Sector Spotlight: Business Services

A closer look at the growth of the business services sector and what this means for the deals market


by Fardeen Nariman

The business services sector is a significant contributor to the UK economy and has grown to account for approximately 10% of gross value added.

The sector employs around 3.3 million people across the UK which translates to over 8.5% of the workforce. The rapid pace of technological development in the sector also means these businesses can operate from remote constituencies, thereby leading to overall economic development in the country.

Despite certain headwinds, the business services sector has witnessed robust growth over the last decade. This growth has been driven by the demand for quality and speed of ancillary services, thus allowing organisations to focus on their core competencies. The most important driver of revenue growth has predominantly been the development of new products and services.

Growing demands relating to speed and the quality of services has also resulted in substantial growth in the sector. It has also highlighted a gap in skills and available resource. This however, not only provides businesses in this sector with a compelling reason to explore the art of the possible through innovation and increased efficiency, but also encourages many to acquire businesses to fill gaps in their service proposition.

Background

Whilst there is now sustained demand for business services, companies operating in this sector are facing increasing pressure on their resources and margins which impacts their ability to meet that demand. This has led to a renewed focus on existing contract performance and more active cost management. While certain sub-sectors like facilities management and engineering services have continued to expand as well as improve their margins, others like logistics and business process outsourcing services have seen margins contract.

Although some businesses blame Brexit for the tougher economic conditions, the truth is that the sector demands adaptation to changing technologies which some businesses find harder to fund through working capital. Other factors contributing to margin erosion are higher labour costs (due to the national living wage), regulatory changes, government inertia due to a focus on Brexit, pricing pressure, reduced spend from customers and continued skill shortages.

As specialists in lower to mid-market transactions and having completed a number of deals in this sector over the last year, we look at its market potential and the opportunities this brings to those looking to buy, sell or invest in businesses in these sectors.

Outlook

This sector remains at the forefront of change and continues to adapt to the challenges arising from economic, technological, industry and political factors.

In Q4 2018, the sector showed its weakest economic growth since the 2016 EU referendum and given its size as a UK employer, Q1 2019 has seen a continuation of delayed investment and in some cases, staff reductions to help businesses manage their cost bases in challenging markets. Economic uncertainty and a weakening pound has put management teams under pressure to meet growth targets demanded by shareholders. As a sector it is driven by reducing organisational complexity and creating flexible, scalable operating models that are capable of quickly responding to new market opportunities at lower costs.

Technology has been a driver of change within service delivery for organisations. In a highly-connected world, the pace of change is accelerating and emerging technologies such as artificial intelligence enable businesses in this sector to transform their clients’ operations in terms of staff engagement as well as experience.

Support services are largely people businesses that rely on their staff to make them competitive, so the process of recruiting and consequently, retaining staff is critical. The challenge of increasing staff costs fuelled by fewer EU workers in the UK economy, alongside the national living wage and increased costs of pension auto-enrolment has pushed up the cost base in those people businesses unable to defray cost via technological advancement.

These demands are driving investment to refocus the sector and develop solutions to deliver services with a smaller employee base. It’s also driving mergers and acquisitions as corporates would rather acquire than develop solutions due to the rapid pace of change. We see growth via this consolidation and the continued provisions of private sector skills into the public sector to drive down costs.

So, what does this mean for business and support services?

Those with legacy models and unable to embrace change quick enough often find themselves with insurmountable challenges. Recent business failures like Carillion and Interserve have shown how rapidly change can overcome the largest businesses. In ancillary sectors like facilities management, we continue to see smaller operators and the carve outs of in-house services as transactional opportunities. For larger businesses, this might not only reduce the future ongoing costs but also generate capital for investment elsewhere.

Some of our recent successes

Having successfully completed a range of deals in this sector, the corporate finance team at Quantuma are in an optimal position to help you understand the market and achieve your ambitions. We can work with you to identify acquisition targets, support you in raising funds, or help you if you are looking to exit and maximise your returns.

If you or a client are an ambitious, entrepreneurial business looking to explore growth opportunities in this sector we would be delighted to share our expertise and experiences with you.  

 


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