After a 26 year career with contractor Kier, Paul Sheffield takes over as chief executive in April. Antony Oliver reports.
The recession may be officially over for the Office of National Statistics but according to Kier’s new chief executive in waiting Paul Sheffield, the next 12 months will continue to be a testing time for contractors.
That said, with the firm expected to post an upbeat set of interim results this week, he remains confident that Kier is better placed than most contractors to weather any storm.
Although last year’s housing crash saw Kier’s revenues drop from £2.4bn to £2.2bn and profits from £87M to £51M, Sheffield is very comfortable that this year’s performance is so far outstripping expectation.
And he predicts that, despite the obvious uncertainties about the economic and political scenes, there are still big opportunities across all of the firm’s key sectors.
But with so much focus by clients on reducing costs, the key is to pick the right work and focus on being rewarded for delivering increased value. “We have got to be very wary over the next 12 months,” he says predicting that the economy was likely to “bumble along the bottom” for some time yet.
“If there wasn’t an election in May I’d be more optimistic but I think that will dampen things down,” he says. “Most businesses have reshaped and resized but we are all very alert to the changes that still have to come. It’s a time to create opportunity.”
In building − which currently accounts for £1.2bn of Kier’s revenue − these opportunities for growth will be in the construction of care homes and mixed use schemes.
The housing division has also been reconfigured to focus more on affordable housing and it is now more of a contract housing business − “lower margins in the good times but in the bad times you won’t lose your shirt,” Sheffield explains.
“Our feeling is that EdF is gaining momentum. Maintaining our nuclear skills has always been a key part of our strategy over the last decade”
And he also sees a big stream of work on the back of the government’s carbon reduction commitment programme, a raft of new retrofit work as clients attempt to reengineer their buildings to save energy by using better cladding, insulation and heating systems.
However, the other big area, he says will be civils and infrastructure which currently only accounts for around £200M of turnover. This workload is based largely around frameworks with Network Rail, BAA and Bristol International Airport and United Utilities in water.
“There is no real reason why it is only 20% of our total construction revenues,” he explains. It is a business he knows well, having joined Kier in 1983 as a graduate civil engineer and then progressed, first to run the construction division in 2001 and then to take over responsibility for all construction activities in 2008.
“There are some big schemes coming along. They will help us to change that. Major infrastructure is where the big prizes are,” he adds.
He points to energy as one major sector. Already, Kier has been a leading provider of new gas turbine power stations in the last decade and Sheffield intends to build on this. He also hopes to utilise experience built up over decades working in the nuclear industry with clients such as Sellafield to capitalise on the expected construction of new nuclear power stations.
That said, he is ready for a whole lot more political haggling over the price of carbon and government subsidies before the power companies commit to investment in new nuclear.
But with generator EdF currently tendering for advanced ground works packages at Hinkley Point, Sheffield is content that progress is being made.
“Our feeling is that EdF is gaining momentum,” he says. “Maintaining our nuclear skills has always been a key part of our strategy over the last decade. These are big schemes worth £3bn to £3.5bn and you will need nuclear experience.”
Add to this a predicted growth in Kier’s existing support services business which encompasses building maintenance, facilities management and local authority outsourcing.
“It’s a higher margin business than construction and it’s an area for growth as there will be more pressure put on local authorities to reduce their budgets,” he explains. “One of the ways to do that is to outsource. We believe that there will be more contracts coming out to allow us to expand that side of the business.”
Of course Sheffield is quick to praise current chief executive John Dodds for steering the firm through this recent difficult economic period. Dodds retires in April after 40 years with the firm and seven at the helm. He has reinforced Kier’s position as a market leader in a diverse range of markets with 11 regional businesses, across the UK.
Frameworks have been key to the company’s success and they are certainly at the heart of the strategy going forward. With up to 75% of work now coming from frameworks in water, education, airports, prisons, health, rail and retail, these agreements are key to meeting Sheffield’s desire to boost Kier’s profitability.
