Quantity and general practice surveyors have led this charge towards maintaining profitability through mergers and acquisitions. Anecdotal evidence suggests even more of this across the profession as surveyors seek to boost income to cover fixed costs. That means a possible reduction in the number of practices. General practice surveyors were the only firms in the sector to sustain bottom-line profits. This could indicate that a broader activity base offers greater protection if a particular market hits difficult times. Acquisitions by some companies may have been to spread risk by diversification as well as add income to cover fixed costs.
How will the profession respond to the challenge? It has become clear that surveyors are faced with a number of choices:
- "sticking to their knitting" and hoping the market improves,
- rationalising business to reduce costs in line with income,
- seeking added value by specialising or developing niche markets,
- spreading risk by diversifying. This may involve increasing the range of services or spreading geographically to exploit new markets.
Recent research by Willott Kingston Smith shows surveyors are more likely to take risks than fellow professionals such as lawyers. The current batch of financial results - and our own experience advising clients - confirm that they are willing to take difficult management decisions in response to external economic factors. If risky action such as the acquisition of another practice seems necessary, surveyors are likely to take decisive action.
The most recent figures reflect the difficult economic climate for surveyors. A number of firms reported tough trading conditions and there seems little confidence that the market will improve. Turnover increased by only 0.6 % in the period under review. But companies that reorganised and restructured in previous years seem to be reaping the benefits today. (Where reorganisation costs have been identified in the accounts we have treated them as exceptional and so operating profit is shown before deducting any such costs.)
Agencies seem to have been less successful than other surveying firms. Their sector did not manage to generate an overall profit and half the member companies reported operating losses. The main reason is that operating costs rose by more than income. This may reflect increased reorganisation expenses included (unusually) in operating costs but not separately identified, or it may indicate high property costs. The aggregate operating loss was also exacerbated by interest and other charges, resulting in an even bigger pre-tax loss. Further rationalisation seems required among agencies. Staff costs have reduced compared with income levels but a key area to address seems to be non-staff operating costs - principally property.
Quantity surveyors continue to be the most productive sector in terms of fees per head, but this is due to staff cuts rather than increased fee income. The sector appears to be retaining higher-paid employees and the key ratio of turnover to employment costs has risen marginally. Those quantity surveyors with increasing fee income generally achieved this by acquisition of smaller practices rather than organic growth. The sector generated operating profits but reported a pre-tax loss. Again this reflects a considerable amount of money spent on reorganisation. General practice surveyors improved both operating profit and pre-tax profit - a creditable performance given the economic climate.
Half the practices surveyed reported a decline in fee income, but overall turnover rose marginally. The increase is in part due to acquisitions by some larger groups. Profit margins for the sector have increased, too. Operating profit margin on turnover rose, as did the pre-tax profit margin on turnover. These margins are at least three times greater than those achieved by quantity surveyors and agencies (which reported negative margins).
Income and Profitability
Latest published accounts show a significant fall in agencies' profitability. It was the only sector to report an overall operating loss. In fact, 50% of agencies surveyed made losses - two of them more than £1m - and the sector overall sank £2.2m into the red. So what went wrong? Turnover rose by 1.7% while employment costs increased faster - by 5.3%. But the major impact on profitability was the 90% increase in other operating costs from £25 million to £47.5 million for the sector as a whole.
As surveyors' main non-staff operating costs must be property, it is difficult to see how this happened. It may be that some surveyors have deducted exceptional reorganisation costs in arriving at operating profit but have not separately identified these amounts. The aggregate operating loss was exacerbated by interest and other charges, resulting in a pre-tax loss of £3.2 million compared with a pre-tax profit of £862,000 in the previous year. One of the main contributors to the deterioration was reorganisation costs incurred by three larger agencies.
How can agencies recover from this position? The more successful ones have reorganised business in the last couple of years to contain costs within income. But there still appears to be the need for further rationalisation for the sector to operate profitably. Staff costs do not appear far out of line with income. The key area to address seems to be non-staff operating costs - principally property.
Productivity is a measure of how well businesses utilise their main asset - people. The number of employees in the agency sector increased marginally while turnover remained static. As a result turnover per head fell by 2% to £43,299 per employee. A key ratio is income to employment costs. This measures the income generated for every £1 spent on employment and is a useful guideline when recruiting. People businesses should aim for a ratio of fee income to total employment costs (not just the cost of fee-earners) of approximately 2:1. The agency sector generated a ratio of turnover to employment cost of 1.76. This is a decline from the previous year's 1.83.
Employment costs and employee numbers have increased ahead of activity, indicating that agencies are recruiting ahead of demand. Another possible explanation is that agencies could be paying more to retain good staff to keep their competitive advantage.
Income and Profitability
Quantity surveyors were profitable at the operating level but reported a pre-tax loss because of exceptional costs. This reflects a considerable amount of money spent on reorganisation. Fees earned (as measured by turnover) have remained static for the sector but 80% of practices reported a decrease of up to 25%. Companies with increasing fee income had generally achieved this by acquisition of smaller practices rather than organic growth. Operating profit fell by 14%. Employment costs and non-staff operating costs increased by 2%. The sector as a whole saw pre-tax profits of £642,000 transform into a £1.9m loss. The drastic change is due primarily to one practice making a restructuring provision of £1.6m. Operating profit margin on turnover fell from 2.9% to 2.5%.
This sector generated the highest turnover per head at £49,146, an improvement of 1% from the previous year. This is due to a marginal fall in employee numbers rather than increased income. Quantity surveyors may be working hard but are also being paid well. They rate the highest employment costs per head in the industry at £27,765 - up 3.6% - showing that the sector appears to be retaining higher-paid employees. The ratio of turnover to employment cost has risen marginally from 1.77 to 1.80. Although moving in the right direction, quantity surveyors need to watch rising employment costs carefully when turnover is broadly static. Operating profit per head has declined by 14% to £1,233 despite reduced employee numbers.
Income and profitability
General practice surveyors improved both operating and pre-tax profit. Half the practices reported a decline in fees but overall turnover rose 0.5%. The increase is in part due to acquisitions by some larger groups. Operating profit margin on turnover rose from 6.2% to 7.1% and pre-tax profit margin on turnover was up by 20% to 6.71%. These margins are at least three times greater than achieved by quantity surveyors and agencies (which reported negative margins).
The number of employees has risen by 2%, compared with a rise in turnover of 0.5%. General practice surveyors appear to be recruiting ahead of demand - but among lower-paid staff. Employment costs per head have fallen to £25,777 from £26,102. General practice is the most profitable sector. Staff are generating operating profit per head of £3,334, significantly more than elsewhere. The ratio of employment costs to turnover has remained stable at 1.8:1 - another indication that the sector has been able to keep employment costs in line with earnings.
"Surveying Trends" is produced by Willott Kingston Smith & Associates (part of chartered accountants Kingston Smith), which specialises in advising people businesses such as the surveying profession.
Copies may be obtained from Willott Kingston Smith & Associates, 10 Bruton Street, London W1X 7AG tel:(0171 304 4646) or Devonshire House, 146 Bishopsgate, London, EC2M 4JX tel: (0171 377 8888).