The only in-depth analysis of the health of the consulting and engineering industry in Europe, the Benchmarking study was launched in 2006 and explores industry trends. Participants are provided with a company-specific comparison, as well as a copy of the Benchmarking report.
We have reproduced Hannah Vicker's introduction to the report below which summarises the major findings from this year's study.
The full 90-page Benchmarking 2019 report is available to purchase now from ACE.
We continue to live in uncertain times, and this anxiety is reflected in this year's ACE Benchmarking report. With domestic political uncertainty in the shape of a continuing stalemate over the UK relationship with the European Union combining with wider geopolitical instability around the world, the outlook for our industry is not as bright as it can and should be. For our industry to thrive it is now more important than ever that we maintain clear sight of industry trends in profitability and productivity and continue to benchmark our collective performance with our peers in the UK and in Europe.
Pipeline and workflow
The UK domestic market has been hit by Brexit uncertainty, instability in the UK economy and client indecision which has affected new orders and particularly affected commercial activity. Policymakers will need to pull a large rabbit out of the hat, and fast, to improve these difficult conditions and prevent a further entrenchment of gloom and contraction into 2020. This year's average order book length for UK firms was at 12.3 months in comparison to European firms at 12 months.
The Construction Products Association (CPA) forecast for 2019-2021 predicts a 0.3% decline in total construction output for 2019, in line with previous projections, but the forecast for 2020 has been revised down to 1.0% from 1.4% at the beginning of the year. The forecast for 2021 has been cut to 1.4% from 1.7% previously. All of these figures are based on Brexit being effectively concluded by the end of 2019 which does not look likely at this time. Construction output looks in doubt with projections that the sector will see no growth up until 2021 without the delivery of major infrastructure projects, which have been put into further doubt given that Johnson has initiated a review of HS2 and is throwing his weight behind much cheaper schemes instead.
On the plus side, major projects such as the Thames Tideway Tunnel and Hinkley Point C are expected to drive activity in the infrastructure sector as well as the new five-year regulatory periods in the water & sewerage, rail and roads sub-sectors. After almost a decade of austerity, local authority funding will also prove important to activity on roads although the risk of delays to these projects makes the fortunes of the wider construction industry far from certain. The industry is looking towards the Comprehensive Spending Review and National Infrastructure Strategy to get the confidence it needs.
Looking into what the benchmarking survey tells us about specific industry influencers has been revealing.
The increase in costs and the lack of increased revenue has seen firms cut back their spending on IT despite the fact that the digital revolution continues apace. UK firms are still spending more than their European colleagues but there has been a decline since last year.
64% of UK firms stated that overheads were rising at a faster pace than revenue which is higher than the 50% of European firms who also saw this trend. The increasing cost of overheads is clearly placing a squeeze on UK companies' balance sheets.
If we look specifically at client-consultant relationships, we can see some modest signs of improvement in debt collection in the UK. Total UK debtors were higher at 80.7 days, but if debts less than 30 days old are excluded, there was a small improvement. Total debtors for European firms were also higher at 75.3 days, but debts over 30 days were unchanged.
Despite the uncertainty in the market, companies are registering an increase in their order book pipeline for next year of 8% on average. UK firms are much better placed than European ones.
Profitability continues to be an issue for our industry, but one that appears to be a little less of an issue for European firms than for UK based ones. UK aggregate profits in Cs were 0.9% lower than last year. With revenue rising by 8%, the weighted average UK profit margin fell from 6.3% to 5.9%. The simple average fell from 7.2% to 6.3%. The weighted average profit margin for European firms improved from 4.5% to 5.1 % but the simple average was unchanged at 7.5%.
Investing in people
In order for the industry to embrace the opportunities open to us for the benefit of our clients we need to define the business models of the future which provide value, incentivise quality and innovation delivered by sustainable businesses. To this end, ACE and the Environmental Industries Commission (EIC) have launched the Future of Consultancy campaign which aims to ensure the UKS engineering and environmental consultancies are able to seize these opportunities. Over the coming months ACE will lead on a number of activities to bring together members, industry stakeholders and clients from the private and public sectors to examine how business models and conditions can be improved for the sector.
In this years' Benchmarking project, we note single-digit growth in revenue (net of subcontracted costs) both within the UK and European markets levels more muted than in recent years. There has been a fall in profitability for the UK firms and a standstill for the European firms.
In this situation it is cost control that will help our industry manage the margins and this has been a successful strategy for both the UK and European firms in this report. Whilst there are slightly better profitability margins than many contractors, this is still too marginal a performance to produce the returns our members seek for re-investment, expansion, to embrace the opportunities of digital transformation and to prepare for the next phase of significant growth.
Copies of ACE's Benchmarking overview report 2019 are available to purchase now.