|
     
|
"Yes, the Internet Changes Everything" Construction Business
Review -- Millennium Edition -- August 3, 1999 rev. December 21, 1999
Introduction The Internet does change everything. For AEC firms and the Owners they serve, the Internet will restructure the industry. Owners will be able to buy the same scope for much less cost, but they will be buying it from fewer designers and constructors. This vision of the future proposes that the real leverage of information technology is in shared models and in efficient purchasing. It goes well beyond mere adoption of the latest gizmos. What firms will survive until 2010? What strategies are appropriate today? In the end, your people may be the true source of competitive advantage. The problem for Owners: the design and construction industry today Owners are increasingly unhappy with the design and construction industry today. How many times have you heard, "I just want my building, I don't want an extended bad experience that costs me money"? Many large corporations and institutions even outsource their whole corporate real estate function to third parties, to escape this pain and to populate the balance sheet with income-generating assets. There are all sorts of business models to redistribute risk and to reallocate pain, most of which can be seen in the pages of Construction Business Review. Can technology improve any of this? Today, the client's intent takes a tortured path to realization. A need is expressed in words, gestures, nuance, and cutout pictures to a designer. The designer conceives an idea in three dimensions, in her head. She then expresses this three dimensional idea as best as the tools allow, into two dimensions: plans, sections, tables, and text. These static and imperfect 2D representations of a 3D intent are the basis for layer upon layer of further static agreements contracts, scope, schedules. Heaven help the team who has to change something there's a lot of static to ripple through, and change is the scourge of existence for owners and contractors alike. But guess what. Owner's businesses aren't static anymore; they change, in Bill Gates' words, almost at the speed of thought. Supply chains aren't static anymore either; new technologies which promise real-time responsiveness will place increasing pressure on the classic delivery systems in construction, the largest industry in the world. Industry structure today On a project basis, projects are organized around static and imperfect information, with teams trying to do the best they can but largely positioning themselves to press risk onto other parties. There is miscommunication, misalignment, misunderstanding; it's testimony to the goodness of human nature that projects are completed at all. At the same time, the macroeconomic structure of the industry places different sets of pressures on firms. Design and construction alike, as industries, are characterized by several distinct elements. I recognized these as a construction CEO and real estate investor; readers will recognize them in their firms as well:
Historically, these factors have led to intense fragmentation. In the US, over $650 billion of construction is put in place every year, according to the US Commerce Dept. Yet the largest builders in US billings, Fluor Daniel and Bechtel, each put about $4 billion in place in 1998 in the US, or less than 1% of the market each. More strikingly, the ENR top 400 in aggregate put in place about $156 billion or less than 25% for the top 400 combined (source: ENR). This means that firms are deadly competitive, and show relatively low returns to capital. Public companies like Turner, Fluor, and Centex trade at P/Es of 12, 28, and 8 respectively, while the S&P 500 as a whole is at about 35 (Wall St Journal, early August). These companies' profit margins, measured in tens of millions on revenue of billions, are microscopic, especially in relation to the risks accepted. Amazon.com alone (1998 revenue: about $600mm) could easily buy Fluor, Centex, and Turner today, for cash, if it wanted to. Investors don't see a future in this industry. Further, with such extensive fragmentation, no one firm has the standing to take the lead in any significant innovation. Industries like this are very slow to change; the dynamics are too tough. Designers, constructors, investors, and project owners alike all suffer as inefficiencies and diseconomies are hard to overcome (source: Michael E. Porter, Harvard Business School, Industry Structural Change). The promise of information technology Information technology is everywhere. It promises to make a difference. But what technologies will help us do the same old things faster, what will help us truly change the value system in this industry, and what will be the outdated useless techno-toys that are cast off tomorrow? Thoughtful attention to these issues will be at the core for firms that want to survive one more decade. As the Nobel-winning economist Robert Solow of MIT has said, "The impact of computers can be seen everywhere except in the productivity figures." There are plenty of gizmos that help us do the same thing as always, but faster. These include mobile phones, videoconferencing, satellite delivery of drawings, and many forms of email. The list also includes word processing, accounting, estimating, facility management, and even CAD software packages. For many firms, this is the state of IT investment today. The graph below shows how many firms are spending their money.
