Digital Construction Leadership – Winning the Race

January 24, 2018 - Industry Insights

Senior Partner of McKinsey & Company, Dr.-Ing. Gernot Strube, spoke at iTWO World 2017 and shared his insights on the trends and opportunities in the global construction industry, the digital solutions available, as well as the roadmap and imperatives that companies need to take.

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Speech transcript

So what I would like to do is to share some trends and opportunities around construction, then go a bit into the digital solutions that we have available and share how we think about the roadmap and initiatives that companies need to take in the current situation.

Trends and opportunities

Once a leader in innovation … construction is now a distant follower

I think when we look at innovation and go back, it was a leader for the world. Many innovations happened in construction when we go back some centuries ago. Big changes happened and you see some pictures here, the Empire State, which was way ahead of its time when it was built. And then what happened to it? Today’s construction, if we look at the numbers, it’s a distant follower to other industries. Productivity growth is hugely lagging, it’s basically zero, and it’s following far, far behind and we can illustrate if we put the pictures up here, of agriculture, then and now; automotive, then and now; retail looks fundamentally different. Construction, you probably have seen many of these pictures, if you take a picture of the construction site many years ago and construction site today, it’s hard to detect the differences.

Resulting in project cost and schedule overruns

And we also know that when we talk about large projects, 500 million – 1 billion, 80% cost increase, 20-month time overrun on average, which is killing many companies and many projects.

Technology is the most promising lever for productivity improvement

What we have done? We have really gone back and analyzed, last year I showed that the productivity gap between construction and manufacturing is roughly 50%. Over the last 20 years, the gap hasn’t developed. So what we did is we went back and analyzed, if we take all the levers that we can imagine together, what will we get? And it’s not always easy to break down and allocate individual numbers but first of all, if I start from the bottom of this chart, we can close that gap. The opportunity in construction is huge. It’s anywhere 50 – 60% productivity improvement that we can capture. Then we broke it down into different levers from collaboration and contracting, which is particularly important in our industry. Design, procurement, execution, then you see a big bar for technology, and you see a separate bar on capability building, because in our industry, that is one of the more profound needs compared to other industries. Now there are two things that I think are important beside message that there’s huge opportunity. No.1 is that technology is the biggest lever that we have in hand, that we need to embrace. And I would claim that at least 50% will be opportunity that we have along the other levers but also be technology-related. That means technology is the driver of the innovation that we need for this industry.

But construction is least digitalized with low investment in R&D and IT

At the same time, and that’s a bit the water in the wine, we are dealing with an industry that has almost the lowest level of digitalization of all industries. It has the lowest level of R&D investments of all industries. And it has, among the lowest levels, of IT spending. And I think this is extremely important when we think about the roadmaps, one thing is to put it on paper, how much potential there is, I think the big challenge for us is how do we capture that potential? And I think we need to bring these things together.

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Digital Solutions

VC firms are heavily investing in E&C technology solutions

Let’s take a look at what has been happening. And well this is probably not comprehensive, we’ve been tracking over the years the investments into digital construction, or construction tech funding. When you look at these charts, there’s been a significant increase in 2012. But the real breakthrough in spending has really started in 2015. Now we see over half a billion dollar and that curve, in our opinion, will go up over the next couple of years, being poured into digital technology for the construction business. I think that’s a big change. Keep in mind nothing has happened for the last 100 years, and suddenly you see all this money pouring into our industry.

 Creating a proliferated landscape of solutions around three clusters

What we’ve also done is we’ve analyzed a lot of the solutions into what do they tackle. And the size of the circles on this chart that you see is the number of companies that have received funding for a certain area. And again, it’s really we always call this finding a way in the cluster, because if you just map out all the technologies, you can get clouds that are infinitely complex, so we tried to group them a bit how to think about technology. And I think what I would like to lead you through for today is really more, there are probably 3 areas of tech developments. One is out in the field: execution, on site, all the material management and all these kinds of things. There’s a second one which is the yellow one here, it’s back office, it has a lot to do with the things you do in the office. It’s about planning, it’s about designing etc. But then there is a big field around collaboration, just making things easier in this very complex environment. And this is a bit about how we started to think about it and this is how we try to help companies think through everything that’s happening. To at least make it digestible in the complexity that we face already.

