Twenty years ago, the FM industry worked off margins anywhere between 14-27%, these margins have now eroded to 3% to 9% with very little room for commercial risk built into their service offerings.

The so-called “Big Players” drove a price-related race to the bottom by putting revenue accumulation before profitability. With Carillion going into bankruptcy and other large industry players “phoenixing” from administration, the time for change is more apparent now than ever.

“Vanity and Sanity” expressions have been around for many years, the reason this statement has been bandied around boardrooms for years is simple – because it is true. Yet most do not take notice of this simple yet powerful reminder when competing for large FM contracts.

In a battle to out-manoeuvre their competitors, large players will sell a service “financially” that cannot be delivered operationally. More worryingly, in order to compete, small and medium size operators have recently joined this race.

It is not just operators which need to cease this behaviour - procurement departments need to stop buying and awarding these unsustainable contracts.

A disaster waiting to happen

In a recent survey carried out by law firm CMS and as reported in Construction Manager Magazine, contractor margins remain “under immense pressure” and three in five respondents are sceptical about the long-term health of the UK outsourcing market. It appears that in the 18 months since the collapse of Carillion, the outsourcing and procurement market is continuing the same principles as before.

Typical responses from senior decision makers surveyed told CMS that:

• "a culture of suicide bids…is creating an insidious race to the bottom"
• "we are not proud to compete on a lowest price basis, but I am afraid this is simply unavoidable for
• many decent firms out there"
• "Government has a lot to answer for both locally and national. We can’t go on being expected to take
• all the risk on our shoulders"
• "the key issues of tenders being decided on ‘lowest price’ rather than quality of the finished product
• and whole life-cycle cost and contractors operating on cut-throat margins do not yet seem to have
• changed"

Carillion, at the time of its collapse, provided facilities management services to over 150,000 buildings in Britain. As we all know, FM has been affected by the same race to the bottom as construction.

Its demise was precipitated after it revealed in a profits warning that it had to find £845m to deal with problems with ongoing contracts despite telling the stock market a few weeks earlier that it had a “strong pipeline of contract opportunities” and a “high quality order book”.

Finding a way forward

The future for productive, ongoing, and mutually beneficial relationships between contractors and their clients (via procurement and facilities managers) is based upon partnership. Let’s look at the example of cleaning contracting, a major area of FM expenditure.

Cleaning contractors must understand that, even though the facilities management market is growing year on year, that does not mean that individual company and public sector FM budgets are increasing at the same rate. The strong likelihood is that, in fact, there is pressure from the upper levels of management to continue to reduce waste and inefficiency and, in their mind, cleaning contracts should be interrogated for savings as much as any other cost centre.

However, clients should be clear that cleaning contractors need to make a decent return from the risks they take in running their businesses.

They should also acknowledge that contract cleaning staff need to earn a sustainable wage. Here at The Green Block Consulting Group, we believe that there is a real opportunity for partnership by:

• contractors offering genuine open-book reporting and the delivery of cleaning to the very highest standards and
• by clients not applying downward pressure on operator margins or cleaners’ wages.

The traditional ways of working have led to the driving down of margins to completely unsustainable levels and this, in turn, has led cleaning contractors to look for ways to recover margins through a lack of transparency. We need to replace an adversarial system with an approach better suited to long-term partnerships.

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