Figure 1: The State of the Art Today. "Top Areas Where IT Has Delivered Competitive Advantage" (1998 survey of 148 Construction Industry CEOs from firms ranging from 18 to 3,000 employees). Source: BST Consultants (http://www.bstconsultants.com) These investments, while worthy and certainly necessary just to keep up, don't provide a sustainable advantage; maybe firms can be a few months ahead of the pack. What are the transforming technologies? Shared project models It is technologically possible today to streamline the delivery of design intent right from the designer's head into the craftsman's hands. Today, 3D models of structures can be built, including extensive interference checking and realistic representation of complicated details like flashing; every single component can be linked to a database that tells users what it is and what it weighs, costs, and is made of; and all of this can be available right now, in real time, for every project member to share. Leaders in mechanical engineering include Unigraphics Solutions (http://www.unigraphics.com) and Parametric Technology (http://www.ptc.com/), in the AEC space, Autodesk (http://www.autodesk.com) and Bentley (http://www.bentley.com/) are key players. Portions of this capability have been in practice in the process world for years; other portions thrive in manufacturing, still others exist in various fledgling Internet businesses. The figure below illustrates a 3D model with associated data; taken from an IBM/Catia application in the AEC piping industry.
Fig 2: 3D Solid Model tied to Data. Source: IBM/Catia (http://www.catia.ibm.com/.) Why doesn't this happen on a widespread basis in practice in the AEC market today? Technologically, right now it's a lot harder to model a one time project with a million parts, (a building) than to model a million copy model with a hundred parts (a cell phone). But that will change as libraries of parts evolve and as firms acquire learning about the technologies. More importantly, the business relationships flat out don't exist to allow firms to abandon the static representation of design and contract intent, manifested in adversarial business "agreements," to adopt an open, infinitely dynamic, model where the reimbursement is based on overall system performance. For example, if the project is done early, under budget, and beating the quality goal, the whole team should be compensated as one, in a proportion according to the value of each member's contribution. Can this happen? Are there precedents in other industries? Is this about technology, or is it really about business relationships that can take advantage of the technology? Purchasing A second capability that exists right under our noses today is the online auction, for example at Ebay.com. (http://www.ebay.com/) Ebay collects or aggregates buyers and sellers who otherwise wouldn't be able to find each other; and it makes a market with open auction technology. Product gets moved. In the industrial world, Freemarkets.com does the same but for large lots of industrial products. (http://www.ebay.com/) Freemarkets qualifies vendors, makes sure the scope is bulletproof, and runs an open bidding situation where vendors compete to deliver the low price. Freemarkets claims cost reductions averaging 15% of prior purchase spending, across industries. Would your firm like a 15% reduction in the cost of construction? Can this be done for complex services like structural engineering or electrical subcontracting?
Fig 3: Example of bid prices descending in Freemarkets Online reverse auction (source: Freemarkets.com) The real impact of information technology Transforming an industry The real impact of information technology is in transforming an industry. In my class at MIT, "Strategic Management in the Design and Construction Value System," (http://web.mit.edu/1.46/www/) we have been studying these opportunities for more than a decade. As corporate real estate readers will recognize, many industries served by construction have been totally restructured in the last decade. My former construction company, George B. H. Macomber Co (http://www.gbhmacomber.com) does a lot of work in retail, financial services, and health care how long will it take for the same information and scale pressures felt by these industries to come to construction? Many industries have resisted the siren song of open information and scale economies. Witness local lumber yards hanging on in the face of Home Depot; or old-style stock pickers withering in the relentless glare of new intermediaries like Morningstar and Lipper (who also quickly coronate the above-average performers), or the present battles in Congress and in the insurance industry over health care. Will the present AEC players lead this same transformation in design and construction, or will real change be forced by owners and delivered by new kinds of service firms, with a different set of skills and taking on a different set of risks? New information technologies will lead to both barriers to entry and to economies of scale that didn't exist before. New competitive pressures will arise. For example, will all design firms be able to build their own library of solid parts for building 3D models? That's a lot harder than copying 2D details. Will all contractors be able to organize on-line bidding for services? That's a lot different than waiting by the phone ten minutes before the bid, collecting subcontractor prices on uncertain scope. Will all owners be able to purchase construction effectively, or will some be so good at it that they will gain major cost advantages over their competitors? The recent resurgence of the REIT market, even after the past 12 months stabilization, shows the new scale economies that are realized by firms like Equity Office, the nation's largest REIT (http://www.equityoffice.com/), (NYSE: