This week, we hosted our building resilience Q&A with Andrew Wood and Simon Murphy of DMA Group. They offered their expert opinions from the construction and building maintenance industry point of view on how the industry dealt with the 2008 recession and what lessons we can reflect on for today’s current economic climate.
Tell me what happened to the built environment sector in 2007/2008?
SM: Between 2007-2009 there was a near-death experience in the global banking sector, not seen since the global depression of the 1930s. Big banks saw their share prices fall by 20 to 30% on what felt like an almost daily basis. The huge financial issues created in the banking sector were brought on by excess leverage in a whole host of areas, one being real estate and the broader built environment. This was a massive problem, with issues arising from shot balance sheets. It took a long time to repair the balance sheets and there was a restriction on credit – we saw a rewriting of commercial and residential lending rules.
AW: I was in construction at the time and by the end of 2008 our pipeline had disappeared; the large projects we were working on at shopping centres, for example, all went. There was a large amount of debt on the balance sheet. We applied for more funding but couldn’t get it despite having a compelling case. We tried to pivot, but we didn’t have access to cash because we were a leverage vehicle – it was a harrowing time.
SM: Construction suffered. FM, on the other hand, was and is perceived to be less risky and so it didn’t hit the built environment sector in the same way.
What do you think will happen this time around?
SM: We’re in a much different place. For a start, we don’t have big financial problems of the financial crisis because banks have been cautious ever since and haven’t been aggressively lending – we are not coming out of a big investment boom in residential or commercial building either. Although everything seems pretty gloomy at the moment, I actually don’t think we’re set to endure a particularly bad recession, especially if you look at it from a nominal growth perspective. We’ve also entered this recession from a unique position in that consumers have been able to build up savings during the pandemic – we saw this over the Christmas period with retailers reporting on how resilient consumers have been.
AW: The ‘flight to quality’ is another aspect worth noting. The cost of FM services remains an important consideration for customers, but what we are seeing is that they really do want their businesses to be in good hands. My feeling is that the more uncertainty there is around, the more certainty customers will appreciate in terms of our support services – in that respect, I think we’re very well placed. We have also done everything we can to recession-proof the business in terms of cash, our leadership team, customer solvency and how innovative and agile we are with technology.
‘Cost versus value’ seems to be the key debate in times of economic strife. But what does offering ‘value’ actually look like in FM?
AW: I would argue that a high proportion of customers don’t know the difference. What we do is in many ways boring and unsexy, and our customers only really start to care when things go wrong.
SM: During the previous recession, there was this great theory that cost was absolutely everything and that there would be a huge shift to outsourcing – but it never really happened. When you spoke to bigger companies about why it didn’t happen, we found they had so much going on that there was no prospect of adding outsourcing into the mix.
What value small firms offer that big FM firms can’t and vice versa?
AW: I think the best business model in industry is an owner/manager who is a one man band or small team – a highly skilled engineer with good interpersonal skills serving a small collection of customers who they are reactive to, know well, and provide good customer service for. Those people are gold dust to customers. You can have all the tech in the world, but if everything you need sorted gets sorted, you don’t need anything else. The problem is that these highly skilled engineers are thin on the ground, and some of them don’t have the business acumen to know when to stop – they grow too much and stop offering value to every customer. As a larger firm, we’re trying to mimic that small business approach. Technology is what enables us to scale while keeping the same ‘small’ working practices.
SM: Many smaller companies went bust during the last crash, and I can still perhaps see big companies trying to squeeze their margins again, but this feels like a very different cycle to last time. Small firms could not access cash in the last cycle – it is different now, which is better news for smaller companies.
The Living Wage has increased. Firms that commit to RLW are questioning the financial sustainability of annual hikes, bearing in mind the increases to the remaining cost base. What are your thoughts on that?
SM: Inflation is high for reasons largely out of our control. From my perspective, the biggest issue to tackle is to get inflation down, and the one thing that will stop that is if we embed high wage increases in the system. We need to be pragmatic. Certain levels of social strata are struggling, but plenty aren’t – I think it’s right to be relatively cautious on wage increases, but there’s no getting away from the tight labour market. You need to pay up for skilled engineers. It’s a hard one for many businesses.
AW: If your costs go up by X, and you can put your prices up by X, then that is sustainable. We’ve been able to generate a big efficiency dividend which, with all else being equal, would make us a leading player in terms of margin. But that is not the reality for several reasons, one being that we pay engineers around 20% more than what we were 18-24 months ago.
How can FM cut costs and add value at the same time?
AW: This is a big, big question that could take days to answer! People misterm tech for what really amounts to the reengineering of workflows. A lot of businesses really don’t know what they do, how they do it, and who does what and when. If you don’t have a grasp of these basics, then you can’t begin to consider automating processes – let alone find the right software product. Firms without their own CTO need to start with smaller elements of the business and optimise them. To make a substantial difference, you need to break technology apart from the engineer – this takes time, time companies may not have when they are scrambling around for survival. There are no quick wins.
Do you think the recession could curb or accelerate progress?
AW: It is fundamentally about resource, money and time. To do this properly, you need to stop doing what you’re doing, start doing something else and rejig procurement – it takes a lot of time and resource to manage that. If the recession is deep, progress will be slowed down because those resources will be scarcer. In our case, DMA is quite a complex beast already, so to come up with broad tech strategies that improve our business is difficult – niche cases percolate to the top when people talk about tech, and I can see more niche tech players coming through to support the FM sector.
What lessons did we learn in the 2008 recession that we can apply to 2023?
SM: From a macro perspective, avoiding excess leverage is a lesson we have learned, and that’s why we’re in a better place this time around. After the 2008 crash, UK housebuilders went bust because they had huge debts on their balance sheets and unrealistic expectations for growth – this time they all have cash on the balance sheet. The risk in a recessionary environment when you have cyclical industries is if you have an operational downturn and have financial leverage, you can get into trouble quickly. The broader FM and construction sector has learned that lesson. There is also a lesson around the supply chain. Today, companies are coming under pressure from big shareholders in the ESG arena, and part of that is supporting your supply chain and treating partners responsibly.
AW. For me, the lesson is that cash is king. People really get it now. We’ve seen a lot of the supply chain saying they need shorter terms, or we can’t work for you anymore – that’s good governance.
How else can firms in the built environment offer value to safely navigate through this recession?
AW: I think the winners of the recession will be those who manage to get tech into the heart of their business. But it’s two pronged, and you can’t just present technology to your customers without the human touch. Human customer service is what clients want. Technology will help create margin efficiency that enables the more costly customer service to flourish.
Check out our previous participants in the series here:
