This blog is part of our Covid series that explores a range of topics related to these issues and will naturally evolve as events unfold and facts reveal themselves. The blogs are in no way intended to provide scientific or health expertise, but rather focus on the implications and options for facilities services and workplace organisations.
These insights are based on our ongoing interactions with organizations operating in impacted areas and our expertise in facilities service growth delivery.
As the economic implications of the global pandemic are becoming clearer, most facilities services businesses are scrambling to assess the impact on their top and bottom lines. Others are scrambling simply to survive.
In this article, Baachu Rain Founder, Baskar Sundaram shares his views on what is happening in the FM sector from buying organisations and FM service providers. These views have been shaped by more than 50 interactions with both the service providers and the buyer side of the tendering process.
Covid-19 has impacted every area of life and business. Procurement is no exception last month the public sector published the fewest opportunities since Contracts Finder fully came into force.
Local Government were responsible for nearly half of these cancellations. This is to be expected. The public and private sector, like all of us, is adjusting to this ‘new normal’. Non-urgent procurements are naturally taking a back seat to this immense crisis. With closed offices and people isolated and working from home, companies working with the public sector will fare better than most.
Longer-term, procurement will be one of the levers through which the government reignites the economy. With the slow down there is more time that can be spent on strategic planning, so you can be in the best position possible when the tap is re-opened
Let’s look at the macro environment.
UK ECONOMY – The Macro Environment
- Business activity in the UK dropped to its lowest level in almost 20 years as the UK services PMI (which accounts for approximately 80% of the UK economy) dropped from 53.2 in February to 34.5 in March – the lowest reading since records began. The latest figures point to an economic recession of unprecedented scale and depth.
- UK consumer confidence has fallen to 2008 levels according to a consumer confidence index compiled by GfK. The index plummeted from minus 7 in February to minus 34 at the end of March – its lowest level since the 2008 financial crisis. Measures implemented to prevent the spread of COVID-19 have fuelled fears over personal finances and the health of the economy, with the survey scores showing a slump in buying intentions.
- Official figures show that 950,000 applied for the Government’s universal credit benefit since the UK’s lockdown began on 16th March 2020. The surge in claims suggests that despite the support promised by government for workers furloughed by their employers and for the self-employed, the UK is suffering job losses on a scale and speed unprecedented even in the aftermath of the global financial crisis.
Tendering behaviour of buying organisations
The first question to ask about tendering in this environment is whether it will keep happening.
There’s no doubt that the current situation is serious and to a large degree, uncharted territory for many of us. But if the past is of any use, our experience of working through various economic downturns such as the global financial crisis leads us to believe that buying organisations, especially larger ones, will likely respond along the lines we have seen before.
How quickly and deeply this response happens will, at least in part, be influenced by two things: the extent and pace of the government economic stimulus measures that are being progressively implemented, and the evolving concept of business ‘hibernations.
If you look at the public sector, in the short term, provisions have been made for suppliers to continue to be paid (even if services aren’t being delivered). The Crown Commercial Services (CCS) has already announced the extension of a number of frameworks through to 2021, including G-Cloud 11. So, Facilities services and workplace technology can take those applications off your to-do list.
Buyer approaches to current contracts and planned procurements
So, while it’s difficult to predict exactly how this play out, assuming buying organisations adopt ‘typical’ approaches, we can expect:
For Current Contracts
Reviewing all existing deals and deciding whether a negotiated contract term extension (for expiring contracts) is a more prudent measure than re-tendering or, for continuing contracts, establishing whether terminating for convenience and/or retendering is likely to improve near term cost or reduce supply chain risk.
For Planned Procurements
Reassessing current planned spend to determine if projects need to proceed, can be delayed or, in the worst case, cancelled. It’s reasonable to expect a focus on discretionary expenditure, and questioning projects that don’t have a compelling ROI or activities that don’t address short term priorities/issues.
As the impact of Covid-19 builds by the day, supply chains are being significantly disrupted and businesses’ rights and obligations under contracts are coming into sharp focus. A particularly frequent question both buyers and service providers are pondering is whether Covid- 19 is a force majeure event and whether force majeure clause excuses parties from performing their obligations or from doing so on time.
Government reticence to slow down
One positive aspect is that in order to generate economic stimulus, governments of all levels will be very reluctant to curb their sourcing activities. Thankfully we are seeing evidence of this already. Government contracts provide business stability and cash flow and, critically, keep people in employment.
And although it may not provide immediate reassurance, if planned spend is cancelled or delayed, there is likely to be a wave of buying and tendering activity once more normal business conditions return.
