Key themes of the day include the specialist verses multidiscipline debate, why the middle ground can be good, identifying market opportunities and overcoming constraints
1 October 2015 / United Kingdom
With key themes of the day including the specialist verses large multidisciplinary firm debate and the latest thinking on industry M&A trends, Environment Analyst’s inaugural Business Summit in London last week was attended by around 100 delegates from over 70 companies active in the environmental consulting and services sector (Environment Analyst 24-Sep-15). The event was also attended by representatives from industry associations, regulatory bodies and some of the industry’s biggest clients, advisors and investors.
The topics under discussion, both as part of the wider panel-based Q&A sessions and the smaller group roundtables, were both varied and yet highly relevant to the audience which comprised environmental consulting business managers spanning the full breadth of the industry, including those from some of the largest international consultancies, as well as those active in niche specialist practices.
Environment Analyst has pulled together some of the overarching themes dominating the day’s discussions:
Current state of the sector: opening the day were presentations from Alan Fletcher, director of Eclexis Associates, and Environment Analyst managing director Julian Rose, who provided a brief summary of the history and structure of the UK environmental consultancy market and current market growth estimates, which put growth at around 3% for 2014 representing something of a climbdown on the previous year’s c5% increase. It is evident that EC market growth is much more tied to economic performance – including recently the surge in infrastructure investment – than it was in its boom years of the 90s and early 2000s when new environmental legislation was the primary driver.
In 2015, there have been little more than one or two “fine-tuning initiatives” in terms of new policy drivers, according to Rose. These include the ISO 14001 update, EIA Directive amendments and changes to the hazardous waste regulations.
Also noteworthy from EA’s market research programme, is that while large firms tend to be performing better than smaller practices in UK – probably on account of the recent changes to the structure of the market in terms of contracts with the recent clutch of major nationally significant infrastructure projects such as HS2 and Crossrail playing more to the strengths of the large firms.
That said, on the global stage the best-performing firms have recently tended to be the small and mid-ranging in size but more specialist environmental/sustainability firms, rather than their large multidisciplinary rivals which have been struggling to achieve any real organic growth in the EC sector in recent years. Their niche capabilities, management focus, independence and agility in responding to the ever-changing market dynamics and complexities have been clear differentiators for the specialists. However, Rose noted that with growth now not a given in this industry service innovation has become a more critical success factor than ever, whatever the consultancy size.
Political uncertainty: Rose went on to summarise the current political backdrop, referring to the regulatory hiatus at both a UK and EU level concerning green policy. While the lack of consensus on UK energy policy has created a major headache for the renewables sector, the review in Brussels of existing legislation such as the birds and habitats directive and the circular economy package also suggests that the environmental agenda is unlikely to be driven forward from within Europe in the near future.
These concerns were later echoed in executive director at the Environmental Industries Commission Matthew Farrow’s session on environmental policy drivers. Farrow criticised energy secretary Amber Rudd’s position on renewables and used the platform to remind people in the room who the environment secretary is, after a year of Elizabeth Truss “focusing on the food and rural affairs aspect of her job, and largely steering clear of the environment”. He also cited a continued “lack of direction” in waste policy, as well as the downturn in oil and gas markets and the impact of a likely EU referendum in the UK.
But he did also identify several emerging opportunities for the EC sector, including mitigating the impact of infrastructure, the sustainable cities agenda and recovery of housebuilding and brownfield redevelopment. Other positive drivers mentioned by Farrow for 2015/16 include the growing awareness and concern for air quality made prominent by the ruling from the UK supreme court to take “immediate action” in tackling pollution and more recently Volkswagen’s emissions scandal. Meanwhile, Rose touched on the return to prominence of international climate policy as a key underlying driver following on from the US clean power plan and run-up to COP21 in Paris later this year.
The importance of partnership: this was a reoccurring theme throughout the day. Indeed the warmth of atmosphere in a room full of what were, ultimately, competing rivals, was proof of the existing spirit of cooperation within the industry. Ian Allison, global head of climate resilience at Mott MacDonald, was keen to stress the benefits of strategic partnerships, particularly so when it comes to winning the major infrastructure projects which are driving the UK EC sector at present, and the complexity of which require a range of skills and knowledge so broad that no one company can realistically hope to offer it all.
Allison said he believes the “days of the one stop shop are probably gone.” Partnerships in the shape of joint ventures, whether incorporated or unincorporated, he argued, enable a group of specialists to cover all angles. On the client side, Andrew Page, head of contract management at Anglian Water Services Ltd, agreed with this assessment, underlining the importance of “co-location” to enable a group of specialists to come together and truly collaborate on a single project. This is not, he stressed, a question of “going native” but more an exercise of “de-badging” and ensuring that every voice within an alliance has equal weight regardless of the size of individual firms.
