Leaning in: Wates’ chief executive reveals productivity plans

Avoiding conflict with the supply chain over cladding remediation, decarbonisation and implementing
lean management sit at the top of the priority list for Wates’ chief executive

In 1994, Eoghan O’Lionaird was posted to work in the US by the firm he had joined four years earlier as a graduate trainee. He’d just finished learning his trade as an electrical and instrumentation engineer in Tokyo for metal producer Mitsui Kinzoku. “By the time I finished with that company in Japan and moved with them to the States to head up an engineering team, I was a reasonably competent engineer,” says O’Lionaird. “Certainly the only reasonably competent engineer who spoke Japanese and was Irish working in Indiana. I mean, I can be absolutely confident of that.”

Almost 30 years on, O’Lionaird can look back at a career spanning a variety of senior roles at leading electrical engineering firms around the globe. The Wates role he took on in February this year, however, is his first experience of working within the UK contracting market. “It is a learning curve, of course,” he says. “But the company is replete with experts in their own specific areas. I wasn’t hired because I know anything about construction, per se.”

“The company is replete with experts in their own specific areas. I wasn’t hired because I know anything about construction, per se”

Of course, O’Lionaird is not the first chief executive to be in this position – Leo Quinn hasn’t done too badly after joining Mace with a CV that is for the large part even further removed from the sector than O’Lionaird’s. And the Wates boss is clear what he brings to the top table. “I have a few miles on the road when it comes to general management,” he says. “I’ve been doing that for well north of 20 years now. I know something about growing businesses based on strategic differentiators. I know something about assembling teams and then aiming to motivate them to achieve whatever the agreed target is and then doing a little bit better each year.”

O’Lionaird goes on to list another string to his bow that he hopes can help drive margins higher at the 10th-ranked firm in the CN100. “Ever since I started out in Japan, I have been a student of ‘lean’ [management],” he says. This might send a chill down the spine of anyone bearing the scars of previous attempts to introduce the approach to the UK construction industry. But this, perhaps, is where O’Lionaird’s underexposure to the sector’s inertia on productivity could prove advantageous. “People have told me some people have tried ‘lean’. Well, I’ve been practising it for 30 years, admittedly in other domains. In Japan I think we did know how to make processes efficient in engineering and construction.”

It is a subject that O’Lionaird clearly feels passionate about. Even small tweaks to core processes “will yield huge dividends” in terms of productivity, he says. “We can take the processes – whether they are in tendering, or in preconstruction, or in the various phases of construction itself – and we can iron the kinks out of those processes. This is not beyond the wit of man or woman. From what I’ve seen so far and the analysis we’ve done since I arrived, I’m convinced that there is real benefit in doing that.”

Initially at least, O’Lionaird says ‘lean’ methodology can help reduce delays in the construction process (“the greatest single killer of productivity in construction today”) without huge investments in technology. “We may need to invest in capabilities. But we’re not talking about thousands [of people]. We’re talking about handfuls of experts in an organization of 4,000 – it’s not a very significant investment, but it is one that we’re making already.”

Supporting safety

For Wates, the productivity challenge became even more acute following the release of its 2022 results in March. In common with most firms in this year’s CN100, turnover rose in comparison with the previous year – by 17.4 per cent in Wates’ case. But the firm’s pre-tax profit barely twitched, leading to a tightening of margin from 2.05 to 1.76 per cent.

One figure in particular jumps out – a £72m provision (more than double the firm’s £31m profit) described in the accounts as “predominantly in respect of remediation works on construction projects”. In other words, removing and replacing unsafe cladding on its buildings. “I wouldn’t care to be drawn on whether £72m was the correct number scientifically or not, but we think it’s directionally in the right spot,” says O’Lionaird. “We’ve scanned, as best as our records would allow, everything we’ve done. And we think we have a very good line of sight on where the issues are.”

“I know something about growing businesses based on strategic differentiators. I know something about assembling teams and then aiming to motivate them to achieve whatever the agreed target is and then doing a little bit better each year”

However, unlike other contractors with large exposure to the cladding bane, most notably Willmott Dixon, Wates is not looking to recover costs from its suppliers through the courts. “We’re not taking a position that we will aggressively go after our supply chain,” O’Lionaird says. “We’re all in this together in my view. And we have received very good support from our supply chain and from our customers in trying to, in a collaborative way, address the issues that have been brought to our attention.”

On top of these legacy liabilities, the sector faces future costs from other building-safety measures introduced after the Grenfell tragedy. But Wates has “no complaints” about the tighter safety regime. “For issues driven by the BSA [Building Safety Act] moving forward, we’re all committed to designing to the regulations of the day,” O’Lionaird says. “And if they cost more, which thereby impacts negatively on viability, that’s just the reality of the day. Eventually the market will right itself.”