“I think the framework market is better quality because the clients are more focused on working with the contractor to drive down cost”
“It’s very much a two tier economy − frameworks and not frameworks,” says Sheffield, pointing out that, for Kier, being closely aligned to clients’ needs is crucial. “We are on 52 different frameworks and that means that we have access to a much bigger market than many others.”
So while Sheffield is far from complacent about the challenges the next year will bring, he is confident that, right now, Kier continues to win work at the right price.
“It is about getting the price down for the client and making a decent return for the business,” he explains.
And although focused around the UK, Kier also did £60M to £70M of business overseas last year. It remains active in the Middle East with phosphate mining, opportunities in rail and school building in Saudi. Its Caribbean business is also busy and it is bidding in Hong Kong.
Kier’s diversity, he points out, allows great sector cross-fertilisation of ideas. But he accepts that it is also a big challenge to make sure that each of the different divisions talks effectively to each other.
“There is a lot of overlap between sectors,” he says. “The crossover is people and the interface with the public and it is all very transferrable. If you break any construction process down into its constituent elements there is a lot that is similar.”
Having been with the company for 26 years Sheffield knows it well. He describes himself as very much a people person with strengths around building teams and his plan is to continue to leverage the expertise around this
“We are targeting jobs where we think that our intellectual input can save money”
The regional network of 32 UK offices means, he says, that there is virtually nowhere that is not local. And since 1 July 2009 all eleven of its divisional businesses now operate under the Kier brand.
Clearly the forthcoming General Election presents business risks not least since a change in government will, he predicts, mean a review of public spending programmes and an inevitable slow down of work. But, he adds, work won’t just dry up.
“Take the latest academy framework,” he says.
“It’s £4.4bn over four years and if 10% comes off that then at least I’ve still got access to £4bn and a lot of work.”
And even if there’s a 20% cut in spending, he adds, there will still be a significant volume of work available for firms on the frameworks to bid for.
“I think (the framework) market is better quality because the clients are more focused on working in partnership with the contractor to drive down cost,” he says, referring to the alternative procurement method where costs are driven down through a competitive tender process.
This partnership approach, he says, should also give greater potential for cost saving. Most contractors, he says, operate an overhead of say 5% and a margin of 2% which on a £10M job equates to £700,000 profit. With a competitive tender there is very little that the contractor can do to re-engineer the job, so by and large the cost of delivering the job will be the same. To differentiate price, bidders have to cut into their 7% operating margin.
With frameworks, he says, clients work with the contractor to cut into the delivery cost so bigger savings are possible without affecting profitability.
“We are targeting jobs where we think that our intellectual input can actually save money through redesign, reconfiguration or using different materials,” he explains. “We will focus on where we think that we can engineer an edge.”
Paul Sheffield CV
Sheffield, 48, becomes chief executive of Kier Group in April. He is a BSc, CEng, MICE and was Civil Engineering Project Manager of the Year in 1996
- 1983 Joins Kier
- 2001 Becomes MD of Kier Construction
- 2003 Becomes chairman of Kier Construction
- 2004 Joins Kier Regional board
- 2005 Joins Kier Group board responsible for infrastructure and overseas activities
- 2008 Assumes responsibility for Group construction activities as MD of Kier Regional
And if clients are simply employing quantity surveyors to look at cost − and Sheffield insists that there is an increasing number − then Kier will be more likely to walk away.
Of course there are still too many firms who are unable or willing to walk away. Sheffield says that he is already seeing signs of the financial squeeze prompting an unwelcome return of the claims culture where contractors try to claw back losses through litigation.
“I think that there is a great danger that behaviour is going to be changed by the lack of cash and the drive for cheaper and cheaper answers,” he warns.
“We are certainly seeing more subcontractors being perhaps a little bit trigger happy when it comes to adjudications and trying to use a formal process to resolve issues quickly,” he adds.
So there are plenty of challenges ahead as Sheffield prepares for the top job at Kier. And in the short term, he says his goal is simply to come out of the current recession stronger than his peers. But beyond that it is really about building a future based on delivering higher and better quality margins.
“There is no point in chasing volume if you can’t bring the profit up with it,” he explains. “Our vision is to be the most highly respected company in the industry − you don’t become respected by being the biggest but by being the best.”