereby having a negative impact on market values. Other factors that have affected the market negatively since 2000 include:

•  The recession in the TMT and London financial services sectors.

•  The recession in the TMT and London financial services sectors.

• Higher levels of competition resulting in lower bid prices and margins in some sectors.

• The relative maturity of some end user sectors, such as financial services, the transport sector and most Central Government departments.

In mature end-user sectors, such as the corporate sector, intense competition has resulted in decreasing margins.  Growth levels in this sector are currently low, though it is expected to pick up from 2006 as a result of a recovery in the offices sub-sector.

Within the public sector, a key factor underpinning demand for FM outsourcing has been the Government’s drive to upgrade and improve accommodation and related service provision through PPP/PFI DBFO contracting.  Since 2000, this has been particularly prevalent in the schools and acute hospital sectors where PFI has been the main procurement tool. Elsewhere, the massive single living accommodation modernisation (SLAM) programme being overseen by the MoD’s Defence Estates, has involved the upgrading of facilities plus the provision of support services.

The £20m cut-off point for PFI contracts has led to an increase in batching of contracts in sectors where projects are generally smaller in size, such as the courts, police, fire & rescue and leisure sectors. This appears to have led to further delays in the procurement process.

In terms of market structure, it is anticipated that recent trends towards consolidation among existing companies will continue over the next few years, with acquisition activity remaining high.  FM contracts in general are becoming larger and operated over longer terms, in both the public and private sector, and FM companies need to be sufficiently large and offer a sufficiently diverse range of services in order to be able to compete for these large scale projects. 

With the public sector FM market offering good margins, there has been a steady flow in the number of companies entering the FM market. Most of these have been start-ups by companies established in other, associated sectors, notably construction and engineering, which are already large and already offer transferable services. However, the number of new entrants has slowed since 2003.

The most significant acquisition in recent years has been Carillion’s acquisition of Mowlem, which was completed in February 2006, with MITIE, ISS and Interserve also currently on the acquisition trail. A number of companies have also undergone re-positioning, re-structuring or re-branding programmes, including Kier, Vinci, Jarvis, Rentokil Initial and AWG.

The largest FM contractors in terms of estimated support service turnover include; Serco, Morrison Support Services, ISS, MITIE, Rentokil Initial, Interservefm, OCS Group, Carillion Services, Alfred McAlpine Business Services and Haden Building Management.

Market growth rates are expected to remain at 4-5% until 2009 and be slightly higher towards the end of the forecast period, as a result of a number of PFI projects signed in 2004/2005 becoming operational.  Over the next few years, the main areas of growth will be in the public sector, with reasonable growth prospects in the defence, home affairs, health and education sectors. Corporate sub- sectors with scope for growth include retail and leisure, particularly bearing in mind the likely impact of the Olympic building programme in the longer term.

However, in the longer term there are significant growth prospects in less mature sectors such as local authority leisure, private sector leisure and waste management. As a result of the government’s decision to procure only larger scale programmes through the PFI route, and its recommendation that soft services are excluded from PFI contracts, focus is expected to shift to alternative programmes, partnering arrangements and frameworks, a number of which are currently being developed.