Sector spotlight: Services
Ready to serve: opportunities for services businesses
Lessons learned in 2020 pave the way for opportunities in the services sector in 2021 and beyond, according to serial private equity chair Richard Houghton. Creating a mission-critical offering and investing in the tech around it will be key to future success.
Two decades in senior roles in the services sector makes Richard Houghton well placed to talk to the good, the bad and the ugly of businesses from inside and out given his experience in both executive and non-executive positions. And what really stands out to him as a ‘good’ is the importance of leadership – particularly in 2020.
“Businesses with strong and inspirational leadership were able to translate that into superior performance, particularly during the pandemic,” Richard says. He shares the experience of British Engineering Services (BES), a firm he chaired for five years, the CEO of which resisted the cost-saving temptations during early lockdown to furlough staff and withhold bonuses. The firm’s tech-enabled resilience put it in good stead, employees kept their bonuses and jobs, and loyalty – on both sides – continues to support strong performance (see box).
Richard’s roles do more than pay the bills – he is clearly invigorated by the challenges involved in helping growth companies realise their full potential. It is perhaps unsurprising that he’s been involved with nearly a dozen private equity-backed initiatives, journeys which often find growth accelerated through capital and expertise. Detractors often point to high leverage levels once private equity gets involved, but Richard actually feels some of these investors’ value-add in the latest crisis points to productive long-term partnerships.
Their clout was compelling given many lenders have a number of businesses with certain private equity firms. These investors’ recollection of banks’ behaviour in the aftermath of the GFC meant some PE houses were refreshingly quick to assess the leverage robustness of their portfolios. “Having someone dedicated to lending relationships is absolutely critical, particularly at a time like this,” Richard stresses.
None of the businesses he worked with directly in 2020 required this, and he puts their resilience down being on the front-foot as regards digital capabilities and services which were ‘must-haves’ for clients. He draws on his experience with BES, a provider of premium quality engineering testing, inspection and consultancy services he joined in 2015 when Inflexion led the firm’s carve-out from RSA.
“We invested heavily with Inflexion’s backing in digitising and automating processes, such as engineer scheduling and online reporting. It meant we were extremely well positioned once the lockdown came, as we could be very flexible in rescheduling appointments daily or even hourly.” This proved to be a key competitive advantage: as BES’s competition lacked such innovation, many saw capacity run as low as 50%, while BES’s only dropped marginally, from 90% to 85%. This ingratiated BES with customers and brokers as they appreciated the efficient flexibility, leading to BES being able to grow its market share.
A big part of downturn resilience is embedding a business as mission critical within its client base. Certain companies in Richard’s portfolio were naturally protected; BES for example inspects equipment, which is compulsory by law for the businesses it serves. As no exemptions were granted, it meant BES’s demand was unaffected.
Another company he chairs serves the airline industry, which was severely impacted. While areas of the business were affected, the firm’s document and safety management services saw limited impact due to their mission-critical nature. “In 2020, we learned that services deemed discretionary are more vulnerable to market fluctuations, whereas mission-critical services have been very robust. “
Creating a robust technical infrastructure around businesses will be key, not just for agility but for customer enhancement, according to Richard. “Digital enablement has been a key theme in last 12 months so the more digital you can be, the better.
Investment in digital significantly improves customers’ perception and ease of services across the board. We’ll continue to see innovation there to create competitive advantage and this will drive growth.
Richard joined as Chair at the very early stages of British Engineering Services’ carve-out from RSA plc to help orchestrate the complex transaction alongside CEO Stewart Kay and Inflexion.
“Overall, it has been an absolutely extraordinary transformation,” Richard says, his enthusiasm clear. He recalls early conversations around a “litany of issues” which needed to be overcome. “When I look at it today, BES is the market leader, has the strongest brand recognition, the best customer service, and the fastest growth of anyone in the industry.”
He attributes much of the success to the incisive vision of Stewart. “He’d been in the business and knew what the opportunity was. The competition wasn’t very strong, so we knew if we did it right, we could create a market leader and deliver a much higher level of service than was available in the industry. This would enable us to command a higher price in the long term.”
The transformation was multi-faceted, stretching beyond a compressed, 7-month IT migration from RSA’s systems onto BES’s own: “A focus on equipping our engineers with technology means we have a more motivated workforce, together with a fresh and very strong management team, investment into the technology, and much-improved customer service. There were many components to the success.”
And he reiterates his belief in the power of strong leadership. “The ability to maintain a high level of operational capacity meant Stewart was adamant we were not going to furlough staff. He resisted the temptation to save costs and stated clearly our priority to our staff so that we’d have a loyal workforce down the line. His vision and Inflexion's unwavering support – from the initial carve-out through to the growth post-independence and even during the challenging pandemic period – has proved invaluable in making BES such a success. Our faith in them has been well justified; look at the performance of the business.”