Skanska has become the third major contractor to reveal plans to cut back its supply chain in a bid to cut costs.
Chief executive Mike Putnam told NCE that the firm was cutting back on the number of suppliers it uses for commodity purchases but that sub contractors and designers are safe.
“We are taking a more co-ordinated approach and using fewer suppliers,” he said. “In today’s environment, why go buy commodities from lots of people when you can save on transaction costs by buying from fewer?”
Putnam added that through the firm’s “One Skanska” approach it has already moved to minimise the number of sub contractors and consultants that it works with. “For 10 years now we have, where possible, been using skills internally. By doing that we can be much more joined up in our overall thinking and delivery and can control the risks better.”
Skanska’s move to cut back on suppliers apes that of Carillion and Balfour Beatty. Carillion is slashing its supplier base from 25,000 to just 5,000 in an effort to save £140M a year by 2013. Balfour Beatty is cutting the number of suppliers it works with from (News last week).
Carillion and Balfour Beatty have also acquired consultancy skills in recent years in order to further boost their internal capabilities. Putnam ruled this out at Skanska.
“We have some internal specialist design skills, but we have no plans to go and do what some of our competitors have done,” he said. “We prefer linking up with some of our suppliers on an integrated basis.”
Putnam was speaking after the firm announced its results for the year ending 31 December 2010.
Revenue for the year was £1.3bn, a reduction of 17% on 2009. Putnam said the reduction largely reflects the current recession in the market.
Operating income at £38M equated to an operating margin of 3%, an increase on that reported at the end of 2009.
But Putnam admitted it the firm would be unlikely to maintain that this year, with pressure from clients to cut costs.
“We are not doing anything daft and we are not going to buy work. But we are operating in a market that is in a difficult place. The construction market is in recession, and it is definite that clients are in a tough place themselves.
“But while there is a stronger focus on price, clients want companies with a strong balance sheet and good values that are going to look after some of the other agendas,” he said.
“Whilst we expect market trading conditions to remain similar during the coming year, we will continue to carefully select and target the right projects for Skanska focussing upon delivering the expectations of our clients and shareholders alike.”
Putnam said the firm was focusing on “broadening the base” of its clients to mitigate downturns in core markets such as roads and rail. The firm is focusing on energy from waste projects and restarting its UK residential property business. Last month it bought its first development site in Cambridge.
The UK business is also getting involved in Skanska projects internationally, through staff transfers and by taking equity stakes in PFI projects.
Putnam is concerned that in the UK there will be a hiatus of PFI schemes amid coalition government pledges to reform the procurement method.
“PFI is important to us. It gets a lot of criticism and its a shame people don’t focus on the positives. Where you have got complex programmes it is clear that by transferring the whole of the risk across to the private sector they have delivered, to time, and without cost escalation.
“What we see is that PFI will remain part of the solution, but it is not clear what part it will play or in what shape.
“A lot of schemes are still closing, but many of these were already in train [before the decision to review]. We are likely to see a hiatus for a short while. While that happens we are using some of our skilled resource on international projects.
He warned that if others are also forced to adopt that approach UK skills will be lost.
“That might become a challenge for us in the UK as a whole. If we don’t have a regular deal flow, people will go overseas.”
BOX – Cost of civils
As UK boss of a Swedish-owned outfit, Putnam is will placed to comment on the disparity in cost of civil engineering projects in the UK compared to rest of Europe.
He was heavily involved in the production of Infrastructure UK’s cost of civil engineering report and admits to being “staggered” by the difference in costs.
“If you compare a typical Swedish project with a typical UK project you will very often see a factor of four to five difference in the level of staffing alone. It is staggering that it is so much.
“The UK simply can’t ignore that it is not as efficient as other countries – not at a time when money is so constrained,” he said.
He said difference in costs stems from the UK’s business culture. “We have too many detailed standards and procedures; we are much a more bureaucratic place to do business. We like to employ armies of advisors. When tendering, we follow EU procurement rules rigidly and leave far too many firms in the game for too long; and then there is the whole issue around planning in the UK.
“It all adds up to layer upon layer and cost upon cost,” he said.