Current service provider market happenings
Operating Cost Reductions
Many FM providers have withdrawn their 2020 guidance with few withdrawing agreed reduction in salaries including furlough mechanisms, deferrals of directors’ bonus payments and dividends. Also, every major FM player have utilised government support schemes where available to sustain and manage their cash flow.
Several construction contractors have or are currently taking short pauses to conduct project risk assessments, implement social distancing measures and formulate plans about how to continue with work on site. Some have restarted work at a number of its sites where parties are willing and able. This includes re-opening critical healthcare schemes around the country that are building new COVID-19 facilities or adapting current facilities to treat Coronavirus patients.
The Virtual tender environment
Tendering largely has become a desk-based exercise with bid teams able to pull together tenders remotely. Tenders are still progressing, but some contractors are not returning or responding to tenders. Contractors likely to price greater risk and uncertainty into tenders, Recent tender returns allow for working in line with new site operating conditions
Some site visits are conducted via virtual meetings with few even using real-time by drone. Many companies have furloughed half of their sales and bid teams. There are early signs of a tighter/more competitive tendering environment with fewer new projects coming forward.
Demand from private sector will continue to reduce over the next few months as the private sector is in survival mode.
Sectors where essential services like banks, NHS, supermarkets, food and online retailers, data centres, telecoms and drug manufacturing buildings remain open so it’s business as usual for FM providers servicing the essential services.
Service providers supporting other private sectors transport & logistics, manufacturing, property managers and general office-based clients will see a reduction in demand and continue to review the market “month on month” as they gradually migrate to “agile pay as you go” model. Many of the Hard FM buyers have started to delay their planned maintenance next year and stop their reactive maintenance spend.
Some see COVID-19 as a good buying window. We can expect more consolidations in the market this year.
What does this mean for FM service contractors and suppliers?
Summarised, the nett effect of expected buyer behaviour means that contractors and suppliers need to prepare for:
Expect disruption in current/future bids
There has been a significant increase in the number of cancelled procurements past 2 months, and this disruption is likely to continue for some time. It is likely that several tenders facilities service providers are already taking part in will be affected. If you are currently writing a tender, it is a good idea to check in with the customer whether they are planning to go ahead with the procurement in the circumstances
Look out for extensions to current contracts
Contract extensions are likely to follow. Re-procurement is time-consuming and expensive – check in with your customers about their plans for renewal.
Buyers are likely to prefer to extend existing contracts where possible.
If you have a contract due to expire in the next few months, check with your customers about their plans for extension.
Direct awards more likely
While public procurement is usually guided by competition regulations, emergency situations such as this the public sector can directly award contracts relevant to their response to the crisis. If you think you can help the response to Covid-19, consider reaching out directly to public bodies especially NHS, Care Homes and Local Government to offer your services.
Use your time for strategic planning
Less time bidding means more time for account planning, market segmentation and competitor intel. Having a clear, evidence-based growth strategy will mean you are better positioned for the expected rebound, when competition will be even more intense.
Renegotiating existing contracts with current clients doesn’t just happen in times of crisis. But in this environment, be prepared for vigorous negotiation. Private sector buyers have started to request service providers to reduce their service delivery with few services running 20% of their capacity.
Improvement Expectations for Recompetes
If buyers retender expiring contracts, they will certainly be looking for innovation and improved value. Locking in the status quo probably won’t cut it.
For a time, it’s rational to expect that fewer new opportunities will exist. This means that contractors and suppliers will find themselves facing a situation of reduced demand and greater potential competition. The need to re-win existing contracts, in this context, will be paramount. Potential new opportunities will be hotly contested.
A Rebalancing of Value
Supply chain vulnerability is always of concern to buying organisations. This current pandemic dramatically exacerbates this issue, especially noting border controls and access restrictions, as well as potential inefficiencies while organisations adjust to new patterns of ‘work’. This means that, in many markets, cheapest price is unlikely to be a sole motivator. As a contractor or supplier, it’s a good time to be reviewing and communicating how you will address delivery and supply chain vulnerability concerns and ensuring the right ‘value’ conversations are taking place.
It’s clear that the current situation is having, and will continue to have, serious economic consequences. It’s also clear that this will flow through to tendering activities in one form or another.
Despite it being too early to see exactly what this will look like, we hope our observations provide a practical perspective, allowing suppliers to make a clear-sighted assessment of what to expect from buyer organisations, as well as consider some of the implications that can help guide their own response during these uncertain times.
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