Business Services

www.pwc.co.uk

April 2014

Euan CameronPartner - Business Services Strategy+44 (0)20 780 43554 euan.cameron@uk.pwc.com

Jeremy WebbPartner+44 (0)20 7804 9302jeremy.webb@uk.pwc.com

The waste sector is just one of the industries within the business services sector that has been facing challenges over the past 18 months. We have seen an increase in the number of similar businesses, particularly those with distribution and logistics characteristics, whose performances have suff ered despite the signs of the recovery in the UK economy.

The drivers of this underperformance can be numerous: the nature of some of these businesses means that they may face challenges towards the end, of or subsequent, to a recession (‘late cycle’ pressures); some will suff er as a result of third parties continuing to exert fi nancial pressures onto these businesses; and others may face a fundamental structural change to their industry. Structural decline in end-user market has also had an impact – stationery businesses are a prime example of a sector whose overall market is changing considerably, the impact of which just exacerbates all of the other issues we have referenced above.

This article provides an overview on the types of businesses exposed to some of these pressures, as well as some insight into the challenges faced, which could result in this signifi cant underperformance.

Late cycle pressuresLow cost items – companies providing relatively low cost items or services such as water coolers or waste collection can face price pressure at this time late in the cycle; once their customers have already achieved cost savings from suppliers providing more material expenditure and any ‘low-hanging fruit’.

Long running contracts – similarly, any companies which had previously benefi ted from long term supplier contracts, where customers had locked in for three to fi ve years, may now be looking to renegotiate contracts and face the likely scenario where customers will want to negotiate prices downwards. Some companies with high value local government contracts are likely to face considerable price pressure here.

Customers requiring further cost savings – businesses whose customers have back-end loaded some of their cost cutting plans towards the end of or subsequent to a recession, or who are continuing to face budget pressures (such as local government budgets) may continue to seek price reductions on contracts.

Insolvency of a customer – the impact of customers’ overtrading as the economy recovers can result in customers entering into insolvency whilst owing signifi cant back payments. Managing customer payment terms and monitoring older debts is critical to minimising this risk.

CompetitionPrice competition – businesses may continue to face margin pressures caused by a recessionary focus on prices as opposed to ‘value add’ services in sectors such as facilities management.

Routes and densities – again, this recessionary pressure has resulted in a hollowing out of competitors’ routes and densities in some cases, with companies who have been struggling for growth (or even just keeping revenues fl at) pitching for work with less conveniently located clients, which would have historically be considered marginal. Waste collection and workplace service providers are prime examples; the ‘price per drop’ cost curve achieved by these businesses is a key KPI to monitor.

Cost saving plansOver ambitious savings plans – many businesses, such as those with social housing repair and maintenance or road maintenance contracts, have had to quote significantly lower prices to be awarded contracts. It is possible to over-estimate the levels of cost-out which can be achieved over the course of the contract, and some businesses can subsequently face the danger of loss-making contracts.

Fuel and people cost inflation – both of these costs have increased over the past two years, and the increase in the minimum wage in October 2014 will put further pressure on costs.

Marginal costing – cost pressure leads to a temptation to marginally cost (either management driven or sales force driven) and businesses can lose pricing discipline. This can result in a gradual erosion of the quality of the contract base.

Management issuesPoor management information (MI) – many route based service businesses do not have adequate MI systems to understand how to price effectively. This can have the impact of either them unknowingly accepting loss-making contracts or needlessly pricing themselves out of attractive business.

Inappropriate incentivisation – businesses focused on and management teams incentivised by revenue and sales targets as opposed to margin and customer retention can mean the business can appear to be doing well (and remunerating accordingly) but without considering the true profitability of contracts.

Leadership – service levels can suffer in lean times as it becomes more difficult to drive a strong culture through a geographically distributed, low-wage workforce.

Secondary and tertiary buyouts – many businesses are in secondary and tertiary buyouts, experiencing diminishing returns on costs out - although in parallel customers expect year on year improvements in terms. In some cases cuts to the cost base have removed the fat but also damaged the lean, compromising service delivery capabilities of the business.

www.pwc.co.ukThis publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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