Technologies for innovation are ready

Now when you map out these three areas, what we’ve tried to put, again, this is more to make things a bit easier comprehensible. When we think about technology and digitization, we think about 4 areas. One thing is about connectivity and sensing, it’s basically the IoT world that everybody’s talking about. Second element is about robotics and automation: what technology can do for you. The third is about process digitalization, obviously making things flawless and automated in terms of processes. And the fourth one here is advanced analytics, which will eventually lead into artificial intelligence as well. When you group it, then you’ll find a few fundamental technology groups that will eventually need to be put together to capture the potential of the 60% that we were showing before. And obviously we’re not talking about individual solution here but much about groups of solutions and how you should think about this. Starting from advanced analytics, obviously on the right hand side you also see the 5D BIM and we particularly put beyond, because to be very frank, I would say 30% of the discussions I’m having is how to go to 60 and how to use that in asset operations later. But there are also things like digital performance management and as interesting as that sounds, the performance management of the project is probably one of the biggest issues that we still face, partially due to the lack of data, the ability of bringing data together, and the other element is how to actually manage that in such a complex environment.

Identification of business value for portfolio of tools

What we’ve also done is we have gone through different industries. We have gone from oil and gas, to factory buildings, to real estate, and we looked at the different groups, what can they deliver in terms of value, in terms of productivity improvements? And we’ve taken typical cost structures and just estimated what difference fields would yield in terms of cost reductions. And you see quite significant ranges here, simply because we looked at many different industries and combined the numbers. What you also see is that there is not a single lever that sticks out. That’s again something I would like to share with you. It’s not a one trick coin, it’s not like the silver bullet that you can focus on and the world will be nice but you’ll have to find a way to bring all these things together in your complex operating environment. And then you can capture very significant things if you add up all these numbers you’ll probably get above the 60% that I was showing before.

Collecting and “owning” data will be imperative for owners

One message I would like to also share is, I think is when Thomas gave us his introductory speech. We already heard a lot about this. When you think about all these solutions, you see them across the groups of office, field and team that I showed before, there’s many digital solutions. To make use of them and to be honest, when you running a project, you have to take even more data into account. External data sources, macro data from your environments, you need a backbone that will carry all the data, combine it, make it available for you for analysis, to work with. I think that is important and

this is what are we talking about when we talk about iTWO: it’s much more than just a BIM tool, it’s really about the backbone that we can use to couple a lot of other things together.

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Roadmap and imperatives

Every industry will reach a tipping point where digital capabilities become a matter of survival

So what does it all mean for us? What we have done and that’s the benefit of a consulting group, we have looked at other industries. And obviously, the good things for us is we are behind, but we can also look at others: what has happened during digitization. And we’ve looked at things like digital media, which probably was the first industry that was totally disrupted by digitalization. And you can go down the curve, retail, telecom, etc. and you probably recognize a lot of these examples of disrupted companies who entered this space.

There are 9 “hard truths” from other sectors for construction

What I would like to spend a little bit time on is what can be learned from all these industries and what does that mean for us in construction? What you see above the line there is the general finding from the other industries and we’ve tried to translate that into what we feel it means to us in construction. If you just look at the first one, I think this is going to be extremely important. In digital, this proportionate value will go to the consumers, or the end customers. That means even though we have huge cost-saving opportunities, that doesn’t mean that the players in the industry will suddenly have EBITs of 50%. Most of that will be passed on due to the competitive nature. And that’s something we need to realize because that means also if you don’t come along, you’ll get killed. Because otherwise, others will be upgrading at 50% of lower cost, while they still don’t make 50% EBIT, that means if you don’t reach that cost level, you’re dead.

• Barriers between industries are breaking down. We see transaction costs are going to zero, that means we can do a lot of fragmentation that we can still have full control of what’s happening. I think our industry was always super fragmented. But we paid for it with inefficiency. That is gonna go away and a big part of this is gonna be platforms. And we can think of platforms in many different ways. We can think about data platforms, we can also think about material supply platforms. And I think we already see all these things starting to happen. When do we have the Amazon of the construction industry? There’s no reason not to have that, especially with the fragmented distribution systems that we have today. And YTWO is a good example of this.

