Strategy
In 2005, ISS announced the new strategy, Route 101. Route 101 is a
destination plan that describes ISS in terms of service offerings, organisation,
geography, etc. The destination described in Route 101 is a Facility Services
company with revenue of DKK 101 billion. ISS will continue to work towards this
goal following the vision: “Lead Facility Services globally”.
To further operationalise this vision, ISS in the spring of 2007 introduced
the “ISS Strategy Plan 2007-2009”.
ISS strategy plan 2007-2009
The ISS Strategy Plan 2007-2009 is not a new
direction for the Group. The strategy of transforming ISS into the leading
global Facility Services company remains the same. The ISS Strategy Plan
2007-2009 further details the initiatives needed to fulfil the vision.
- Facility Services
ISS continues the process of transforming itself into
a Facility Services company. In response to customer demand, ISS has established
operations in security services through acquisitions in several geographies. To
further strengthen its strategic focus on developing these services, Security,
including access control and guarding services, has been added as a fifth pillar
in ISS’s “IFS house” as illustrated above. This means that ISS wants to offer a
wide range of services supported by the five pillars of the IFS House:
> Cleaning
> Office Support
> Property Services
>
Catering
> Security
Service solutions are offered to the customer as single services, multi
services or Integrated Facility Services (“IFS”).
In a single service outsourcing the customer buys one service solution from
ISS, e.g. outsourcing of cleaning or property services. The customer thereby
enjoys the benefits of outsourcing to ISS and can capitalise on service know-how
and best practices, labour management and handling of all HR issues, procurement
benefits, reduced financial administration of the outsourced service area,
increased operational fiexibility, etc.
In a multi service outsourcing the customer achieves the same benefits as
single service outsourcing only for each outsourced service area as well as
benefits of service integration where possible.
In an Integrated Facility Services solution ISS takes over all or most of the
service functions at the customer’s premises, provided the services are within
the pillars of the IFS house. The customer thereby receives the full potential
of single service outsourcing and benefits from an ISS on-site management
solution that exploits the synergy potential, and as a result provides the
customer with an integrated and cost effective solution.
Through the acquisitions of broadranged service companies in Germany,
Switzerland and the United Kingdom, ISS is able to provide management of
Facility Services. The acquired capabilities have provided an approach to
clients where ISS is able to offer management of services, delivered either
through subcontracting or through own service provisions depending on the
preference of the client.
An IFS implementation team was established in 2006 with the primary focus of
accelerating the IFS implementation in selected countries. The team consists of
four experienced specialists with an overlying mission of providing operational
support in winning, bidding, transitioning and operating the first IFS contract
within a country. The prioritised countries in 2006 were Spain, Belgium and
Switzerland. In 2007, the prioritised countries are Germany, the Netherlands and
Australia.
- Single service excellence
The foundation for being the leading Facility
Services company is a continuous focus on delivering service excellence in every
service area. Going forward, ISS will continue to focus heavily on developing
single service excellence and spreading it throughout the organisation.
- Operational efficiency
ISS will seek to maintain and enhance
operational efficiency by retaining its focus on three well-established and
prioritised operational objectives for its local managers: (i) cash flow; (ii)
operating margin; and (iii) profitable organic growth. In addition, ISS will
focus on reducing the financial leverage on a multiple basis.
Cash cow
ISS’s first objective is to continue to maintain a relatively
high rate of cash conversion primarily by operating in a manner that optimises
working capital. Through this approach, ISS expects to continue to generate a
positive free cash flow.
Operating margin
ISS’s second objective is to maintain or improve its
operating margin, which increased from 5.1% in 2000 to 5.8% in 2006. ISS will
seek to generate operational efficiencies by increasing its local market
positions and operational densities, as well as through the implementation of
company-wide best practices.
Profitable organic growth
ISS’s third objective is to continue to
leverage its international market position and service offering in order to
increase its local market positions and drive organic growth. To do this, ISS
established a Sales Excellence Centre in 2006 to create sales systems and to
promote benchmarking and the sharing of best practices between countries. ISS
continues to work with a wide range of initiatives to: (i) attract new
customers; (ii) increase customer retention rates, including through the
establishment of dedicated key account teams; and (iii) cross-sell related
services, such as pest control and washroom services, to existing customers.
Additionally, ISS has established a market presence and operating platforms in
selected high-growth economies, particularly in Latin America and Asia.
Reduce financial leverage
Following the acquisition of ISS A/S by FS
Funding A/S, ISS is determined also to seek to reduce, on a multiple basis, the
financial leverage of the FS Funding Group, which increased as a result of the
acquisition. This is expected to be achieved primarily through growth in ISS’s
operating profit through a continued focus on cash flow, operating margin,
organic growth and acquisitions. However, as a result of this growth strategy,
ISS expects to incur additional debt in the future. The extent and timing of the
FS Funding Group’s deleveraging on a multiple basis will, however, depend upon,
among other things, ISS’s cash flow generation and the scale and timing of
payments related to its future acquisition activities, which may temporarily
increase its leverage on a multiple basis in terms of net debt to pro forma
adjusted EBITDA.
