Dr Euan Bowditch, a forestry researcher from Inverness College UHI and teacher at the Scottish School of Forestry, has been a part of an EU Northern Periphery project on Forest Business Innovation and Advancement (FOBIA) since 2017. A partnership with organisations from Finland, Sweden and Ireland, the project focusses on the current state of forest contracting in the four countries, exploring profitability and sustainability, underpinned by skills gaps of various contractors. Here he shares what he has learned from his last three years meeting contractors in four countries, all with industries at different scales, but sharing similar problems.
ACROSS northern Europe, forestry contracting is facing a fight for survival. For some contractors, each day may seem like a challenge, not only because of the physical and technical work on rough terrain and in harsh conditions, but also due to the uncertainty of turning a profit or even surviving into the next year.
It may come as a surprise here in the UK, but even our Scandinavian cousins, with a high percentage of forest cover and perceived robust forest economy, are struggling too. The profitability and, more importantly, sustainability of forest contractors in Scotland, Ireland, Finland and Sweden face common challenges that affect most business owners, machine operators, managers and planting squads.
Even the larger companies are vulnerable, with profit margins rising to over 12 per cent then crashing to 2 per cent the following year. Why are these issues so prevalent across different countries? Is it the nature and structure of the forestry sector across the world that puts contractors and those in the middle of the supply chain at a disadvantage, or are the reasons embedded within the contracting culture itself?
In 2017, a project within the Northern Periphery and Arctic Region (NPA) was launched: Forest Business Innovation and Advancement, or FOBIA for short. Such NPA projects focus on economically disadvantaged areas of northern Europe; in Scotland, this means the Highlands and Islands, and Dumfries and Galloway regions.
FOBIA’s main aim was to identify the difficulties faced by contractors (specifically small and medium-sized enterprises), which prevented them making profit and growing their businesses. Central to this was looking at the skills needs from a business perspective, as well as operational efficiency of machine operators.
The end result would be an online training platform tailored specifically to the identified needs of contractors in the four partner countries. The project was wrapped up in February this year in Voukatti, Finland, with a contractor conference.
WHAT DID WE LEARN IN A NUTSHELL?
- Contractors are vulnerable to, but rarely benefit from, market distortions and fluctuations
- Long-term contacts are key to growth
- Procurement and associated systems are a barrier and large cost
- Average surviving profits around 4 per cent, good profitability around 7 per cent, and exceptional profitability at 11+ per cent
- Despite the figures above, many contractors skirt around the 1–2 per cent profitability mark, if they do not accumulate debt or simply break even
- Contracting is an expensive business, almost prohibitively so
- Ageing working population and lack of young entrants
- Under-represented community
- Most explicit needs are around business planning, accountancy/finances and marketing
- Needs surrounding people management are important: reliable and trustworthy staff was identified as key
TONNAGE VERSUS VOLUME
One clear distinction between Scotland (Ireland, too) and Scandinavia is the mode of payment, which impacts potential profits. In the UK, contractors are paid through the head (tonnage – weight) whereas in most countries contractors are paid by volume. This distinction can have serious implications on final payment dependent upon collection and weight of the cut timber, as timber at the roadside waiting for collection dries, losing moisture and weight rapidly, especially in summer months.
Therefore, contractors are losing money at the roadside even after the job is complete. This is at the heart of the profitability issue. One contractor told us: “We have no control over what we earn from a job. We are contracted to cut, but cannot rely or plan on what we take out, as it might be left at roadside for six weeks; and if it’s hot we might lose a third or half of the weight. Nothing will change dramatically unless we switch to payment for volume.”
Without resolution in this area, contracting will remain for many an unstable business. However, this would require a drastic change for the industry that would have knock-on effects to other parts of the supply chain, requiring a period of adjustment. The majority of industry professionals believe dealing in volume rather than tonnage is a more useful metric that would level the playing field between contractors and timber buyers, resulting in a more stable forestry supply chain and sector.
PROCUREMENT
The current procurement system and the process for tendering for jobs is a strain and frustration for both small and large contractors. Inordinate amounts of time and money are spent on the process, which is not always fully understood.