In May, Wates paused work on a high-rise site being developed through a joint venture with the London Borough of Havering, over what the firm described as “continued regulatory uncertainty” over a proposed requirement for all high-rise residential buildings to have two staircases (at that point pencilled in for blocks over 30 metres high).

O’Lionaird welcomes housing secretary Michael Gove’s July announcement that the threshold will be lowered to 18 metres. “It’s good that we got the clarification – we’d been waiting a while for it,” he says. However, he adds that the move to 18 metres will force a fundamental redesign of many residential projects to hit the “economic sweet spot” for room sizes and the number of floors and rooms in residential developments. “Some schemes will be viable,” he says. “And some schemes ultimately may not be, because their available plot size is fixed.”

However, he argues that changes to the regulations are only part of the story – the issue is exacerbated by inflation. “If the dual-staircase issue had not been there, some schemes would have been stopped because of inflation in any event,” he says. “When you have inflation running in strong double digits, in fact, running at 20 per cent at one point, it is inevitable that some of these schemes will have been challenged.

Light is at the end of the tunnel, though, O’Lionaird believes. “As the very big price increases come down to a manageable level and in aggregate the overall cost of building gets to a point where it’s affordable again for the customers, I’d expect in the next 12-24 months schemes like Havering will become viable again, and we’ll all get back to something approximating normal service.”

Carbon cutting

Wates might be worse hit than some contractors by legacy building-safety requirements due to its exposure to local authority housing projects – one of its mainstay sectors for decades. But the company’s complementary work on affordable-housing maintenance could put it in a good position to benefit from the growth sector of retrofitting homes to become more energy efficient. “Certainly we have very good relations with councils – we maintain half a million homes across the country each year,” O’Lionaird says. “And we have a very strong franchise in retrofitting aside from that.”

Decarbonisation sits right at the top of O’Lionaird’s stated agenda. And he has strong words for central government over funding for retrofitting. “I would be happy to go on the record and say it is grossly underfunded,” he says. “The £6bn allocated for the work over three years [2025-2028] is nowhere near enough to meet the challenge. One of our team recently calculated that the quantum that needs to be spent is £250bn up to 2050.”

In another challenge to current government policy, the Wates boss calls for a mixture of tax and borrowing to fund retrofitting costs. “I recognise that the government has many demands on its expenditure. And it’s difficult to know where the money should come from. I personally believe that taxes can go up. I will be happy to pay more in tax – I think people who earn enough should pay more. And that will help. I also think the government could safely borrow money to decarbonise. There will be returns from that, in better health.”

A diverse portfolio

Ultimately, O’Lionaird believes Wates is protected from some of the worst impacts of the macroeconomic climate by its diversified portfolio. For example, in the private residential sector, currently dampened by rising interest rates impacting demand for mortgages, Wates’ development division is building 15,000 homes.

“The scale is very different to a large housebuilder,” O’Lionaird says. “They build hundreds of thousands of homes, so the
exposure we have is much smaller. If we have a scheme in, let’s say, Cardiff, where we have 300 houses that we need to sell, we know the market very well, we’re very close to what’s happening on the ground, and to move 300 houses as opposed to 300,000, I think makes the problem very, very different.”

In other sectors, Wates is developing the UK’s first gigafactory in the North East for Japanese developer and manufacturer of high-performance batteries for electric vehicles AESC. “This is where we bring together what is already quite an established capability in Wates – engineering – alongside what I’d regard as probably fairly competitive construction capability,” O’Lionaird says. “It’s an unusual combination, and it’s a great place to use it.”

Looking to the future, O’Lionaird expects a continued pipeline of work in schools – both new-build and remediating buildings hit by historic issues with reinforced autoclaved aerated concrete. Other jobs are expected to come through the government’s prisons programme, on which it is already collaborating with competitors on a number of projects. “This is the way of the future, I would say,” he says of the model. “We’re very pleased and I believe our competitors/collaborators are very pleased with the way the government has orchestrated that.”

Just three months after O’Lionaird started in his role at Wates, chairmanship of the company passed from Sir James Wates to his cousin Tim Wates. Unsurprisingly, the new chief executive is positive about the relationship. “It’s wonderful to have a chair who has been in the industry and in the company for 30-odd years, but also is new to the role and we’re learning at our jobs together,” he says.

But isn’t it odd to run a firm where half the board members are related to each other?

“No,” comes the emphatic answer. “It’s different, certainly, when you have family shareholders on the board. It introduces a different dynamic, but the fact that they also own the company, they leave at the door. We work together as executives and non-executives without really anybody thinking, about the fact they are owners. This is a family-owned business, not a family-run business. And there’s quite a distinction, I think.”