- Growth
A wide range of initiatives will underpin organic growth
spanning from further investment in the growth economies of the world via an
enhanced sales force and training to new customer retention initiatives.
ISS expects to continue to make acquisitions to facilitate its strategy of
increasing local scale and broadening its local service offerings. Since the
beginning of 2000, ISS has acquired and integrated more than 500 businesses,
more than 450 of which were acquisitions of relatively small businesses with
annual revenues of less than DKK 100 million (EUR 13.4 million). The two largest
acquisitions to date have been Abilis in France in 1999 and Tempo in Australia
in 2006 which on the date of the respective acquisitions had estimated annual
revenue of approximately DKK 5.2 billion and approximately DKK 2.9 billion.
Apart from Tempo, the two largest acquisitions in 2006 were Edelweiss in
Switzerland (estimated annual revenue of DKK 0.7 billion) and DEBEOS in Germany
(estimated annual revenue of DKK 0.5 billion). ISS expects to continue focusing
primarily on smaller acquisitions, which it believes will reduce the risks
relating to individual acquisitions and enable it to leverage the experience of
local management teams throughout its countries of operation. ISS cannot provide
any assurance, however, that it will not pursue larger acquisitions in the
future.
It is important to emphasize that acquisition driven revenue growth will vary
widely from year to year, among other things depending on opportunities,
organisational capability, financial resources, etc. and thus acquisition speed
could deviate significantly from the range mentioned above.
- Geography
ISS intends to increasingly focus on the BRIC-countries
(Brazil, Russia, India and China) as well as other growth markets, particularly
located in Eastern Europe, Latin America and Asia.
In 2006, ISS established country operations in Mexico and the Philippines and
in January 2007, ISS set up operations in Taiwan. Furthermore, the presence in
Turkey was significantly expanded in 2006 through an acquisition. ISS is
currently analysing the US market in preparation for a possible US entry.
- Organisation
As a foundation for the strategy plan, ISS is transforming
its organisation to allow it to focus on accelerating the service development.
Head office resources focusing specifically on China and India have been
appointed. Organisational resources have also been added for Eastern Europe,
Russia, Australia and Latin America in order to support the development of these
geographies.
Training and education is key to the strategy plan. ISS will invest even more
in these areas in order to continue to accelerate its transformation towards
Integrated Facility Services.
- Branding
As a part of the transformation to a global Facility Services
company, ISS will invest further in strengthening the ISS brand across the
world.
- Systems and methodologies
ISS will invest further in systems and
methodologies. A “Corporate Solution”, i.e. a standardised IT-business solution,
has been further developed and implemented in a number of countries. Shared
initiatives in a number of areas such as planning tools, facility service
management systems, etc. have been developed and will be implemented going
forward.
- Acquisitions
ISS considers acquisitions an integral part of the
business model. Acquisitions are the Group’s primary means of investing in the
business, to develop and refine the business concept and to continuously improve
its competitive strength in an unconsolidated industry structure.
The acquisition process is aimed at creating value for shareholders. The
acquisition process is anchored with local management teams enabling them to
take advantage of and leverage the local presence. The local management team
screens the market for potential targets and builds a pipeline of qualified
opportunities. The management teams stay involved throughout the acquisition
process from the very beginning of target identification to the final step of
the integration in order to make sure that responsibility and focus on the
execution is maintained.
ISS’s mergers and acquisitions department manages the
acquisition process, primarily with respect to valuation of the acquisition and
negotiation of the material acquisition agreements, to the extent that its
centralised resources add value. This centralised department is responsible for
quality assurance with respect to all acquisitions and is a driving force with
respect to centralised pipeline management in the country organisations. The
centralised pipeline management ensures that each subsidiary continues to
explore acquisition opportunities which would contribute to the achievement of
ISS’s objectives. ISS’s mergers and acquisitions department is more heavily
involved in all larger acquisitions, and all acquisitions are approved by the
Executive Group Management of ISS A/S. In addition, the approval of the Board of
Directors is required for large or strategic acquisitions. The most important
element of Group involvement is in the assessment of country readiness for
acquisitions as well as strategic screening and valuation of acquisitions. On a
discounted cash flow basis a total value of the target is estimated by assigning
value to six independent components.
1.Stand alone value of the target
2.Value of expected contract
losses
3.Value of expected margin improvements
4.Value of expected
financial synergies
5.Value of expected cost synergies
6.Value of
expected future organic growth
The Group operates with three key valuation indicators. First, Return on
Investment (“ROI”) and price multiples are assessed and measured up against
appropriate benchmarks varied according to size, industry segment, geography,
etc. Second, the time structure of the MVA and the EVA break-even horizon is
assessed. In addition to the mentioned valuation parameters a range of other
criteria are employed on a discretionary basis.
The ROI to ISS is measured as the difference between the total value and the
investment.