Construction's next revolution

The construction industry is on the cusp of a revolution - everyone knows it, but as always with a revolution pending, you are nervous about which side you ought to be on. In every discussion I have in the industry, the first question leadership teams are asking is what they should be doing, and the second is to find out what everyone else is doing. If the future is binary, and your business is not to end up consigned to the annals of history, you need visionary leadership. You must innovate to survive.

Many businesses are acutely conscious of emerging threats to their existence, but unsure what to do. The structure of the industry does not give much freedom of manoeuvre, with few clients willing to support investment

Construction is now at that point where there is a critical mass of disruptive technology about to completely change the face of how the industry works. Some technologies offer a step-change in efficiency in individual businesses, shifting competitive advantage; others will change the relationships between clients, contractors and the supply chain; some will make skills in today’s industry redundant. Each business needs to think through what it believes the future will look like, then work back to the changes that need to be made today. Some of our best businesses have been thinking like this for years - innovating, investing and continually improving. But many, alas, still have their heads in the sand.

Think about the photographic industry. It was seen as quite progressive as the camera evolved over a century but the fundamentals were changed by the ability to capture digital imagery. Do you remember the names Agfa, Ilford and Kodak? All of them had been in existence more than 120 years, but went bust in the last decade. Before the Second World War the average life of a firm in the S&P 500 was 75 years - now it is 15 years.

So how might the industry look in 10 years’ time? Here are three models, not mutually exclusive:

• The manufacturing model. NG Bailey recently suggested that off-site manufacture saves 35% of build cost and 40% in labour requirement. Combine offsite with Building Information Modelling (BIM), embedded from the client right through to the last component supplier, and most of the value in the industry will be earned away from the site.
• The consolidation model. UK construction is one of the most fragmented industries in the world, with more than 90% of our contractors having fewer than 10 employees. It has long been recognised that this fragmentation drives inefficiency, and hence there is value to be unlocked in both horizontal and vertical consolidation. In this future, businesses will capture some of the efficiencies in BIM by buying up their supply chains and turning themselves into vertically integrated outcomes providers.
• The technology takeover model. Much of the industry’s future is about technology, both embedded technologies in assets and construction technologies in their creation. Building and asset management systems, BIM, smart buildings (linked to smart grids and smart cities); user tracking systems; site-based IT and laser imaging, to name but a few. But technology is expensive and few contractors have the margins to invest material sums. So the value in that future industry is captured by the technology providers themselves, who eventually control the platforms and the data.

Many businesses are acutely conscious of these emerging threats to their existence, but unsure what to do. The structure of the industry does not give much freedom of manoeuvre, with few clients willing to support investment. Public companies in particular can find it challenging to persuade their shareholders to take a longer-term view.

But preparing for a different future doesn’t necessarily involve throwing money at it. There are three things - essentially cost-neutral - that every business in the sector can, and should, do: n Recruit those who have the vision and skills to see a different future and take a risk by giving them a substantive say in the future direction of the business. This encompasses both hiring and trusting younger talent and hiring from outside the industry.

• Build stronger alliances with suppliers. Encourage and support their investment programmes. Put in place common systems to drive efficiencies and offset the investment costs in the partnership.
• Enter the world of the technology industries. Seek out alliances with technology businesses. Help start-ups with seed capital and access to your markets, in return for stakes in their products.

Policies like these, brought together within a strong vision of the future of the business clearly articulated by the leadership team, offer the best chance, in my view, of a business coming out on top.

Any prediction is dangerous, but let me close with this one. I would be prepared to put a lot of money on less than half the current Tier 1 contractors surviving in their present form over the next decade. And it could be you.

Richard Threlfall is head of infrastructure, building and construction at KPMG