At a turning point in its history, facilities management is a profitable sector

According to Nick Lawson, facilities management firms should specialize rather than overstretch themselves

Nearly all large commercial buildings are subject to the invisible hand of the facilities management (FM) sector. The fire suppression system and the chillers are being maintained by someone. There's a person cleaning the floors. Theoretically, someone is aware of whether the fourth-floor HVAC unit is three months away from failing. This industry, which is vast, unglamorous, and seldom covered by analysts, brings in more than £4 trillion a year worldwide. Additionally, it is in the early phases of a bifurcation that will destroy a significant amount of value for those who choose the wrong horse and present some truly intriguing investment opportunities.

The fundamental issue with facilities management is that it has been solving the wrong issue for decades. Instead of figuring out why things break in the first place, it has been concentrated on fixing things. When its clients require it to be predictive, it has been reactive. Even the most sophisticated clients have been using it when they are in dire need of something more strategic. Furthermore, it hasn't been able to demonstrate the value it offers. As a result, every contract renewal inevitably leads to a discussion about costs, which facilities management firms are ill-positioned to win.

This is now changing due to technology, but not in the way that most industry observers have thought. For many years, the narrative has been that facilities managers would be able to control the strategic dialogue with their clients by owning the data through a single digital platform, or "single pane of glass." That story is essentially true. It has overlooked the question of who ultimately controls that glass.

The issue with facilities management firms.

Original equipment manufacturers (OEMs) are the wise investors. Over the past three years, integrated workplace-management software companies have been aggressively acquired by Siemens, Schneider Electric, Johnson Controls, and Trane Technologies. The core telemetry is produced by mechanical and electrical systems under their control. The platforms that interpret that data are now being purchased by them.

In response, two major US commercial real estate services and investment firms, CBRE and JLL, have made their own technological investments, with CBRE creating something truly unique. From raw asset data to AI-driven performance optimization to a generative AI interface for facility managers, its technology stack significantly outperforms the majority of conventional facilities management competitors.

More significantly, CBRE has made a strategic decision that, in my opinion, is wise and undervalued: it subcontracts nearly all of the work and self-delivers the engineering and maintenance tasks where risk and complexity are high. This keeps the company concentrated on its core competencies, avoids the costs associated with managing large, low-margin cleaning and catering staff, and maintains customer conversations at a level where CBRE's technology and insight capabilities truly add value.

Low margins, erratic profits, and poor cash generation have plagued the integrated model that FM companies ISS, Coor, Mitie, and ABM Industries have pursued, employing sizable workforces across subsectors from cleaning and engineering to food service.

These businesses are not poorly managed. The model has a structural disadvantage. When a company manages electricians, cleaners, security guards, and caterers at the same time, every dollar invested in innovation or process improvement results in a smaller portion of the total business. Scale has advantages that are more difficult to quantify. It is more difficult to standardize best practices. Often, the most skilled engineers would prefer to work for a pure-play technical services company rather than one of eight service lines.

Compass Group discovered the correct route.

There are some exceptions, and they are useful. By concentrating almost solely on food, Compass Group has established one of the most remarkable records in international services. Its management and performance framework serves as a master class in what happens when a big, decentralized services company forces a few well-defined drivers of value and a common operating language throughout the entire organization.

Every choice made by the framework is linked to one of five levers that determine profit or loss, ranging from labor scheduling and overhead control to client retention and consumer participation. In its simplicity, it sounds almost dull. Two decades of best-in-class margin delivery at scale have been achieved by it.

Bravida (Stockholm: BRAV), a technical services company that installs and maintains the plumbing, HVAC, and electrical systems in buildings throughout Sweden, Denmark, Norway, and Finland, is my favorite name among facilities management stocks. It doesn't make an effort to do everything.

With a network of 330 branches that provide the local density and customer proximity that make the economics work, Bravida focuses almost exclusively on facilities management engineering. You can standardize methods of operation, make wise training and certification investments, draw in the top engineers, and compound efficiency gains year after year when you establish true scale in a single technical discipline.

A downturn in Swedish construction, a branch's poor governance that led to its closure and prosecution, and some bad debts from a major client have all contributed to Bravida's challenging period. The price of the shares has drastically dropped. That presents an opportunity, in my opinion. The company's internal focus on operational excellence is precisely the kind of self-improvement culture that distinguishes durable compounders from cyclical operators, the underlying business model is sound, and the structural drivers for technical building services are very positive.

Another company worth keeping an eye on is the privately held Churches Fire and Security, or CFS. It operates in the UK fire safety and electronic security market, which is characterized by alarming fragmentation, historic underinvestment, and tightening regulations. Approximately 2,000 small operators compete in this market with essentially no scale advantages. Currently, CFS has taken over 70 companies, all of which were completely integrated in three to six months. With attractive margins, revenue has increased to £100 million. The market is big enough to support additional consolidation, the model is replicable, and there are actual regulatory tailwinds.

In the facilities management sector, depth is more important than breadth.

Over time, diversified business models perform significantly worse than focused, scalable ones with true density economics. In a field where big contracts appear appealing from the outside, it makes sense to be tempted to add more services and regions. However, each new service line is also a new source of distraction. You cannot run dozens of start-ups at once and hope one succeeds, according to Peter Thiel. A low-margin services company with limited funding and management capacity follows the same reasoning. Almost always, depth triumphs over breadth.

Additionally, the FM sector is experiencing a true technological turning point. The ability of mediocre operators to conceal themselves is being eliminated by developments in building sensors, AI-driven predictive maintenance, and integrated data platforms. Previously opaque buildings are now transparent. Customers who previously relied on SLA compliance reports are now requesting sustainability documentation, asset-lifecycle forecasts, and energy dashboards.

Weak processes and inconsistent data collection will expose operators. Strong procedures, standardized methods of operation, and the capacity to convert data into value for clients will enable operators to bill for more than just labor. Our surroundings are becoming increasingly intelligent. The businesses that cater to them must also be more astute. It will be interesting to possess the ones that are.