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Client dislike of 'one stop shop' model at heart of Balfour Beatty decision to sell Parsons Brinckerhoff

Contractor Balfour Beatty has cited clients’ lack of enthusiasm for its one-stop shop model as the reason behind its decision to put consultant Parsons Brinckerhoff (PB) up for sale.

The contractor announced today that it is putting the consultant up for sale, just five years after buying the US-based outfit for £380M.

Balfour Beatty had hoped to generate significant savings by offering a “one stop shop” for design and construction services. But UK chief executive Nick Pollard told NCE that client demand for such a model has not developed as expected.

“The decision to sell PB is down to how the market has evolved during the recession, and what customers now look for. The model that was in prospect at acquisition has not developed,” he said.

He added that it was “a bit too simplistic” to assume that ownership was the best way to align design and delivery expertise.

“I could point at a number of businesses – mine included – where they have partnered with firms like PB to deliver tremendous value for clients,” said Pollard. “Ownership isn’t necessarily the precursor to delivering value.”

Pollard added that while there has been growth in the market towards design and build contracts, clients were keen to retain control by procuring front-end design separately. This had led to conflict of interest in some cases, he said.

“Some clients like to procure professional services independently at the front-end and then may perceive there to be a conflict of interest to award a design and build contract to the same firm further down the line,” he said.

Pollard said the situation may change but that right now a sale could provide shareholder value and make Balfour Beatty a simpler and more focused group.

He added that there was no balance sheet pressure to sell and that such a sale will only be pursued if it provides attractive shareholder value. He said there was no timescale on when any deal would have to be concluded.

The decision to put PB up for sale was announced alongside a shock trading update that included news that chief executive Andrew McNaughton had stepped down with immediate effect. Chairman Steve Marshall is to step into an executive role while a successor is found, supported by Pollard as UK boss.

The trading update warned that its UK construction profits would be £30M lower than expected. McNaughton has paid the price.

Said Pollard: “It is not necessarily what Andrew did wrong, but the territory that goes with being the leader of a group. With responsibility comes accountability.”

McNaughton’s decision to step down was made at an emergency board meeting over the weekend. At the same meeting it was agreed that Balfour Beatty Engineering Services MD Phil McGuire should also resign from the company.

Pollard will take on the role in the short-term, much as he did last June when brought into the firm following the resignation of then UK boss Mike Peasland. Peasland was forced to resign after another profit warning, this time caused by the UK operation’s misfiring regional business.

Pollard told NCE that the experience it gave him valuable insight into what was going wrong and what needed to be fixed. “It immensely helped me to understand the customers better and it helped me get that bit of the business back on the road,” he said. “So now I am following a similar pattern with engineering services.”

Today’s trading statement said that there had been a “significant performance improvement” in the regional construction business. This business is now led by Mark Cutler.

The statement says that the decline in profit expectations is predominantly within the UK construction business, where profits are now expected to be £30M lower than previously anticipated. It adds that mechanical and electrical engineering (M&E) and major buildings projects businesses have both experienced significant operational issues.

As a result of the £30M write-down Group pre-tax profits for 2014 are now expected to be in the range of £145M to £160M. The firm’s order book is also down to £12.9bn compared with £13.4bn at the end of 2013.

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