Facilities Management - UK - October 2015
Executive Summary 
 
“While the contracting out of non-core services is typically motivated by financial and technical considerations, the other benefits that follow this initial decision have allowed the facilities management industry to offer a more diverse range of services to existing clients. When combined with new client conversions, the sector is demonstrating strong growth that permeates both public and private sectors, with plenty of growth potential remaining.”
-Terry Leggett, Senior B2B Analyst

The market
Demand for actual facilities management continued to expand in the recession, driven primarily by the private sector looking to improve efficiency and productivity in difficult times, and the then buoyancy of the public sector. As the recession developed into flat economic conditions, the facilities management sector continued to achieve modest growth, with the private sector continuing to strive for greater productivity and efficiency, while the public sector started to be placed under intense spending restrictions. As the economy has moved to growth, the political agenda has continued to restrict public spending, while the private sector has developed.

FIGURE 1: Actual market for facilities management services in the UK, 2010-14
 
(£ billion)
 
Note: Historic data have been revised

Source: MBD and trade estimates

However, alongside the total facilities management market, the industry is also involved in a more restricted set of individual contracts, which means it can be expanded to include other contracted-out services. There also remains considerable further potential in the services that are still undertaken in-house:

FIGURE 2: Segmentation of the potential market for facilities management services in the UK, by type of contract, 2010-14
 
(£ billion)
 
Note: Historic data have been revised

Source: MBD and trade estimates

Segmentation of the market is difficult due to its size, the vast range of clients served, the sectors in which these clients operate, and the different services offered. There are a vast array of combinations of the three above sectors operated by companies. However, the most frequently identified models are a combination of in-house provision and contracted-out services, which can involve a single FM supplier or a complex array of providers.

FIGURE 3: Adoption techniques of contracted out service users, by mix of contracts, 2014
 
(% of total)
 
Source: MBD and trade estimates

Mechanical and electrical engineering accounted for 36% of the contracted-out facilities management market in 2014. Annual growth of 13% was a significantly stronger performance than evident in recent years. Many facilities management companies originate in these services, but the recent trend has been for companies to withdraw from new construction and concentrate on the maintenance aspects of the industry due to the volatility of construction activity. While the market is currently in a period of strong growth, the recent recession encouraged companies to choose between the volatility of new construction and the more stable maintenance aspects of the sector.

PFI remains a highly politically contentious issue. While the recent boom in new projects has significantly slowed, the length of contracts ensures that there will be continued strong revenues from PFI and now PF2 for many years to come. Contracted-out revenues from landscaping and gardening continue to grow modestly year on year, with recent trends mixed. There is currently growing demand from new construction projects in the private sector and intense price pressure in the highly significant public sector.

Office services continues to offer significant potential for the facilities management and contracting-out sectors, with the vast majority of activity still undertaken in-house. The contract cleaning sector has been relatively flat in recent years, but growth was evident in 2014. This element of the market is one of the most highly labour intensive, and will be strongly affected by the minimum wage increases recently announced in the budget. There remains a strong trend towards automation in the sector to reduce the importance of wages, and this can be expected to intensify with an upward pressure on labour costs.

The market for contracted-out building fabric maintenance continues to demonstrate growth. Contract catering has demonstrated stunted growth in the last few years, with low raw material price increases. However, this sector also remains highly labour intensive, so the announced minimum wage increases will strongly affect it over the next few years. Public spending restrictions will also have a strong influence on the sector, particularly those companies serving the healthcare and education markets.

Increasing CCTV usage in the security sector is reducing labour intensity in some applications, though security staff remain a critical component of activity in other areas, so the sector will also be affected by minimum wage increases.

FIGURE 4: Segmentation of the market for total facilities management and contracted out facilities management, by type of service, 2014
 
(% by value)
 
Source: MBD and trade estimates

The total facilities management sector is forecast to demonstrate real growth of almost 13% between 2015 and 2019, while other contracted-out services (of which facilities management companies are also involved) will increase by 10% as the migration towards the greater bundling of services continues. This is against a background of overall growth in service provision, while the market for services supplied in-house will also expand in the review period.

FIGURE 5: Forecast segmentation of the potential market for facilities management services, by type of contract, 2015-19
 
(£ billion at 2014 prices)
 
Source: MBD forecasts

Market factors
There has been a long-term trend towards outsourcing of non-core activities, with arguments for outsourcing existing in both difficult economic conditions and times of growth. Companies and public services are increasingly concentrating on core activities, creating a market conducive to the facilities management sector. At one level, it is has been invigorated by the desire for greater efficiency, though it can also be entrenched in capital expenditure decisions as to what companies wish to place on their balance sheets or operating costs.

FIGURE 6: Motivations for outsourcing, 2014
 
(% of respondents)
 
Source: Interserve

However, realised objectives against motivational factors reveal some disappointment with initial purchase criteria, but over achievement for less expected benefits.

FIGURE 7: Motivational versus realised objectives for outsourcing, 2014
 
(% of respondents)
 
Source: Interserve

The public sector forms a large part of the potential market for facilities management services. Demand has been influenced by government legislation, policy and initiatives, which dictate what public sector services are open to contractors and how tendering processes work.

The PFI was launched as PF2 under the Coalition government following intensive consultation to address the ‘failings’ of PFI, but very few PF2 projects have progressed. This is partly because of a shift away from (PFI and PF2funded) social infrastructure, like schools and hospitals, towards bigticket economic infrastructure, like energy and transport, which, once built, improve GDP directly. In 2014, 21 publicprivate partnership deals worth £7.6 billion were signed, including the Mersey Gateway bridge crossing and Intercity Express rolling stock, but limited legacy PFIs or new PF2 projects are being taken forward.

Minimum wage legislation impacts the costs of many operators that employ staff to fulfill basic services for clients, such as cleaning or security. It equally affects facilities management companies and their customer base. In the 2015 budget, the chancellor announced that employers would be forced to pay staff a minimum of £7.20 an hour from April 2016, and that wages will be raised by 6% a year on average to around £9 an hour by the end of the parliament in 2020.

Companies
Both the number of businesses and the outlets that facilities management companies operate have grown strongly throughout the review period, which covers both the flat period following the recession and the more recent buoyant economy that has recorded the strongest growth in Europe.

FIGURE 8: Analysis of the changes in the structure of the combined facilities support activities industry, 2011-15
 
(Number of outlets and establishments)
 
Source: MBD analysis of government data

What we think
The soft services sector of facilities management will be initially challenged by both intense competition and the increased costs of the minimum wage increase. The difficulty companies will have in passing on direct cost increases will stimulate automation and technological advances. While this will be a short-term cost challenge to the sector, higher levels of automation and technology will provide the sub contracted industry with a competitive advantage over in-house provision, which should facilitate further market penetration in the long term.