Balfour’s UK shake-up about ‘positioning for growth’

Balfour Beatty’s major restructure of its UK construction divisions is a key part of a bid to realise £50m in efficiencies and is aimed at preparing the firm for further growth, not down-sizing, the firm’s operations boss has said.

Speaking to Building following the announcement that the contractor had put all 12,000 staff across its UK construction services on notice, Balfour Beatty’s chief operating officer Andrew McNaughton insisted that the move was not about scaling down its UK operations. Rather, he said it was about “positioning for growth”.

As first revealed on Building.co.uk last week, Balfour Beatty has notified all 12,000 staff in its construction services division that their jobs are at risk.

The firm’s £3.4bn turnover UK construction services arm includes contractor Mansell, Balfour Beatty Civil Engineering, Balfour Beatty Engineering Services and Balfour Beatty Construction.

The contractor would not say how many jobs would go as part of the restructure, but Building understands those employed across the firm’s infrastructure projects - around two-thirds - would be unaffected. Of the roughly 4,000 working in construction, around 1,500 jobs could go.

McNaughton was reluctant to be drawn on the detail, but said the restructure was aimed at driving “further forward on our efficiency savings”.

“This is about growth,” he said. ”[It’s about] how the business is organised in the UK [and] how we structure to face clients.”

Balfour is an international business and won’t be harmed by the loss of 2,000 jobs

Andy Brown, Panmure Gordon

Balfour Beatty’s construction arm was the only part of the business not to see a rise in profit last year, with the firm pointing to lower public spending and a highly competitive market eroding margins.

The results for the year ended 31 December 2011 showed operating profit for its construction arm at £169m - a fall of 16% compared with the previous year. The firm’s global order book for construction also fell, from £9.2bn in 2010 to £8.5bn last year.

UK construction services performed worst, with revenue down 1% on the previous year, compared with a 12% rise in the US and an 8% rise in the rest of the world.

McNaughton said the latest UK restructure was part of the firm’s move to broaden its efficiency drive, after the success of its UK shared services centre in Newcastle, which led to savings of £15m in 2011 and an expected further £15m in 2012.

Now the firm is seeking to move that efficiency drive deeper into its operations to realise an extra £50m of savings a year by 2015.

Last month chief executive Ian Tyler said the efficiency drive would aim to “take advantage of the increasing integration of our activities”, with £10m to be realised over 2012 - on top of the £15m already identified - £30m over 2013, and £10m over 2014.

Analysts told Building they expected most of the £50m to be realised in the UK, with the latest restructure a key plank of the programme, as the firm increasingly looked abroad for work, rather than in the UK.

In 2011 the UK construction services order book was down 25% on the previous year to £2.8bn and comprised only a third of the firm’s overall construction order book.In contrast the US order book was up 12% to £3.7bn, reflecting the expansion of the firm into the US market.

Announcing the firm’s results, Duncan McGrath, Balfour Beatty’s chief financial officer, said the “heart of our strategy” and the reason for the firm’s “optimism for the future” was its focus on expanding its business in power, rail, transportation and mining, as well as focusing on growth markets such as Australia, Canada, India and Brazil.

He stressed that UK construction was a small part of the firm’s business and that he expected the UK market to remain “reasonably steady”, with the UK cost reduction programme key to the firm’s performance.

Andy Brown, Panmure Gordon analyst, said the UK restructure was “no major surprise”.

“All companies are looking to take costs out and unfortunately for construction - where there are not a lot of assets - that means people,” he said.

“But looking at the bigger picture, they are a genuine international business […] and won’t be harmed by the loss of 1,000-2,000 jobs in the UK.”

Howard Seymour, Numis Securities analyst, said the move was “prudent”, given market conditions, but said the firm would need to think carefully about rationalising its divisions if that meant the end of “strong names” in the market, such as Mansell and Balfour Beatty Civil Engineering.

Tony Williams, Building Value chief executive, said: “They are an exceptionally well managed firm so they’re doing it because they have to. It’s going to be another very difficult year or two and they have to cut their cloth accordingly.”