Environmental Protection

Greener Pastures Ahead

A review of recent developments in the environmental services industry provides insights into promising future trends

The commercial environmental services industry has certainly been through its share of ups and downs, but at the moment seems to be in a more stable and predictable place than it has been during most of the last 50 years.

Looking back, the booming growth of the late 1970s and early 1980s ultimately yielded a significant surplus of capacity that led to tougher times in the 1990s. Many players struggled to survive. But eventually, industry consolidation and thinning of the competitive ranks in many sectors of the business brought supply back into better balance with demand. Talk to the surviving players in almost any sector of this business and they will tell you that although the business can still be highly competitive, conditions today are more stable and predictable than 5 – 10 years ago.

Although the outlook seemed pretty dire for many sectors of this business in the mid-1990s – the hazardous waste management business or the environmental lab sector, for example – it is now clearer that these tough times were not so much a result of declining demand for services as they were a consequence of overcapacity in those sectors. The fundamental underlying demand for environmental services of all types is still growing today, and – given rapid industrialization and emerging new challenges in many parts of the world – will continue to grow in the future.

Client Categories
Another way to segment this vast and sprawling $300 billion business is in terms of client type. Providers of water treatment equipment and chemicals, for example, may often sell primarily to municipal organizations – a client base that, although large, is often thought to be rather conservative and slow-moving in terms of purchasing decisions and a willingness to embrace new products or approaches.

Hazardous waste treatment firms and disposers tend to focus on the basic industries – energy companies, petrochemicals, mining firms and pulp and paper companies – in which waste management is a critical component of the costs of production. With these types of clients, companies may tend to develop more internal expertise, and may be more knowledgeable, sophisticated, and hence demanding. And indeed, some of these basic industries have begun to develop very sophisticated internal environmental management techniques, metrics and initiatives. Though these practices may decrease the amount of work available to commercial vendors in the environmental services industry, they have made them better environmental citizens. Even the mining sector – once thought to be a sleepy, unimaginative and environmental hazardous industry, has become active in many new environmental management and sustainability initiatives.

On the other hand, the more "high tech" industries – like health care and medical technology, pharmaceuticals and the semi-conductor business – have perhaps become better customers for the commercial environmental services industry over the years. Efficient material usage and recycling, use of ultrapure water, and a visible reputation for environmental stewardship are often critical to these types of businesses, even though environmental issues may represent only a nominal percentage of overall production costs. These types of industries – where environmental concerns are critical but small in terms of cost – are less likely to develop internal expertise and tend to outsource more of their business.

Expanding Number of Sectors
The commercial environmental services industry is no longer a small business – some estimates put the industry at around $300 billion – and it no longer has the characteristics of an immature industry. However, it is perhaps still difficult to get a good handle on how to best define, segment and analyze the business. The definition of the industry has continuously evolved, and in many ways "environmental services" continue to expand today.

In the 1970s, when the business was young, and when many of the sweeping bodies of federal environmental management legislation first were enacted, environmental services often referred, fairly simply, to waste management – the ongoing management of solid and hazardous wastes, remediation of contaminated sites, and the supporting services which went along with that – engineering services, analytical testing, and the like. Although these traditional sectors of the original industry are just as critical today as they were 40 years ago, the industry today encompasses much more – material recycling, water and wastewater reuse and recycling, advanced monitoring and process controls, a whole cottage industry of improved strategic environmental management approaches, enhanced asset management programs, and so on – these are reflections of the widely heralded shift from the traditional approach in pollution control to more a mindset of waste and pollution prevention, smarter materials usage, and recycling and reuse philosophies across all industries. And the whole disparate and diverse water business – a huge international industry, sometimes called the largest in the world – is today typically included as part of the "environmental services" industry. Years ago, most observers thought of water as a different business.

One way to evaluate the vitality of individual sectors of the business is to examine the fortunes of leading companies. Every year, The Environmental Benchmarker & Strategist takes a look at the top financial performers in the broader environmental industry. For years, the water utility and solid waste management companies were invariably the strongest financial performers across the industry. This was thought to reflect the "natural monopoly" characteristics of these businesses – actual in the case of water utilities, and effectively in the case of many solid waste management jurisdictions. It is obviously a strategic advantage to play in markets where barriers to entry are higher and where one can build infrastructures that are less vulnerable to competitive attack – solid waste management and water utilities surely represent the two such key market areas.

But success is not just dependent on the individual market in which one participates; it clearly also depends upon the strategic vision and management skills of the individual company. Even in those industries that are characterized by tougher competition or lower barriers to entry, some firms thrive while others suffer. For example, at least a couple of major players from the hazardous waste disposal business – a sector of the industry that was essentially left for dead in the mid 1990s – now appear regularly on listings of strong growth and profitability. The environmental lab business – often ignored by the financial community due to its supposed "commodity" nature and strategic position at the bottom of the environmental services food chain – now boasts a number of growing and very profitable companies and has recently attracted significant private equity investment interest. Some sectors of the business may be tougher or more competitive than others, but it is clear that all sectors still offer opportunity for well-managed and innovative companies – there are strong, growing and profitable companies across all sectors of the environmental industry today.

