The Dicey Game

Oligopoly, lack of choice and underperformance is likely to result from the current drop in private sector NHS bids, warns business consultant Julian Fris.

Interview by Jane Renton for HEFMA Pulse magazine, December 2017

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The fact that fewer FM contractors might want to bid for NHS contracts might possibly be seen as a source of some rejoicing in certain quarters  – even an excuse to crack open the Bolly. Those on the more militant left of the trade union movement will no doubt welcome that news as especially welcome, after what they regards as years of profiteering at the NHS’s expense. With trust in big business and government at an all time low that view is likely to be even more widely shared.

But current experience suggests that such views are based on dangerous misconception. Putting aside the argument, for now, that the NHS simply cannot provide all the resources and services it requires on its own internally, there is scant evidence of too many snouts in the trough – at least currently, though that may change.  

Recent tender bids for NHS work have been based on margins as low as 2%, and sometimes lower. Allied to that the propensity by bigger contractors to offer up large capital sums to secure the deal, it is easy to see why relatively few smaller contractors are still willing to pitch for NHS work.

According to MTW Research, healthcare represents around 14% of the UK FM market and is expected to stay stable for a couple of years, however, that's a mix of all in and outsource. The overall market is worth around ￡120bn. 

“Outsourcing has just got a lot more difficult. As the market squeezes out more contractors we are seeing more business failures, near-misses and acquisitions,” asserts Julian Fris, who as founder of the consultancy firm Neller Davies, has spent much of his career advising a number of major institutions, including the NHS, the BBC and HSBC about securing the appropriate catering and FM services.

Meanwhile, major outsourcers such as Carillion, Mitie, Serco, G4S, Capita, Interserve, have hardly acquitted themselves in glory. All have been the subject of negative media headlines. While those who are smaller, but who would like to be bigger, companies such as CBRE, JLL, Elior, ISS and Servest have all snapped up smaller rivals.

“The thing about outsourcing is that every year, there is one, two or three less companies bidding,” he says.

In a recent tender exercise in which Fris was involved, no more than five companies expressed interest in the contract whereas in the past he would have expected to have at least 12 or 13 expressions of interest.

It’s not just soft FM service providers who are being deterred by poor margins on contracts. The same holds true for the big construction companies, which have also retreated away from NHS bids in similar fashion.

“We’re seeing the same thing. In hard FM we’re down to four or five big players with the appropriate hard FM hospital experience,” adds Fris.

As Fris explains, many of the big players in this market are construction-led, companies that have come through the PFI (public finance initiative) model. But PFI was a totally different model: it was equity-based, lucrative and long-term and importantly offered good returns.

Now increasingly, it’s all about market-testing, at least for catering, domestic cleaning, and laundry services, driven primarily as they are by cost. 

“Even if you go in on the most economically advantageous price or tender you are still under pressure because the trust wants to make ends meet,” explains Fris.

It is hardly surprising that the decline in interest from potential bidders has followed the steep decline in margins. In some cases margins have become unfeasibly low, in fact lower than 2% Fris says, in some recent cases. Add to this the propensity by contractors to make additional capital investments to secure business and you begin to understand just how easy it is for them to end up struggling to return healthy profits on their NHS endeavours.

So what exactly is going on? Presumably, the big boys who continue to bid have an end-game in mind? They will no doubt strive to renegotiate with trusts once they have won business, though that is an undeniably dicey game to play. Many have had to withdraw from NHS contracts because they just can’t make money.  Carillion has already withdrawn from healthcare, other than to conclude its current contractual commitments.

Some may have endeavoured to clawback by cutting corners: “Since the credit crunch, there has been a feeling that 15–20% can be saved from the building services function, however, this can’t be a recurrent activity.

“We get corner-cutting, safety is compromised, slower service, disengagement – there’s plenty about that in the press at the moment on “value-engineered” projects,” he says.

But the end-game is clearly market-dominance. That remains the ultimate objective of the ‘big boys’, asserts Fris.

 “The UK market is becoming more oligopolistic and choice is increasingly being limited. New companies entering the market find it difficult to break through the cost, margin and risk barriers particularly with ‘premier league’ contracts with the big PLCs, multinationals and public sector.”

According to a recent study by FM World magazine, facilities management contributes about 8% of GDP in the U.K and approximately 40% of is outsourced.  Market dominance is clearly an objective for the ‘big boys’ and they are acting predatory.

Initiatives to bring in specialist SME sub-contractors have produced mixed results. They may be fine for work on lifts and air conditioning, but are likely to prove less successful for delivering, for example, a distinctive hospital food offering. Many cannot simply handle the cash-flow problems that may well arise from such an unequal relationship.

The current state of impasse is also far from ideal for NHS organisations. While patient care should always come first in their list of priorities, the role of services and estates should not be underestimated.

“Facilities shouldn’t be a soft target when organisations are looking to reallocate funding. Cutting facilities funding is a short-term view. A building is an intrinsic part of the operation,” says Fris.

Everyone, agrees there is a problem because maintenance backlogs have increased while the capital investment into the NHS has decreased.

“I think if you talked to any estates director, they would all agree there’s a major problem, but the prevailing attitude is, ‘we haven’t got the money to do that, so just fix that bit instead. The highly reactive nature of the NHS is forcing estates directors to prioritise only high risk work. Also, Trusts are more likely to only commission high risk/essential work or where there may be a direct statutory compliance issue or something the CQC has highlighted.”

The NHS is a vast super-tankers, says Fris, whose current model clearly has to change. Constantly changing initiatives by successive governments is one thing and lack of capital investment another.

But as Fris stresses, it doesn’t always come down entirely to money: “There is alack of collaboration in the organisation, meaning that money often ends up going to the wrong places.

Addressing current issues in isolation is impossible, he argues: “There are already lots of examples of good collaboration between Trusts to enable them to share services, save money and foster a broader spirit of community.”

Too often the health service is a coalition when it needs to be seen as a collaborative. As the country’s biggest employer it also needs to attract smaller, more agile and innovative companies and solutions, rather than decreasing choice and monopoly. If it achieves that, then it really would be an excuse to crack open the Bolly.