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WSP’s golden ticket to green consultancy

Stuart McLachlan, WSP Environment & Energy’s global managing director, says why his business is in a strong position to ride out the credit crunch, while others may not

06-Oct-08 

By Liz Trew

WSP Environment & Energy – as it has been known since the rebranding of WSP Environmental in 2007 to reflect the growing focus on energy services – is undoubtedly one of UK environmental consultancy’s biggest success stories. Stuart McLachlan was there from the start in 1995, when at the age of 27 he was brought into WSP Group by CEO Christopher Cole to set up an environmental arm of the business. At that time, WSP Group was primarily a design, consultancy and facilities management specialist to the property and construction sector.

With McLachlan at the helm, WSP Environment & Energy has delivered year-on-year double-digit growth in profit and turnover, and embarked on an ambitious strategy for global expansion. He has overseen several major strategic acquisitions, including the 2001 purchase of Swedish consultancy Jacobson & Widmark and more recently Environmental Strategies Consulting of the US (2006) and Fitzwalter Group in Australia (2007). McLachlan was appointed to the parent PLC’s executive board in 2005.

Today, WSP Environment & Energy employs more than 1,000 environmental professionals around the world – of which just under half are based in the UK – and constitutes around 14% of the multidisciplinary consultancy parent's business alongside transport and infrastructure (30%) and property (56%) related projects. The group’s latest financial results show the environmental consultancy still in rude health during the first half of 2008 despite deterioration of some of its core markets. While WSP Group’s overall turnover grew by 40% to £363.5 million and operating profitability also improved to 7.2% (up from 6.5% for the first six months of 2007), environment and energy saw a healthy 20.5% turnover increase to £46.5 million in the same period and slight increase in profit margins to 7.1% (2007: 7.0%). Recent growth has been predominantly organic and Stuart McLachlan confirms that the 16.5% increase in UK turnover for the first half of this year was entirely down to organic growth (see table below for a detailed breakdown of the financials by geographic region).

WSP Environment & Energy financial summary

-	Six months to June 2008			Six months to June 2007
-	Revenue	Profit*	Profit margin	Revenue	Profit*	Profit margin
-	£m	£m	%	£m	£m	%
UK	19.0	1.7	8.9	16.3	1.4	8.6
Mainland Europe	11.7	0.7	6.0	9.3	0.5	6.5
US	9.3	0.5	5.4	7.6	0.4	5.3
Africa,India & Middle East	1.7	0.1	5.9	2.5	0.1	4.0
Far East & Australia	4.8	0.3	6.3	2.9	0.2	6.9
All	46.5	3.3	7.1	38.6	2.7	7.0
*Operating profit

Property sector

Given the roots of the parent firm, it’s no surprise that the property and construction sector continues to form a significant component of WSP Environment & Energy’s business – projects shared with other parts of WSP are estimated to account for almost a fifth of total UK turnover. Meanwhile, contaminated land services across the client spectrum constitute about a third of the total fees earned. Yet McLachlan remains remarkably unfazed by the recent turn of events in the house-building industry and related sectors: “We are not governed by the property sector any more than any other multidisciplinary environmental consultancy. We are diversified across many sectors but we must remember the fact property has been a fantastic market for most environmental consultancies for many years and, whilst the market will change, it will continue to be so.”

Whilst acknowledging that it is “changing rapidly,” McLachlan views the current situation as more of a management challenge than a market challenge. “The [property/construction] market is still delivering the volume of work that we need to grow, but it’s delivering in different areas,” he explains. “Clearly the residential sector is under strain, but we continue to see progress with some of the larger regeneration projects, such as the London Olympics, which are helpful. We have also been successful with some of the products launched in recent years like ‘Active Transfer’, which has produced a couple of major projects that will last several years, keeping our remediation business very active.”

Market innovation

Launched in 2003, Active Transfer provides a permanent buy-out solution to the potential liabilities associated with contaminated land without affecting the ownership and control of the property assets in question – and typifies the WSP Environment & Energy objective to be recognised as a market innovator. The risk transfer concept is fairly well established in the US remediation industry, but less so across the pond in the UK and European marketplace. According to Stuart McLachlan, there are some “look alike” products (from Arcadis and others) but typically they are guaranteed fixed-price remediation and not liability transfer.

Last autumn, WSP completed what is believed to be the first liability assumption deal outside of the US for the firm purchasing one of the former Kodak plant sites on Merseyside. Under the terms of the agreement, the consultancy took on the obligation of cleaning up the site which includes any cost overruns to fulfil mutually agreed environmental responsibilities. The deal was underpinned by insurance that protects both the site’s vendor and acquirer from third-party claims and regulatory fines for at least ten years.

“Since the project last year, we’ve been faced with a significant number of opportunities of a scale that could change the face of environmental consulting, both in the UK and outside the UK,” McLachlan boldly states. He makes no bones about it that “if this product really takes off, it would be absolutely phenomenal for environmental consulting,” and qualifies this by saying that the ten per cent market growth year-on-year commonly quoted for the sector “would be absolutely blown out of the water”.

McLachlan explains why such a service could change the face of the market. “What it is does is remove uncertainty, cleans things up from an accounting point of view and protects the money for actually doing something about the pollution legacy we have in industrialised nations…On an Active Transfer, we are contractually obliged to draw the money down to reach a point of closure with the regulators.

