Confronting Core Market Decline
Portfolio diversification in the industrial services sector

Portfolio-led diversification can create a wealth of new growth opportunities for industrial service providers, but also presents new challenges. In this article, we highlight some critical success factors for the effective transition to a portfolio service offering in the context of changing customer expectations and sustained market volatility.

The industrial services sector is multi-faceted, comprising a range of services, from the maintenance and decommissioning of existing installations to the design and execution of new build projects, both onshore and offshore, across a multitude of vital industry verticals, including oil and gas, power generation and process manufacturing. In 2013, the market was estimated to be worth in the region of €20bn in Europe alone, and by 2018 this market is forecast to reach €26bn, representing a 5.7% CAGR.

However, the sector faces a number of challenges. The significant and sustained reduction in the oil price since June 2014, to which many industrial service providers are heavily exposed, has impacted investment and demand for critical services. In addition, environmental regulation is limiting the lifetime and profitability of assets in certain sectors, forcing industrial service organizations to pursue alternative growth markets. For example, coal-fired power stations would appear to face a bleak future in the UK; a third are expected to close by 2016 and the government has proposed that all are shut down by 2025. At the same time, while not all client organizations are ready to transition to portfolio-based procurement, customer needs are nonetheless evolving and interest in portfolio solutions is growing, driven by the potential to improve capital productivity, reduce supplier interface costs and enhance profitability.

In this paper, we first consider the challenges that organizations can face when seeking to implement a portfolio strategy. We then introduce ADL’s High Performing Business (HPB) Model and highlight some critical success factors (CSFs) for effective transformation, based on our experience of working with leading industrial service providers to develop new operating models to deliver such strategies.

Challenges in portfolio strategy transition

It is with this forecast decline in core markets and changes in customer expectations in mind that many industrial services companies are challenging established service offerings, and the organizational models that support them. They are reorganizing themselves to efficiently target new market sectors, potentially with revitalized, portfolio-style offerings. However, doing so is not without its difficulties, including specific issues relating to post-merger integration, business processes, internal capability development and governance.

1. Strategic intent not matched by sufficient postmerger integration activities

As an alternative to the challenges of attempting organic growth, many industrial service providers have chosen to pursue a growth-by-acquisition strategy as a means to achieve scale benefits and enhance their overall offering to the market, as rapidly as possible. However, the attainment of target benefits is contingent on clear leadership, resolute decision-making and regular communication. This is especially true in the immediate wake of an acquisition, when ways of working and cultures are formed, and the seeds sown by which the envisaged integration benefits, may be realized.

As the below case insight highlights, the consequences of delaying the integration of acquired entities, or failing to do so effectively, can result in issues with the existing organizational model, that tangibly impact the delivery of a strategy.