Carillion’s failure is significant within both the construction and the facilities management (FM) industries and will have implications for clients, competitors and suppliers across the spectrum of the construction industry.
The company employed approximately 43,000 people, and had grown via the acquisition of companies such as Mowlem, Alfred McAlpine and John Laing Integrated Services. The company was made up of the following business segments: Support Services, which includes facilities management; PPP Projects, which covers sectors such as healthcare, defence, education and transport; Construction Services excluding the Middle East; and Middle East Construction Services.
The facilities management environment in particular has been a key sector for Carillion as they supplied FM services to more than 150,000 properties across the UK, whilst the Support Services division operated in sectors such as defence, local government, corporate, healthcare and home affairs/justice, providing both hard and soft FM services. Elsewhere, the company jointly owned the CarillionAmey joint venture, which provided maintenance and housing services for personnel from the armed forces and their families.
Some challenges that have faced the FM industry in recent years have included:
â€¢ The Brexit effect – the current uncertainty caused by the Brexit vote has hampered economic growth, and one effect within the outsourcing industry has been a slowdown in the overall contract pipeline, with companies less willing to invest until the economic and political situation becomes clearer. There is also a worry that the industry will see labour shortages if immigration is restricted.
â€¢ Budget cuts – in the public sector, the market is strongly influenced by the Government’s attempts to rein in spending levels, to reduce the public sector deficit. Budget cuts continue to impact upon many government departments, including leading FM end-user sectors such as healthcare and education. Across both central and local Government, budgetary constraints mean that the current emphasis is upon public sector organisations ‘living within their means.’ Many public sector organisations are therefore more reluctant to commit to long term outsourcing contracts, with the result that shorter contracts (e.g. three years or less) are becoming more common and renegotiation of longer term contracts is also evident.
â€¢ Declining contract values – the need to minimise operational costs has seen many organisations reducing both office space and their workforces, therefore having a negative influence on the FM market, as contract values are cut.
â€¢ Higher labour costs – the introduction of the National Living Wage in such a labour-intensive market (FM and support services), has led to increased pressure on contract prices and on some existing contract margins where the costs could not be recovered.
â€¢ Price competition – increasing competition between suppliers in the market has constrained both market values and growth and had an adverse effect upon margins, and in some instances led FM suppliers to underbid and over-commit to delivery in order to secure contracts successfully.
The growth of FM provision has created some major companies that are, to some extent, victims of their own success. They are managing very large numbers of contracts across many countries, something which can lead to operational and management problems. These developments have led to some companies adopting more stringent procedures for monitoring contracts, to ensure performance levels are adhered to and costs kept down.
Within the last couple of financial years, turnover for many of the leading FM operators has decreased, something which can mainly be attributed to the factors mentioned previously, i.e. the uncertain state of the economy, the continued rationalisation of the government estate and the market’s maturity. The market appears to be approaching something of a crossroads, with FM services now also incorporating data management in greater quantities – companies able to embrace these new concepts and technologies will be the most likely to prosper.
There is little doubt the UK FM market is facing difficult times, not just in terms of profitability, but also the fall-out in terms of sentiment from the Carillion failure and whether this leads to a change of direction in many public and private sectors, with regards to the attraction of outsourcing.
For a more detailed review of the facilities management and outsourced services markets, visit this link , which provides details of market reviews relevant to this industry.