PFI opens doors for FM industry in UK

Copyright: David Lawson– Facilities Business Feb 2000 

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A strange mix of excitement and  suppressed panic has hung over the industry since the dreaded initials PFI became part of its daily language. On the one hand is the promise of fat contracts as outsourcing proliferates; on the other a fear that traditional suppliers and in-house teams could be threatened.

 Governments are not supposed to move faster than the private sector, yet  the rulebook  was shredded by a 2bn pound deal handing the whole DSS estate to an outsider. Facilities management has been farmed out for years but this went much further, including the bricks and mortar as well in this Private Finance Initiative. A new kind of company called Trillium  was born, offering an all-in-one service. Others have also sprung up, linking financial engineers with property and facilities experts in ad hoc partnerships.

  Other departments  like Customs & Excise are now up for grabs, but even greater excitement is generated by  possibilities that  the private sector will follow this lead. As Facilities Business went to press, ICL was understood to have finally settled a deal to outsource 3m sq ft of property. Two leading banks, Lloyds and JP Morgan, were also studying the possibility of off-loading buildings and FM in a single bundle.

 Three   uncertainties remain.  Will this kind of total outsourcing sweep through the private sector? Why is it taking so long to sort out? And if it happens, what becomes of  'traditional' FM suppliers and  in-house managers?

 The ICL deal  could  offer some answers. JP Morgan has also intimated that it wants to act quickly, although  Lloyds could  spend the rest of the year talking to potential partners and there is no certainty it will go-ahead. Only a year ago property chief Hugh Stebbing was dismissing the idea that Lloyds would benefit by handing over property.

 Meanwhile, other names will float to the surface. The potential for corporate PFI is increasing almost by the month as a variety of factors come into play.

The first is simply a desperate need to raise returns on capital. 'All big corporations are under pressure from shareholders to improve margins,' says Manishe Chande, chief executive of Trillium.  'Property is a major cost, so it is being examined carefully.'

  Attached to that is a drive to concentrate on core activities. Individual companies aim to spin-off as much as possible - a major reason why the FM industry boomed in the Nineties. Mergers are now accelerating  this trend. Fashion has switched from sprawling conglomerates to highly-focused groups. Today's mega-mergers seek not to assemble diverse businesses but win economies of scale by absorbing competitors. Potential duplication is dragging property  out of the shadows.

  'BP has  boasted about making savings of 4bn dollars a year after the merger with Amoco, so it is a prime candidate for property outsourcing,' says Oliver Jones, chief executive of Citex, another Trillium-style operation.

  The whole process has been sent into overdrive, however, by proposals for changes in accounting rules published late last year. These will demand that property costs are included in profit and loss accounts and balance sheets rather than hidden away in filing cabinets.

 'These changes have been gestating for ages and are not yet in force. But they have finally taken the cost of property into the boardroom,' says Andrew Russell, managing director  of  Katalysis, the management arm of property consultant Chesterton.

 The electronic revolution is also gnawing away at a tradition of sweeping accommodation costs under the carpet. FM has bloomed since a computer appeared on every desk, demanding more specialised management of the equipment and  associated networks of ventilation and wiring systems. Now it must adjust to the Internet revolution.

 'Occupiers are looking more closely at whether they should own property if it becomes less intensively used because of home-working and Internet business,' says Chande. 'It may not have taken off yet but they still have to consider the possibilities.'

  The sheer success of outsourcing FM has also been a factor. It has taken occupiers past the difficult threshold of letting outsiders into their castles. The next step is to offer them the castles themselves.

 Chande says that as a  newcomer to FM, brought in to head Trillium for the DSS deal,  he did not carry any baggage and could see a potential insiders had  missed.

 'Occupiers continue to carry the risk of their property, even with sale and leasebacks and joint ventures. And they are not property specialists, so they cannot see the possibilities for further savings.

 'To them, a half-empty  floor upstairs or a sub-let building on the other side of the country is not important. We can see ways of extracting more value.'

 This extra value is the honey attracting financial groups to back teams of FM and property specialists. Nomura was an early bidder for ICL's estate and is backing Servus, one of the consortiums bidding for the Customs & Excise estate. Goldman Sachs funded Trillium, another bidder and the legendary investor George Soros is backing Servus in the contest.  The logic is that by exploiting hidden property value, they can offer sharper terms for FM services.

 'FM is not a high capital-cost operation, so outsourcing is not ridding occupiers of big burdens,' adds Russell. 'Buildings, however, have a continuing hefty stream of maintenance costs.'

 So what will happen to 'blue collar' suppliers?  Not everyone wants to own the castles. 'We can see off all these ambitious newcomers because we are good at what we do, which is supplying services efficiently,' says a director of one conventional FM group. 'We don't need to complicate matters by becoming their landlord.'

  That could be true, if only because relatively few companies will manage to cast off their bricks and mortar  in the near future.

 'This finance-led approach will probably affect only around 40 big firms in the UK,' says Jones. They will be blue-chip names with a mix of leases and freeholds  that property investors believe they can exploit. It will also need to be in big chunks: Jones figures a minimum asset value of 100m pounds.

 Total outsourcing  is not a simple process, as the long gestation of the ICL deal has proved. This  writes off less sophisticated firms and demands a corporate culture which is comfortable with buying services.

 'If they have not gone down the outsourcing route already, they will not be in this game,' says Jones. He picks out BP and  Hewlett Packard, long regarded as expert service buyers as offering great potential.

 FM suppliers will require a similar sophistication. 'This is about management, not technical services, says Jones. A 'blue collar supplier' may be top dog at cleaning operations around London, but could it take on a contract in Glasgow?

 And what about Stockholm or New York? International companies are increasingly looking at global contracts. Core technical skills in one country may not work in another, but management ability is universal.


 One nugget of certainty among the rampant speculation about corporate PFI is also the most surprising. In-house FM managers seem to have a secure future.

 Outsourcing was predicated a few years ago on the  argument that this would benefit occupiers by  sweeping away lazy and inefficient insiders. This has undoubtedly happened for some firms but these teams are now seen as crucial to the success of performance-related contracts.

 'This process is not about making profits by cutting jobs,' says Andrew Russell of Katalysis, the FM specialist set up by property consultant Chesterton. 'Increased efficiencies come from boosting purchasing power through amalgamating in bigger operators.'

  Managers could actually benefit through wider opportunities and real career structures rather than being isolated in small departments within individual firms. Many may not want to move, but this is fine by the new generation of super-managers.

 'We need their skills,' says Manishe Chande, head of of Trillium. In fact, they could be crucial for the success of bundled property/FM contracts. 'PFI is not proliferating because these people have done a poor job but for a host of other reasons. They are an integral part of the operations and we need their in-house intelligence.'

 Trillium's takeover of the DSS estate saw 150 managers directly taken on while service suppliers employed some 3,000. 'Some of these have now become our star performers,' says Chande.