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Consultants File 2009: Market report

With a recession looming, caution prevails. Firms with low borrowings and who stick to what they know are best positioned to weather the storm as others struggle.

Twelve months ago when we put the last NCE Consultants File to press, the UK consultancy sector was bemused and unconcerned by reports of a credit crunch and possible recession. This time round, the bemusement is still there but it is matched this time by real concern.

Companies with any focus in commercial property and building have been hit by falling workloads and are having to lose staff as they struggle to cut costs to match haemorrhaging revenues in those sectors.  Arup, Atkins, Buro Happold, Scott Wilson WSP, WYG,  Hyder and Aecom are just some of the companies which have announced they are having to cut hundreds of staff.

And everyone is aware of the strangled state of infrastructure spending as bank lending dries up. It is the lack of bank lending to businesses, however, that is generally seen as the biggest risk in the year ahead.

It’s not all unmitigated gloom though. Chief executives spoken to for this article were universally cautious. But each was also convinced that their business has what it takes to ride out what are going to be a tough couple of years.  This is not just bravado because the sector has proved itself extremely resilient through other economic crises.

Professor Bruce Tether of Imperial College Business School has made a study of the last 30 years of data in the NCE Consultants File series as part of a government funded project to explore the development of design and engineering firms.

“Three things stand out over the last 30 years,” he reports. “First that despite the ups and downs of the last three decades we have seen spectacular growth and achievement by Britain’s engineering consultancy firms. Second is that firms tended to ride out the storms of recession rather well.  And third, it is remarkable how quickly, and unexpectedly, the tide can turn.

“If history is any guide, we can expect British consulting engineers to hold up rather better than many other sectors of the economy, and to enjoy some significant growth
opportunities when the recovery comes.”

In 2008, even with workload in the last three months of the year dropping dramatically, companies replying to the NCE Consultants File questionnaire brought in fees of £10.33bn, up 20% on 2007 which in its own right was a boom year. Staff numbers employed also ballooned to 171,886 – up from 156,423 but those numbers need to be taken with a pinch of salt, as they were staff numbers on 2 January. Since then consultants have been announcing between 5% and 10% job cuts on an almost daily basis.

I think the entire construction sector will lose 25% of its capacity

Atkins chief executive Keith Clarke

Atkins chief executive Keith Clarke is expecting a big fall in industry capacity over the coming year. “I think the entire construction sector will lose 25% of its capacity,” he says, but stresses that engineering firms are more robust than the overall construction and house building industry.

“Companies with a strong local presence and strong balance sheet, that haven’t borrowed huge amounts and have good, strong technical skills will survive better than those that are highly diversified and more generalist,” he believes. “The great thing about engineering is that we are selling our judgement and that is why we may have more chance in the worst recession we will ever experience. Global recession is no reason to doubt the validity or need for good engineering design in the built environment.”

But Clarke points out that however much need there is for engineering, particularly with the need to rethink engineering to cope with climate change, everything will remain seized up until the banking crisis is finally resolved.

“The market globally is extremely difficult in the short term and will remain so until the banking system is re-established and working again,” he says.

Scott Wilson and current Association for Consultancy & Engineering chairman Geoff French agrees. “The banking sector has to resolve itself or it will constrain everyone’s growth. The success of the government drive to get money through the system is crucial.

“As businesses grow they need cash.  We all get paid in arrears and it is unlikely in the current circumstances we’ll get clients to pay in advance! But we either change the way we are paid or get access to capital. The problems start when a company comes to the end of its arrangements with a bank because in this climate the bank is likely to be more difficult about the next line of credit.”

He continues: “The biggest concern is that banks will force people to reduce their overdraft. If they do that, a listed company might have to issue more shares; a private company has less places to go. I worry a lot for people traditionally working with the private sector, contractors and smaller firms.

“Smaller companies maintain their independence because they fill a niche, but when the good times are over the result could be some misery.”

Over at one of those smaller firms – 212 strong Tony Gee – they are a bit more bullish. “We feel very sorry for people in building,” says managing director Graham Nicholson. “Most of our work is public sector, rail and we are getting into power. All three sectors seem to be doing reasonably well.”

What is changing though is the workload horizon. “We’ve seen that halve from a year to six months,” Nicholson adds. “Luckily we are not risk averse. We are chasing everything there is and if it’s risky, we’ll manage the risk.”

Mott MacDonald chief executive Keith Howells has also got is eye on the workload horizon.  “We won a lot of work in January all over the world, against my expectations,” he says.

“We’d been expecting to see things stop – for example private finance schemes but they have got going again having paused for breath and are now limping to the finishing line. We have a strong order book (£1bn) but we are fast burning that up and I think the real problem is going to be 2010.”

Recession lessons

Recession is certainly putting the consulting industry’s bosses on their mettle. Managing growth is a breeze, managing your way successfully through a slump is real badge of quality leadership.

It’s not always nice work. As Keith Clarke says: “Every time you shrink your business you cause a fair bit of distress.  But it does mean you are managing. Rather than coping with strong markets you are managing in real time. Recession can be good for management. It makes you try harder.

“If you believe in your skills, you hold your nerve, and if not, you improve them. If you believe in your business, it is not a time to panic or adopt a different strategy. Don’t go into non-core work, stick to the knitting, value your technical skills, keep investing and be thankful you didn’t borrow too much.”

New Hyder chief executive Ivor Catto has been restructuring his business over the last six months to focus on what it does best – transport, utilities, property and the environment. “Any good gardener prunes to bloom,” he says. “Half of our restructure (which has involved 400 redundancies) has been to liberate efficiency and align ourselves more with our clients and would have happened anyway. The other half relates to us pulling back from problem market sectors and non-core business.

“My intention is that we improve the business in the recession and become more client-centric, more client-focused. Recession gives us an opportunity to drive cultural change more swiftly.”

At Grontmij, the challenge for chief executive Lawrence Hughes is to consolidate the growth of the past year that saw three major purchases and moved the UK business firmly into the major league. “We have to get away from this ‘we’re all going to die’ mentality. From the growth perspective, the appetite to do acquisitions is not there, and that’s to do with confidence. When is the right moment? Slightly before the market’s bottomed. We’ve probably got to sit tight for six to eight months. We’ll be back in the later part of this year.”

RPS, whose 2008 results showed revenue up 30% and profit up 28%, all ahead of expectation, is positive about the coming year. “The thing to take from the sector is that there are very experienced, very talented people running the big organisations,” says chief executive Dr Alan Hearne. “The businesses have been around a long time, the people at the top have been there a long time and their depth of experience will stand them in good stead.”

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