One big qualm about the system is the reliance upon metrics primarily based upon economics rather than more qualitative criteria that would ensure quality and build upon best practice and planning for the future. However, this problem in itself has created a gap to be filled by professionals who can prepare a competitive bid and navigate the complexities of national procurement systems. As such, forest management contractors are often hired to prepare and file bids.
“Procurement takes up half of my resources,” one manager told us. “It is too complex and unnecessary, which really hurts many businesses, especially the smaller ones who have no chance to take the administrative hit.”
In spite of traditional divides and miscommunication between operational and forest management contractors, the strengthening of their relationships has emerged as a key step for enhancing business resilience. Not many companies have access to multiple skillsets that can specialise, interlink and support wider forestry goals. Partnerships, collaborations and resource-sharing may improve business sustainability and flexibility.
STUCK BETWEEN A ROCK AND A HARD PLACE
Priced-out, under-priced and receiving no benefit from timber-price highs. The power and implication of price is found elsewhere in the supply chain and the contractor has little room for growth, as their prices remain competitive rather than benefitting from market peaks and booms in the sector.
Though some power remains with the seller, it mostly benefits the buyer. Contractors expressed concerns that instances of undercutting standard prices, which fairly represented professional quality and reasonable profit, were undermining the industry as a whole. This results in a knock-on effect that influences the quality of work and therefore the environment and culture that is shaping our future forests.
“Contractors have a tendency to price one another out,” one said. “It is a regular race to the bottom which is hurting the industry and, if we are powered by procurement metrics over professional judgement and experience, then this trend will continue.”
According to contractors and landowners, the race to the bottom has often resulted in poor work, reflecting badly on all contractors, especially in smaller firms.
LACK OF FUNDING AND EXTERNAL SUPPORT
Another contractor told us: “I do not know where to turn for support. There’s not much funding out there for start-ups and expansion of forestry-contracting businesses, even for innovative proposals to adapt machines or try something new. Banks basically see us as too high risk and it is a terribly expensive business. I’m not sure how to begin to get ahead.”
This area impacts many (potential) contractors and just heightens the risk and financial insecurity that will deter many from entering or remaining in the sector. Some coordination around investment areas in forestry structural funds, national forestry agencies and banks needs to be established to address these concerns.
Also, a one-stop shop to facilitate knowledge exchange, disseminate important information and be a repository for funding sources would be useful, especially if hosted by a bridging organisation.
This is an area for potential expansion of the FCA’s or Skills Council’s role, subject to funding and resources. In Sweden, an organisation called Föreningen Skogen operates with around five staff and serves as an active forestry association for over 8,000 forestry contractors, owners and professionals. It provides information, further education, news services, forums for debate and network building.
Its activities include publication of the trade magazine SKOGEN (The Forest), field trips, publishing, digital newsletters, consultations and meetings.
Additionally, it holds an annual congress for continued professional development, networking and recognition of forestry excellence.
OVERHEADS AND CAPITAL COSTS
This will be common to most sectors as decreasing profitability, unstable revenue flows, and potentially expensive initial investment for any new job are underlined by the need to mitigate against unforeseen problems (especially mechanical).
Finances and upfront costs are key for any business wanting to grow, and most will lack this capacity. Therefore, companies will take financial hits during the job, which will most likely reduce profit margins and subsequently impact their ability to work on the next job and plan for others.
This pattern will continually undermine the business, often forcing them to operate on a financial precipice. Over time, this will lead to stressed and strained businesses and workers.
We met a contractor in the Scottish Highlands who said: “I work mostly from job to job. Any unforeseen stoppage in work or technical problem can seriously impact on the job’s profitability, especially when parts are all the way down in the north of England – any stoppage costs.”
LACK OF MENTORSHIP AND DEVELOPMENT
Leadership, mentorship and support are key activities (whether formal or informal) for developing professional workers, standards, best practice and a healthy and resilient sector. Talking to not only success stories but also those with bleaker tales of why their business did not succeed could provide crucial insights into operating.
