While several competitors have won friends in the City by jumping decisively from construction to support services, some industry observers have criticised contractor John Mowlem for treading a less exciting path. But behind the scenes at Mowlem's facilities management arm, Aqumen Group, managing director Jack McGrory and his team have been driving through the kind of change that could provide the City with what it wants – a series of support services acquisitions.
KL: You became managing director of Aqumen in 1998 – a tough year for the division which had found itself over-dependent on some areas of the public sector. Since then you have broadened the client base of Aqumen considerably. How have you done this?

JM: With my background at Serco, I had a (private sector) client contact list and the opportunity to break into some of these markets should the opportunity arise. When I joined we had probably 90 per cent (of our business) in defence. We're now 54 per cent in the private sector and the remaining 46 per cent is split between defence and other (public sector) areas.

I brought with me four directors from Serco who added a lot of commercial capability. We spent a lot of time trying to find the right operators, the right directors and the right commercial people to come into the organisation because the whole skill-set changes dramatically when you talk about the private sector. The same applied to PFI projects. We had to recruit a whole new knowledge base.

We tried to focus on markets we understood – the banking and investment and pharmaceutical industries for example. Also, through our link with Mowlem, the property sector provided us with an opportunity for cross-sector work.

KL: What impact has this change in direction had on Aqumen's growth?

JM: We have trebled profits in the last three years and increased staff numbers on the back of that – we have 4,000 employees and Aqumen's turnover is now £150 million. By the end of this year it will grow to £250-£300 million due to the new work that is coming through, in particular, the Steps (Inland Revenue) project.

Our acquisition of Dudley Bower has given us another offering. As well as M&E, the acquisition took us straight into the retail market.

KL: Private sector contracts haven't lengthened in the way many thought they would – BT's Project Jaguar outsourcing contract for example was expected to set a precedent for longer term deals, but was signed up at 5 years. So why is private sector work so attractive?

JM: I think that management relationships, and new procurement techniques among the client base have improved. I think there is now scope to have a longer negotiated period at the end of a contract where a client says initially it is a two -to-three year deal, but there is an option to extend. We've done this with Barclays – we had a deal which was for two years but is now in the middle of that two years and has been signed up for three and a half. And we've got another extension at four years.

We spent a lot of time trying to find the right operators, the right directors and the right commercial people to come into the organisation because the whole skill-set changes dramatically when you talk about the private sector

If we can show the commitment, investment and innovation at the front end, we don't expect to go to tender. We like to expect that we'll be negotiating through that period for a long-term extension.

KL: Companies like Trammel Crow Savills and Chesterton Workplace Management are seriously targeting the European market right now. How do you hope to develop your presence in Europe?

JM: We have worked with Dutch airline KLM for the last two years and are tentatively negotiating a JV arrangement. Aside from this we currently have four or five companies with which we are in discussion that have a Dutch platform and a pan-European capability. We'll probably sign a joint venture arrangement with one of these. There is also a possibility that we'll sign up a joint venture with a technology partner or an M&E partner. Mowlem has businesses in North America and Australia, and is in the process of acquisition in Australia. We're probably just a few months away from a European deal – we've been working on this for the last six to nine months. We're in the final stage of our selection process.

KL: The sale of the Mowlem group's scaffolding business, SBG, released £50 million for acquisitions. M&E contractor Dudley Bower was the first and you are looking at Europe. Are you close to another in UK?

JM: We're close to looking at a couple of smaller M&E acquisitions to facilitate national coverage for Bower. We're also looking at other service companies that would assist the development of the portfolio. I think, like everyone else, we've looked at business process outsourcing and said that should we find an appropriate company that can do that we will do a deal or find a strategic partner. In PFI we work with Capita for example. There are opportunities that we could probably close by the middle of the year. There is a definite commitment and a stated strategy that we will look to make two acquisitions this year if not three.

KL: The big debate for construction-based groups has been to what extent they should move into support services. Where do you stand in this debate, and what is the split now across the businesses within the Mowlem group between profits drawn from construction and profits drawn from support services work?

JM: In 1998, McKinsey undertook a review of the business and concluded that anything not related to the built environment should go – hence the sale of SGB. That released £100 million plus and after (shareholder payouts) £50 million for acquisitions. McKinsey said this should be invested in service companies. We did the Dudley Bower deal which brought us 500 staff and a route into cross selling into the retail and pharmaceutical sectors.

Aqumen brought in £5.1 million of our total profits this year and our environmental business brought in £4.6 million. Mowlem brought in £20 plus million. So in other words, we brought in one third of total profits.

There is now a recognition of the value the services business has with us

Given that building and civil engineering projects are at a peak now, and margins have moved dramatically, to say that the split will be 50:50 in two years might be wrong. But by 2004, we will end up delivering a profit of £18 million before interest and tax to the John Mowlem Group, which will be a 50:50 split.

The major difference is that Aqumen this year has £760 million retained business. We now have the largest forward order book of the whole of Mowlem.

KL: At the time of Mowlem's year end results in March 2000, chief executive John Gains said that he would not consider seeking a relisting on the stock exchange like so many of Mowlem's competitors have done. Has the group's thinking changed on this in the last 12 months?

JM: I don't believe we've been as astute as some of the other companies in the construction sector at describing what they call services. Some of the other companies that have been re-rated have probably got a larger dimension of building or construction than us. We've given a very straight bat.

John does recognise the value of the services business. All the analysts have made comments on the growth and position of our services business, which I think means there is now a recognition of the value the services business has with us.

Source

The Facilities Business