• Winner-takes-all dynamics. And I’ll get a bit more into that because I think it is extremely important. We have done and I spared you with all the numbers. But we have looked at in the industries that already went through the disruptive digitalization cycles. We have looked at who won and who lost and it was interesting. The first movers in any industry gain more than 2.5 times more benefits than the average industry.

• Fast followers is becoming a very slow and very risky process. And if you are not even a fast follower, most likely in our industry, dying will take very long I’m sure, it may take 15 or 20 years but I think you can already say, if you are not at least a fast follower, you’ll most likely be on the verge to death, or been acquired.

• What’s also important is traditional tradeoffs are pretty obsolete. That means with the increase of transparency, transaction costs zero. You can analyze all scenarios, you don’t have to make traditional tradeoffs. You can do it all. What it means for our industry and we saw a bit of that is, I think what we will have is two things happen simultaneously. We will digitize the world but we will also industrialize the world because when you compare to other industries, our structures are way behind. And I like to always compare construction with, for example, aerospace, it’s a very similar complex industry but much more structured and that’s why they can put out the equivalent of a 20-story apartment building, they do two a day. Think about that for our industry.

• Digital natives attack fast. Startups and you see them popping up all over the place, in our industry as well. But incumbents have a unique opportunity to use the scale to drive scale and breadth much further. And I think there is one particular thing in our industry especially when you talk about mega projects. A brand also means that people, the financing side, the developer side, trust you with being able to run big projects. If you are an incumbent and you are being asked to run a 5-billion project I’m not sure how much funding you would get. So I think there’s something that you can take advantage of, but you can take advantage of it now. You won’t be able to take advantage of it in 5 years when you have some incumbents starting the other track record. I think what’s important is that we can learn a lot from what has happened in other industries and we need to translate that.

Lots of momentum: we are seeing some real strategic commitments industrywide

There are some companies, or many companies already moving. The things you can get publicly and the stuff that’s going on behind the scenes, under the hood, are not always the same thing. I was, a lot of times, a bit disappointed of what companies proclaimed and what actually happened in reality. So I wouldn’t be folded by charts on publications, but I think these announcements show that people are serious about it.

The journey to get there consists of 3 main steps

What we would like to look more at is, what does it mean? And here’s an important thing about how to design the roadmap for people playing in the construction environment.

01   Strategic direction & control

There’s three building blocks that you need to consider. One is, I’ve seen roadmaps that I would call it technology forward. I’ve seen companies saying that this is our digitization strategy and they showed me charts that were AR, drones, BIM, I told them: that’s not a strategy. These are all enablers for something. You need to do this custom back you need to understand in your specific area of business, what is it you want to achieve? What is the value you want to create? What is the new thing that you want to offer to the market, to your customers, and to your project partners? And then you need to develop backward. What are the means, what are the technologies you need to employ to achieve that? So it’s about a strategic framework to set direction, and then eventually also control progress against it.  

02   Project enablement

The second element that is important and this is different from other industries is, most of our work happened in projects, often very big projects, and even if you are fully digitized, if your project partners don’t play along, you will most likely capture a fragment of the benefits than if everybody plays along the same platform, plays along the same processes. That’s why this is, in my mind, something that you can’t necessary look at from other industries. This is something where we have to find our own roadmap to digitization.

03   Enterprise transformation

The third is you have enterprise. You obviously need to think about where do you want to be, what do you need to do: data structures, processes, capabilities, all these things.

So these are 3 critical building blocks as you design your transformation roadmap, these are the 3 elements you need to think about when you do this.

Get out of the stalemate – or someone else will

When we asked owner, contractors and suppliers, what are the biggest contributors to capture the productivity improvements.

To win in digital construction, you have to secure seamless collaboration along the whole value chain. That means you have to do this in project. To do that, you have to shape the right alliances, you have to make sure you find partners that are going on this journey with you. You will not able to do this alone. And these are tech partners, these are also project partners, all the way to the people who finance the business. And you need to leverage data as the share tool, there has to be the single source of truth.

To summon that up, you can either keep debating what you need to do, why it’s so difficult in our industry, or you can get out of this stalemate and move ahead. And I think the key bottom line is: if you don’t do it, somebody else will and you’re gonna die.

Thank you very much.

 

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