“And if you think about the cost associated with the legacy of contaminated land that exists around the world, if the monetary value of that legacy was transferred from the companies that have built it up over many years to environmental consultants to sort out, then you can imagine the sort of sums and potential impact it would have. At the moment, companies just do what they have to do – drip-feeding from environmental consultants as and when they need to. But if there was a financial instrument that was actually seen as a strategic response at board level, as opposed to a technical response at environmental management level, then I believe the impact would be very considerable.”

McLachlan admits there will need to be many more deals done to achieve this vision. More deals will also be necessary to validate the concept in the marketplace, as liability assumption deals have attracted some criticism from within the environmental insurance and legal community for posing an unsafe insolvency risk, being too expensive and not well suited to the UK/EU regulatory environment. Yet McLachlan clearly feels that WSP is onto a winning formula. “Of course, we need a bespoke insurance product to wrap around these deals to protect against unforeseen complexities,” he argues. “One of the things that we’ve found very helpful is that these insurance decisions are often taken in New York – where the expertise is – no matter where the project itself is based. Because we have a global structure, our people in New York can oversee the project which has a lot of currency to be able to get the right commercial deals that are going to interest clients. And I think we’ve moved on a lot with that over the last two years.”

Management challenges

Returning to the “management challenges” presented by the current economic climate, Stuart McLachlan was extremely frank in talking about how environmental due diligence work – which is of course dependent on a buoyant merger & acquisitions market – has slowed over the last twelve months. But for WSP at least, it has been replaced by a new and highly lucrative workload from the introduction in the UK of the energy performance certificate (EPC), as part of the European Directive on the energy performance of buildings, requiring all commercial buildings to be reviewed and potentially upgraded.

“The reason why I think WSP will do very well in the current climate (and we are still doing well) is because we are positioned to capitalise on these new legislation-driven services,” says McLachlan. “And let’s face it, EPC is in the property sector. We have tremendous relationships with clients in that area, and we’re winning millions of pounds worth of EPC work. And what I think we will find when the M&A market comes back – as corporate transactions are one of the triggers for EPC – is that a lot of companies will be looking for firms such as ourselves who can do due diligence and EPC at the same time. We have up-skilled and retrained a lot of our due diligence people to do EPC services.”

In order to survive the downturn, he believes that consultancies will need to be increasingly agile in responding to new legislation: “If a company is positioned to be able to capitalise on the opportunities presented by the EPC and other emerging legislation-driven energy and climate change services, then they’ll continue to do very well even if other parts of the business go into decline for a couple of years. Those businesses unable to adapt to market changes in the property sector and those that are in existence to serve their engineering colleagues I think will feel the strain.”

McLachlan is also explicit that another key strength for WSP at the current time is the business’s international dimension. “We now have a whole host of global master service agreements that operate in a different economic cycle to the UK domestic scene. We’ve also got parts of the world where markets are just exploding like the Middle East. A lot of our staff here are working on Middle East projects, either through transfers out to our regional offices or working remotely from the UK, travelling to the region as appropriate. The US business is also coming on – there’s a lot of talk about the US economy but it may well prove to be in better shape than the UK. We’re starting to see certain markets picking up like due diligence so I would say that the US may be in a very early phase of recovery.”

Certainly there appears to be no evidence to suggest that WSP Environment & Energy is likely to fail to reach its stated goal of increasing turnover two- to three-fold by 2010. However, McLachlan is under no illusion about the difficulties facing the business and the wider sector over the coming months. “It will be interesting to see what consultancies report in terms of organic growth, not so much this year, but next year which I think will be the most difficult year. We are still expecting growth, but it will be more challenging.” He has a hunch that while the larger environmental consultancies will continue to grow, the growth will become more focussed on capturing market share by being “more entrepreneurial and more aggressive” as opposed to simply being a beneficiary in a fast-growing market, which has been the experience for many in recent years. “However, I also think the environmental consulting market will probably still grow across all the service disciplines,” he adds. “Climate change and energy is the big ticket.”

Climate opportunities

So far this year WSP’s climate change and energy team has grown from 20 to 75 strong – and it is still recruiting to swell capacity even further. Stuart McLachlan is keen to point out that this area of the business is focussed purely on sustainability, climate change and energy consulting services “and does not include things like oil and gas exploration which some of our competitors would claim to come under the environmental and energy consulting banner.”

Given the current pace of change, McLachlan finds it difficult to predict by how much the climate change and energy segment might grow over the next few years – although the one thing he remains certain of is that it will grow. “The world is moving towards a low-carbon economy, so there will definitely be dramatic change over the next 5, 10, 20, 50 years as the world looks to deal with climate change. The strategic response to those drivers, whether it’s at government level, business level or at consumer level, is going to require a lot of expert advice and I believe that environmental consultants are better placed than anybody else to shape the future which will be determined by the reality of the threat of climate change.”

“I think engineers will also be beneficiaries too, as it’s one thing to shape the future but another to deliver the future,” he adds. McLachlan expects huge changes to the way that we engineer things, from transportation to buildings. “I think that it’s a terrific opportunity and perhaps we shouldn’t be surprised that some of our traditional environmental consultancy competitors are now buying engineering companies specialising in buildings and infrastructure.”

• WSP Company Analysis by Environment Analyst