Peter Webster – What the Interserve Situation teaches us about the future of the security industry

Peter Webster, Business Consultant

By Peter Webster, Business Consultant

“For many years I have been concerned that the security industry has become increasingly commoditised as multi-service contractors offer security as just another part of a bundled package. To me, security is a specialist service that needs to be recognised for the key role it plays in providing protection for our lives and businesses. It should not be treated as just another service, for when it goes wrong, the consequences can be very serious.

“In March we saw the problems at Interserve cumulating in them going into administration and being acquired by the company’s lenders in a pre-pack deal. Fortunately, on this occasion, it appears that Interserve’s trade debtors and sub-contractors were assured that their outstanding invoices would be paid in full. Following on from the well-publicised downfall of Carillion 14 months earlier when again a small number of failing projects were cited as the catalyst for the failure, there have been many voices questioning the whole rationale for outsourced services.

“Interserve’s troubles were claimed to be caused by ‘energy from waste’ projects’ but surely you would think that major companies would ensure that the risk profile of any one project could not bring the whole company down. In reality, most of the major FM and TFM companies are highly leveraged with debt and we have seen some going to their shareholders to prop up ailing balance sheets, whilst others have been selling off businesses or assets and restructuring debt in an attempt to gain some financial stability.

“The problems of the FM industry are deep-rooted and systemic. The industry rose in the 1980’s and was successful for a period but the cyclical nature of the service created issues within a few years. FM companies won contracts and made year one savings for their clients by attacking relatively easy cost savings from the many sub-contracts they inherited. This could be replicated to a lesser extent in year two but by year three they were seeking inflationary price increases which, by year four, led clients to bring the services back under internal management control.

“Since the 1990’s the FM industry has been seeking ways to break the cycle and create long term contracts. Over recent years this has been by self-performing all services and promising guaranteed year on year savings. In many cases clients have transferred to the FM company their whole services management infrastructure thus making it extremely difficult for a client to reverse the contract.

“The issue I have always had with one company self-performing all services is that you cannot be best in class at everything, and therefore the FM company is only perceived as being as good as its worst service. Added to this is the pressure to deliver promised savings which again places strain on the quality of services as operational costs are the only place the reductions can be found.

“Finally, there are the competitive pressures as the FM industry chases economies of scale by ever reducing margins to gain market share. They are left with limited financial resources and leveraged balance sheets which cannot cope when things go wrong. As Carillion and Interserve prove, things will go wrong, it is inevitable, no company can get everything right all of the time, it’s about the quality of their risk management.

“Unfortunately, these high-profile failures impact on the whole business to business services industry as the reputation of all in the industry is trashed by these debacles and the real value-added suppliers find they are increasingly commoditised. In addition, many specialist security service companies rely on sub-contracts with the major FM operators and when they go bust the impact of bad debts can be devastating for the smaller businesses supplying them.

“It is my belief that the security industry must take proactive steps to distance itself from the FM and multi-service industry, so that clients place security contracts separately from the rest of FM and evaluate their security service proposals on more than just price. This needs to start by a carefully planned and coordinated PR campaign by the industry and their trade bodies explaining to the business community the true value of using specialist security providers. Change will not happen overnight, but it has to start somewhere and the sooner the better.”