Looking first at the industry picture, recent history tells of a client-driven change process, starting with the introduction of the PFI, that gave the pathfinders among the contractors the opportunity to leave low-margin, competitive-tendering markets. More recently, some contractors have taken a step further into facilities management to allow better risk management and exploitation of PPP's long-term earning streams.
Major clients have also sought value for money and reduced conflict by promoting partnering and frameworks in place of adversarial forms of procurement. Again, those changes have created opportunities for contractors to extract themselves from traditional markets and some businesses have changed so radically that they have been relisted as support services providers.
The future direction of contractors' business strategies is an interesting question, as they are perhaps one of the only industries that does not drive its own agenda. Compare their position to the consumer electronics firms that create demand with a pipeline of shiny new gadgets, and it is clear that contractors react to demand generated for other business reasons – and, effectively, build what they are asked to build. Not being able to create new products makes it difficult for firms to devise innovative strategies without looking beyond their existing markets.
In the past, contractors have owned housebuilders and vice versa, but today the limited synergies are, for some, more distracting than valuable. Urban regeneration opportunities that bring contracting together with housebuilding and finance could change this, and firms might do well to harness all three.
Should contractors, then, be thinking of diversifying into biscuits or internet banking? Perhaps not, but some interesting possibilities are developing.
Should contractors be diversifying into biscuits or internet banking? Perhaps not, but there are other interesting possibilities
Recent announcements on government spending seem set to boost PPP, if the market allows. I say "if" because the government is facing a credible threat by some of the major players to leave the market if issues such as bid costs, standard terms and lead-in times are not resolved. My sense is that the lobbying will gain some concessions, as a successful PPP is key to the delivery of the government's promises. The lobbyists should, however, be mindful that bid costs are a barrier to entering the PPP arena and lowering the bar will increase competition, leading to reduced prices.
A side effect of addressing the issues could be the creation of a new market in smaller PPP projects, as lower front-end costs would bring more projects under the viability threshold.
The second opportunity I see is for the construction industry to join forces with other service providers to offer a wider range of services. Construction firms are already involved in consortiums that run sewage treatment plants, hospitals, prisons and schools, and taking the ideas developed in the PPP arena into the private sector may well open up a host of possibilities. Could consortiums own and run office buildings, cinemas, sports centres, hotels and the like?
In a different direction, could they also link up supply chains to drive efficiency in areas such as waste management, where some critical mass might tip businesses into profitability? For instance, they might manage refuse by building, owning and operating recycling and disposal facilities. Joint ventures and strategic alliances might go against the grain, but it is worth exploring where such relationships could lead.
Frank Devoy is an executive consultant in Ernst & Young's Real Estate, Hospitality and Construction Group.