‘Middle ground is good’: in the various discussions focused on the recent wave of M&A activity which has dominated the industry, there were recurrent references to the widening gap between the niche boutique firms and multidisciplinary professional service firms. The words ‘polarisation,’ ‘dichotomy’ and ‘middle ground’ were used repeatedly. Al Spiers CEO of the US-based sector advisors 2020 Environmental Group noted that deals are taking place at both ends of the spectrum with the so-called “mega-mergers” at one end – creating super sized firms of 100,000+ staff – and “micro-M&A” at the other whereby firms of around 100 employees are happily snapping up ten-strong firms for example. Spiers asserted that “the middle place is a nice place to be”.
Stuart McLachlan, chief executive of Anthesis Consulting Group plc concurred with this idea, saying that the “bunching” of multidisciplinaries at the top end has ‘created space’ for players such as Anthesis to position themselves as sustainability/environmental specialists but with a global offering. McLachlan’s goal is to grow his c130-strong practice to an “optimum level” of around 500-600 staff within the next five years. And, as Alban Forster, director of SLR, commented, what is often crucial when operating in the tricky middle ground area is finding a balance between introducing a strong corporate brand identity and maintaining the entrepreneurial spirit of an SME. Offering a word of warning, however, Paul Collins, managing partner of Equiteq, advised firms at the tail-end of the industry not to try to be too many things at once but rather to “focus on focus”.
Don’t forget resourcing and skills: demand for environmental consultants is “significantly” higher than two years ago, according to Paul Gosling, executive director of specialist recruitment agency Allen & York. Once again skill shortages and the ability to recruit the right candidates has emerged as a major factor limiting growth in consultancy practices. Gosling identified a number of areas with skills gaps including noise and acoustics, ecology and air quality, as well as an ongoing lack of candidates with “soft skills” such as communication, presentation and decision making. In addition, candidates with three to six years’ experience are increasingly hard to find thanks to the freeze in graduate recruitment during the recession.
Continuing the theme of staffing challenges, Rufus Howard, director at Royal HaskoningDHV, provided his insight into how to tackle the growing conflict between fee rates and client expectations. In order to meet costing demands many consultancies use low level consultants to do the bulk of project work, with director level staff project managing. However, clients are increasingly savvy in demanding more senior level time on projects, yet fee rates remain stubbornly static, making the tendering process and subsequent project management a complicated balancing act. Howard argued the solution is to increase the volume of mid-tier staff – principals and associates – with appropriate training, apprenticeships and careful mentoring to fast track them through internal promotion. Ultimately this strategy will increase the competency of the consulting project team while keeping a handle on project cost. Recruiting from within can also deliver higher rewards for lower risk, he noted.
Fee rate trends and other staffing statistics based on Environment Analyst’s own UK Market Trends Survey were presented at the Summit by editorial director Liz Trew. The online survey of industry contacts – which ran between February and May this year – found the fee rate gap between large and small firms to be increasing with large firms able to charge a premium of c25% on small firms for director level input (Environment Analyst 25-Jun-15). This is the reverse of the situation in the immediate wake of recession when the small firms were generally enjoying enhanced rates. At present, the average daily rate for a senior consultant from a large firm is £596 per day but the small firm average is £520 per day.
World of EIA: the EA Business Summit also welcomed environmental managers from some of the UK’s largest and most complex infrastructure projects including Crossrail, Thames Tideway and HS2 to talk about the challenges of undertaking environmental impact assessments for these high profile projects. Environment director of HS2 Peter Miller illuminated delegates into the process of assessing environmental impacts through the parliamentary select committee while head of sustainability and consents at Crossrail, Rob Paris, explained how in line with the terms set out in the environmental statement, 7.2 million cubic metres of excavated material was taken off-site and used build a wetland reserve at Wallasea Island off the coast in Essex.
Claire Brook, partner at Bond Dickinson ran through the incoming changes coming through the latest round of EIA Directive amendments, including the need for more competent experts making independent reviews of Environmental Reports (as ESs are to be known) more likely, changes to screening and scoping procedures, and also the requirement to monitor mitigation measures which she sees as providing a potentially enhanced role for consultants during consenting and in the operational/mitigation phase.
Meanwhile, Josh Fothergill, policy and engagement lead at the Institute of Environmental Management and Assessment, raised concerns about the recent declining coverage of climate change in ESs but praised practitioners for their generally increased coverage of mitigation methods and responsibility. He also encouraged all EIA consultancies to sign up to IEMA’s EIA quality mark scheme to encourage further improvement and best practice in the sector.