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The Living Wage: Business Services sector

“The Business Services sector has been experiencing margin pressure (on low margins) for a number of years as its customers have sought to control their own costs by reducing the services required and using competitive tension in the sector to push for price reductions. Increased costs from the proposed Living Wage will put operators under further pressure which will no doubt result in an increase in restructuring activity and consolidation in the sector.”

Stephanie McMahon, Restructuring Services Partner

Business Services is a sector that has a highly leveraged workforce and is a major provider of jobs and revenue in the UK. According to the Business Services Association (BSA) the sector employs c.10% of the UK workforce with many of those workers earning minimum wage.
The BSA has expressed clear support of the proposed Living Wage, noting that it will provide consistency and clear guidelines on pay that will help to address claims of unfair and discriminatory pay practices levelled at the sector in the past.

Larger operators have also publicised their support referencing the clarity on pay that the proposal provides which is expected to help with staff retention. Providing this support is easier for larger companies who typically operate on contracts which include the ability to pass on cost increases driven by inflation or changes to government legislation.

For smaller operators, or those that haven’t incorporated contractual protection, the proposed Living Wage presents a real concern and already finely balanced operating models may not work with the additional costs this requires. Those that cannot compete may have to consider consolidation in order to remain viable and others, may need to restructure and/or exit part or all of their operations.

The ability to pass costs on to customers will be a key driver of profitability for operators. For those companies that serve the public sector this challenge will be even greater given the financial pressure faced by both local and central government. The public sector has historically outsourced work to the private sector to ensure higher quality at lower cost. With the higher cost of wages, will it still make commercial sense to outsource the same contracts or will volumes of outsourcing reduce?

Despite its clear support for the principle of the proposed Living Wage, the BSA is looking to engage with members in September to discuss its impact and prepare a response to the government. It is likely that there will be further comments and developments on the impact it may have on this sector.

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