EOP). Equity owns more than 75 million SF, has a market capitalization of over $6 billion, and has a low-leverage debt to equity ratio of less than 1:1. Gone are the days when real estate was owned by individual entrepreneurs and financed by the corner S&L. So, the competitive landscape will change. Customers will be able to buy cheaper, but from fewer (and bigger) organizations similar to what Walmart, HomeDepot, and HQ have done in retail. But it's a people business Construction still is a people business, and it's still a project business. So, will large firms appropriate the benefits of the truly transforming technologies and run away with the market, as did Microsoft, Standard Oil, and the old AT&T? Or, will new third parties emerge who run the information infrastructure in the background, collect large numbers of buyers (or sellers), and "franchise" use of the information to an even larger, more diffuse, more fragmented, and more market focused set of new entrepreneurs, in the McDonalds or Dunkin Donuts service franchise model? This scenario would be similar to the atomization of the stock trading industry into thousands of tiny parts day traders and individual investors who no longer value the scale and market clout of Prudential and Merrill Lynch. Which is better for Owners? This could truly go either way the industry could consolidate around new economies of scale, or it could fragment even further. Much depends on how today's leading firms react owners, designers, and constructors alike. My bet? In my firm, Collaborative Structures, (http://www.costructures.com), we are in the camp that believes that a new category of information utilities will emerge. They will live in the background and help the front line firms be ever more focussed and effective in delivering their services in the knowledge age. Collaborative Structures manages information on behalf of project teams. We provide a central online database for the business relationships, and we nurture the people relationships, anticipating the maturation of the modeling technologies and accompanying relationships. What can firms do today? Maybe the next decade will bring restructuring, maybe it won't. But there are solid steps to be taken today with respect to information technology. Among these: Use IT to lower cost or increase differentiation Information technology is ONLY a source of information if it can truly lower your costs or truly increase differentiation. Examples of reduced cost: better accounting systems, better training, more effective CAFM or CAD tools and eventually, on-line auctions for purchasing. Customers will not pay for differentiation they don't value. Out with technology for the sake of technology; focus on the technologies that either reduce the client's own costs (say, advanced planning technologies) or enhance the client's experience (many communication tools, say a project website). Many many neat and wonderful technology toys do not add value for clients firms should vigorously avoid them. (Source: "How Information Gives You Competitive Advantage," Michael E. Porter, 1985.) Understand the virtual value chain In the old economy, the "physical value chain," gathering and then disseminating information was a major part of the construction task. When I was an assistant project manager in 1980, almost all I did was receive, handle, and send drawings, logs, transmittals, and sketches. There was little time to think about them. In the new economy, the "virtual value chain," gathering and disseminating are trivial and can be outsourced (to FedEx, email, or a project website). The thinking and planning activities information organizing, selecting, and synthesizing now earn the rewards. In all the examples of industry transformation given above, it's these skills that are the core competence of firms the survivors will focus here. (Source: "Exploiting the Virtual Value Chain," Rayport and Sviokla, 1995.) Sustainable competitive advantage Real estate, design, and construction remain face to face service businesses. Everyone in the value chain buys based on four factors: price, schedule, quality, and people. If technology drives price and quality towards a common level, what's left is the people who can deliver the schedule and can lead a team. Although it may seem counterintuitive, leadership is more valuable in the online world than in the paper world; the pace of everything is faster, and you can now get misunderstood at the speed of light. Teams who can truly leverage new technologies like 3D solid models tied to databases, or online purchasing of services, will have outstanding leaders at their core. So in the end, after the techo-dust settles, the enduring source of competitive advantage will still be people, after all. In the new millennium, firms are well advised to select, train, and grow their people first, and their technology second. About the author For over 25 years, John D. Macomber has been deeply involved in the transformation of the construction industry. Former CEO of the George B. H. Macomber Company, a $200,000,000 CM/GC firm in Boston, Mr. Macomber is now Founder and CEO of Collaborative Structures Inc., an Internet services company which manages information for the benefit of project teams through its flagship solution, FirstLine. Mr. Macomber has taught at MIT for over a decade, and has been a member or many industry boards including the Associated General Contractors of Massachusetts, the Young Presidents' Organization, and the Boston Society of Architects. He holds a B. A. in Mathematics from Dartmouth College and an MBA from the Harvard Business School. He is a member of the CBR advisory board. Mr. Macomber can be reached via email at macomber@costructures.com. © Copyright 1999 Construction Business Review. All rights reserved. Back to Press Page |