Challenges and Opportunities Abound
The environmental industry is not without its challenges. Among the key challenges facing this industry are personnel issues and the continuity of trained staff – particularly in the municipal water and wastewater arena, where the availability of adequately trained personnel is beginning to reach a crisis stage. Overcapacity and extreme price competition are still rampant in some sectors of the business – often at the expense of product or service quality. Rampant merger and acquisition activity and increasing private equity ownership during the past decade have also contributed to high levels of uncertainty in many sectors of the business – in turn, leading to a situation in which key people often jump ship and move between companies, impacting organizational continuity, customer service and institutional memory.

As mentioned, much of the country’s spending on the environment and infrastructure is ultimately discretionary in nature when the coffers are flush, the dollars flow more easily to environmental clean-up and infrastructural improvement, but when there is great uncertainty about the future, those dollars tend to be held back and preserved – we may be approaching that sort of period in 2008. And, when more of those tax dollars are being diverted to other presumably higher priorities, such as short-term military needs in Iraq, environmental and infrastructural spending may suffer accordingly. (However, this does not seem to be having an overly negative impact on the industry at the moment – engineering firms indicated that during 2006 they enjoyed the strongest growth and profitability levels in over two decades.)

However, opportunities remain plentiful. Global opportunities for expansion are much more real to U.S. firms now than they were even five years ago – environmental firms have become much smarter in terms of how to expand internationally. The growing challenges of global climate change and whether they may affect natural ecosystems and environments will lead to many new opportunities to address this problem. And perhaps most significantly, more and more clients today view environmental management as an important means of becoming more competitive in a global market, and as a way to save valuable dollars – whereas only a few years ago, many saw it as just a simple regulation-required cost center.

Top Driver: Economics, Not Politics
Some observers have tried to correlate environmental spending, enforcement or qualitative levels of environmental progress to political changes – such as which political party is in power. In this regard, many are now speculating upon what may happen to the commercial environmental business following eight years of a Bush administration that has generally not been thought of as very environmentally friendly. However, a look at recent history shows that the level of environmental spending, enforcement or new regulation is not related nearly as much to the political party in power as it is to the general health of the economy. Indeed, it is the actual process of change between administrations itself that is perhaps the most disruptive factor – as changes in political appointees and consequently senior staff may take months or even years to grind through the federal approval process. In addition, it is increasingly realized that although regulation continues to be a basic factor behind much of this business, economic considerations have gradually supplemented regulation as key drivers behind much of the continuing growth in the environmental services industry.

A Game Plan for Success
So, what are the factors for future success in the environmental services business? Stronger and more successful players seem to adhere to a few simple rule of business – criteria for success that are pretty much the same in any industry:

§ Good People – Many sectors of the environmental business are really "people businesses" – professional service businesses where personal relationships are key. Successful companies are built upon a strong, dedicated and experienced management team – including entrepreneurial and business expertise, good internal "chemistry," some "skin in the game," and marketing expertise.

§ Clear Strategy – Develop a clear understanding and stated sense of where you’re going, and how to get there. Companies must build a clearly defined strategy, based upon an in-depth knowledge of the outside world (i.e. your customers and your competitors) and the strengths of your organization. Clearly communicate that strategy to your employees, customers and shareholders. Refine and evolve your strategy as that outside world changes.

§ Strong Execution – Streamline your operational processes, focus on the numbers, run the business efficiently – get the job done. Execution is the real job of running a business – not simply formulating a "vision" and leaving the work of carrying it out to others. The strategic and tactical plan must be there to guide the business, but that corporate strategy is not the closely guarded and highly secretive edge widely assumed by most people – the real proprietary edge is the management and execution skill to implement the plan.

§ Culture –Develop and maintain a performance-oriented culture. "Promoting a fun environment isn’t nearly as important as promoting one that champions high-level performance and ethical behavior." Hold all employees to specific and unyielding performance expectations – pay for performance, and don’t pay if the performance isn’t there. Furthermore, continue to raise the targets.

§ Structure – procedures and protocols are necessary to make any organization function properly, particularly large ones. However, even the largest organizations can create a relatively flexible and flat structure to reduce bureaucracy, organizational momentum, internal competition and strife. Highly successful companies rely not on the genius of their executives, but on the dedication and ability of their middle managers and employees to innovate and implement new ideas.

Conclusion
In summary, the outlook for the future of the broad environmental services industry is bright. Environmental services and environmental management skills are going to be even more critical in the future – the demand for these services is not going to go away any time soon. In fact, from the current vantage point, it now seems clear that the problems that many sectors of this industry suffered in the mid or later 1990s were not so much problems or declining demand, as they were problems of overcapacity. There were some observers, back in the 1970s and 1980s, who believed, once we fixed up a few of the bad environmental problems, demand for environmental services would gradually tail off. That has definitely not been the experience over the last couple of decades – we have made great strides in many areas of environmental and water resource management, but huge challenges and looming problems remain. As the huge economies of China, India, and other rapidly industrializing countries continue to expand, environmental challenges – and the need for creative solutions – will continue to expand. As we begin to better understand the impact of global climate change, and what impact it may have on ecological systems, watershed basins – indeed, the entire hydrologic cycle – a whole new sector of environmental and meteorological services and sciences is likely to evolve. New needs will emerge, and with them will come new opportunities for the environmental service industry.

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