Pareto featured in FMJ Article 'The Impact of Brexit on Fac Man'
We’re due to leave to the EU at the end of March and how we do so is still very much undetermined. What are your greatest concerns about the impact of Brexit on your business and on the wider FM sector, e.g. rising labour costs; access to labour and supply chain security?
THE FM ENTREPRENEUR’S VIEW - ANDREW HULBERT, MD,PARETO FM
The underlying concerns around a “no deal” Brexit relate to labour supply and costs, supply chain logistics, research & development funding, FDI investment, trade tariffs and uncertainty. But what does this all mean for the FM sector?
A change to the labour market conditions will see suppliers potentially struggle to attract labour and therefore be forced to offer higher salaries to attract the required calibre of workforce. The reduction in labour supply and subsequent increase in wages will result in higher costs to suppliers. This will put financial strain on suppliers who already operate on relatively low EBITDA levels. The new challenge to suppliers here is often when low wage labour costs increase (e.g. national living wage goes up) they pass the costs on to their clients as the increase was outside of their control. However, clients are less likely to be sympathetic to a price hike as a result of a change in labour market conditions. The opportunity here is for good FM suppliers to work hard to retain their high performing staff, which will gain them a competitive advantage, as their industry counterparts struggle to fill new roles. It should be noted that EU-born workers are over represented in the least skilled occupations, directly impacting on the facilities sector.
The impact on the supply chain is one of the greatest concerns to the FM sector as supply of goods is fundamental to the delivery of FM services. The impacts here are vast and wide ranging. There is potential for supply issues with chemicals, consumables, materials and food, as well as electrical or mechanical components. All will bring strain to the delivery of services as well as strain between the client and contractor, as contractors struggle to deliver items that they previously had no problems with. The opportunity for proactive FM suppliers here is to buy, in-bulk, important goods required for services to their clients and be the ‘heroes’ when they can provide goods that no other contractor can.
The uncertainty in UK plc, the drop in FDI investment and reduction of academic research funding all coupled with rising tariffs for imports and exports paint a bleak picture for the clients to FM contractors. This uncertainty may lead to important clients moving their offices from the UK or looking to significantly reduce their costs. This is both an opportunity and threat for the FM sector. The opportunity is that many services contracts will re-tender which creates opportunity but will also potentially drive down prices. The threat is contractors begin ‘buying’ contracts at unmanageably low margins and a further Carillion-style scenario becomes the norm amongst contractors. The other opportunity is the government are creating new service contracts to offset the potential risks of a “no deal” exit. Some of the more entrepreneurial FM service providers may be able to serve the government via these new contracts.
To summarise, Brexit, in whatever form, will bring disruption to UK plc that will be directly felt by the FM sector. With Brexit comes great risk, but also great opportunity for FM contractors. Those providers who can be entrepreneurial now may be able to make significant gains on their competitors over the next three years. In fact, this is a time when contractors can make or break themselves, a great opportunity for all.
THE CONSULTANT’S VIEW - SATVIR BUNGAR MBE, MD M&A ADVISORY AND HEAD OF FACILITIES SECTOR M&A BDO LLP
As we await news from Theresa May about her plans for leaving the EU, there remains much uncertainty and concern about what will happen. The global economic picture continues to increase in complexity and the UK facilities sector as we have known it for decades is also likely to transform.
Below are some considerations in the event of a ‘no deal’ Brexit:
Labour and skills shortage – Recruitment will be impacted as the industry employs a significant number of EU workers across many skillsets. There could be much greater uncertainty to fill both low-paid and specialist roles as the devaluation of sterling reduces the value of wages and motivates these employees to migrate, thus making businesses extremely vulnerable to change.
Regional wage inflation and contract terms – Businesses could struggle to fill vacancies vital to contract delivery and may end up having to pay considerably more for the right people in certain regions. Since labour costs are the largest cost when assessing contract performance, this could have enduring effects. Equally, existing contractual terms reflect favourable rights for workers which could create confusion in the future.
Training-up the UK – There are many good examples of employers increasing their investment in apprenticeships and CSR initiatives, including companies such as TCFM creating partnerships to enable the disabled and long-term unemployed get back in to work.
Five key policies which have a real impact and will help us thrive post- Brexit are:
• Simplifying tax: the formation of one simple earnings tax through the alignment of National Insurance and Income Tax.
• Infrastructure: investment in ‘shovel-ready’ projects, in order to secure quicker wins.
• Skills: reinstating the two-year post-study work visa to help address the skills shortage.
• Boost productivity: the annual allowance investment being increased to £5m for five years.
• Patient capital: the consideration of radical steps to increase pension scheme investment in patient capital.
With under 40 days to go until we officially leave the EU, the Prime Minister has no option but to prioritise policies at home which will help the UK insulate itself from a dramatic Brexit. Whatever the final outcome, we believe that British businesses will continue to adapt, invest and expand. It’s important to remain optimistic.