I believe that our industry has the greatest opportunity it has had in generations – the opportunity to change, evolve and become a value-adding service partner. I also believe that prospects in the UK remain better than they have been for many years. In fact, the last time that the UK markets had such a favourable run was 12 years ago.
Unfortunately that unsustainable peak was quickly followed by the last recession, which brought trauma and a considerable downgrading of the industry by the stock market. Changing that market perception has proved difficult, but over the past few months we have at last begun to see some recovery.
For investors, one of the great negatives of the construction industry is its cyclical nature. There is an argument that, with the government now directly controlling much less of total construction output and a marked change in the economic policies of recent governments, any future cycle will be much less extreme.
Even if this is true, one of the key challenges is to be less vulnerable to even a small cyclical change. When we entered the last recession, Amec's UK strategy was to deliver a one-stop shop for clients, a world-class approach, a quality of service second to none and participation in the rapidly expanding speculative property and private housing markets.
Many of these concepts remain valid. However, although this strategy may have provided flexible solutions for our clients, it provided no flexibility for delivery of profit to shareholders. With hindsight, it increased Amec's vulnerability to any downturn in the cycle. Of course, a downturn is what happened and profit plummeted.
What we failed to understand as the cycle peaked in 1988 was the need to provide a better balance between the short-term dash for growth and the building of longer-term defensive qualities. By this I mean the need to ensure the sustainability of our overall income stream.
I believe that our industry has the greatest opportunity it has seen in generations – to become a value-adding service provider
We now strive to be "the global engineering services provider that generates the highest value through the application of knowledge, innovation and technology". But what does that really mean in practical terms? And what have we done to improve the quality of our earnings? Our approach has focused on three issues. First, we have balanced our exposure to the inherently volatile earnings from major projects with earnings from more predictable activities, such as long-term work in utilities, rail, oil, gas and facilities management.
Second, we have moved away from adversarial forms of contract with uncertain outcomes to more predictable forms of profit earning. Here we have sought to improve the quality of our earnings by responding to changes in client procurement over the past 10 years.
Indeed, the percentage of Amec's activity won on a hard-bid competitive basis is quite small. This has been achieved through a concentration on our consulting and design skills and delivering projects secured on a partnering, alliancing or negotiated basis. Our PFI and property development activity also provides attractive project work.
But we have to recognise that traditional, hard-bid contracting will always be around and this brings me to the third issue – risk management. Ten years ago, we relied on the skill and experience of our managers in the "art" of coping with risk. But as contracts become more complex and potentially more onerous, we have invested heavily in the development of more systematic techniques of risk appraisal.
It would be foolish to pretend that we can remove all risk; we can't. But we have recognised the imperative of minimising exposure and to manage the remaining risk.
Postscript
Peter Mason is chief executive of Amec.
