Institutional Channels in the United Kingdom

Stronger year for institutional services

Institutional services saw stronger growth in 2016 in comparison to the review period CAGR. This was due to more favourable economic circumstances in the UK in general. Growth was also supported by the ongoing outsourcing of all non-core activities by public and private institutions to contractors.

National Living Wage brings up average pay within the industry

From 1 April 2016, the UK government made the National Living Wage (NLW) mandatory for workers aged 25-years-old or over, thus increasing their hourly pay rates above the National Minimum Wage. The NLW was already on its way to becoming a mainstream concept at this time, especially in high-profile workplaces such as bank head offices and public institutions such as Parliament. In Parliament, campaigns for the NLW notably gained significant public support over 2014-2015. Long-term contracts are the norm in institutional channels, with the NLW resulting in an initial increase in costs. This is likely to have an adverse short-term impact on service providers' margins, as contracts are already in place. However, the impact of the NLW will diminish in the long-term, as additional costs are priced into renewed contracts.

High-value contracts grow while low-value contracts remain flat

Although the overall performance was positive in 2016, high-value contracts performed best. Multinational companies with high-value contracts servicing larger institutions, both private and public, notably saw strong value gains. Companies that provide specialist services via low value contracts however struggled, principally due to a fall in contract prices as a result of stronger competition for tenders.

Single-service contracts lose out to bundled facility management contracts

2016 saw further consolidation of overall facility management. Specialist contracts for outsourced single services are seeing declining demand, such as contracts for cleaning, foodservice, waste management, security, mechanical services and electrical services. Public and private institutions increasingly favour contracts for bundled services, with clients shifting to contracts covering multiple services in order to reduce procurement costs.

Brexit puts growth prospects at risk

Following the EU referendum in June 2016, the prospect of the UK leaving the EU has become a reality. This in turn creates uncertainty for the delivery of goods through institutional channels. Labour is one of the largest costs in the delivery of services. In the event that migration flows to the UK are dampened, restrictions on free movement will reduce the supply of labour in an industry that heavily depends on it, resulting in wage inflation. Further risks are linked to a potential economic downturn and increased costs due price inflation of for imported equipment. More businesses may focus on cutting costs, thus reducing spending on contracted services. If there is an economic recession, there is also uncertainty regarding how the largest European contractors operating in the UK will react.

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