However, due to the nature of contractors working in isolation from one another and a tendency to be protective about business information, industry mentorship is not common. Unlike Scotland and Ireland, Scandinavia has a comprehensive and transparent contractor registry list with complete details of accounts, assets and activities, which has cultivated an environment of openness that does not fear the consequences of sharing information. Mentorship can develop organically, and some larger companies provide an informal service to their more regular or in-house contractors, such as our associate partners in the FOBIA project, Norbord.
Mentorship for young entrants or struggling contractors could be a crucial step towards sustainability, as would contracts giving provision for training young and new entrants on the job.
“The contracting world can be a little mafia-like; therefore it is hard to strike out on your own,” we were told. “It is a close-knit community, not very open to cooperation and somewhat suspicious of fellow contractors, as we are all competitors. We all need help, but there is not always a convenient or clear place to turn to.”
THE FUTURE OF CONTRACTING
As someone who has spent the last three years exploring the contracting world in Scotland and looking over the North Sea for comparisons and lessons, I feel I have only scratched the surface. This study has provided only a brief peek behind the curtain at one of the more hidden areas of the forestry sector.
One thing I have learned: there is opportunity! However, insufficient support infrastructure and wider recognition of the skills and benefits to the job hinder a more favourable profile. Contracting may have a “low-brow profile, often tarnished with dirtiness, low skills and low earnings”, but the perception could not be further from the truth.
Contractors are incredibly skilled in a job that shapes future forests and landscapes, managing the lungs of our country. The potential to earn good money from a young age is incomparable to other rural and environmental professions, and there is opportunity to apply those skills all over the world.
Some contractors I have spoken with are on the cutting edge of industry techniques and practice. Contractors are often regular innovators as the necessity drives the job, and adaptation is required for any new site.
So, is catastrophe on the horizon? I have heard stories from both sides of the business tracks: pessimistic, optimistic, uncertain and even fatalistic. All of them, in spite of uncertainty brought on by Brexit and even as the machines are being turned off and operations shut down, know there are trees, and more trees to come, especially with the current focus on commercial forests from our now Minister for Tourism in Scotland.
Good contracting work is valued and we continue to adapt our practices to the needs of our time, such as the exploration of lower-impact machines, new ways to calibrate our machines, use of machine and site data for improved operational efficiency, and even planting methods and protection against pests and diseases.
I earlier spoke of the Swedish Forestry Association, a relatively small operation that serves 8,000 forest professionals through membership dues alone. Admittedly, it has existed for 130 years, but it is not out of the realm of possibility that such an organisation could fill the current void of representation. Could an already established body expand its remit? This could span the entire UK, and even Ireland, which lacks a central representative body.
As a lecturer at the Scottish School of Forestry and former student of the National (English) School of Forestry, I am aware that those students who often become machine contractors and forest managers follow different education streams early on and rarely return to common classes for the entirety of their learning.
I believe combined learning from an operational and management perspective, using collaborative planning classes involving mapping, machine data and bringing trees through the supply chain, would be an invaluable exercise. This would establish communication and the roots of understanding between future professionals before they begin to work in relative isolation.
Given the issues highlighted by this project, it feels like this should be the beginning of something spanning 10 or 20 years to help effect real change. The FOBIA Boost site is up and almost running and will be maintained for the next five years. It is a decent start, but could potentially become a hub and repository for learning materials produced by educators and active forestry professionals.
What do you say: will you help build a valuable resource for current forestry professionals and those yet to come?
Visit the FOBIA Boost site at https://boostsite.org/en/ and the FOBIA project site: https://www.luke.fi/fobia/en/
Forestry Journal remains dedicated to bringing you all the latest news and views from across our industry, plus up-to-date information on the impacts of COVID-19.
Please support us by subscribing to our print edition, delivered direct to your door, from as little at £69 for 1 year – or consider a digital subscription from just £1 for 3 months.
To arrange, follow this link: https://www.forestryjournal.co.uk/subscribe/
Thanks – and stay safe.
Comments: Our rules
We want our comments to be a lively and valuable part of our community - a place where readers can debate and engage with the most important local issues. The ability to comment on our stories is a privilege, not a right, however, and that privilege may be withdrawn if it is abused or misused.
Please report any comments that break our rules.
Read the rules here