Consolidation and integration in the A/E/C industry will escalate because it must. How else will we move beyond our current highly inefficient processes?
Heraclitus is credited with espousing the philosophy that the only constant is change. In the 2,500 years since that doctrine was proposed, its validity remains intact.
In 2012, the architecture/engineering/construction industry continuing to undergo change driven mainly by three needs:
- The need for growth in revenue (particularly important for publicly owned companies)
- The need for geographic expansion (primarily for backlog generation)
- The need for process change due to inefficiency (for competitive reasons)
How is the A/E/C industry changing in response to these needs? Some key facts are important to remember when forming a judgment about the direction of change being observed:
- The A/E/C industry remains a hugely fragmented industry with low barriers to entry for competition. It contains much commodity work that is price-driven and low value-adding. So the theory goes that industry consolidation will enable innovation, efficiency, and integration.
- The A/E/C market is driven by public-sector spending on infrastructure and private-sector spending to meet consumer demand. Geographically, the fiscal policies of European countries and the United States have reduced demand for services in aggregate; therefore, looking overseas has become a key strategy of many U.S.-based A/E/C firms.
- The construction industry is hugely inefficient and very large in terms of capital spending. It therefore attracts much interest from catalysts for change in other industries because it appears ripe for revolutionary change that could lead to large revenues and profits for successful change agents.
It seems to me that the combination of these factors will ultimately result in a macro change in how buildings in particular will be designed, procured, and constructed. I believe the A/E/C industry is in fact moving toward a single global new practice model, albeit incrementally and perhaps not with strategic intention. 2012 will be another step along this road.
In the field of architecture and engineering design, there are many different companies offering services on the basis of their experience in particular project types. One consistent factor across the board in the A/E industry is that many firms are organizing themselves to focus their practice and business lines on skills, clients, and markets.
This makes sense in that generalist practitioners are now being replaced by specialists. That organizational change closely aligns with the mechanism by which clients choose consultants, which is initially by qualification and then via a specific proposal. This means that any particular firm’s track record is used to open the door to a project, and then the specific skills of its proposed team secure the deal. Therefore, both reputation and skill set are important to nurture in equal measure. This is also the reason that matrix organizational structures are now quite a consistent arrangement in this most fragmented of industries in which no one firm holds any significant market share.
This arrangement more easily allows identification of market knowledge by companies keen to grow revenue by M&A in target markets that align with their strategic plans. Hence the growth in M&A activity driven by need.
Opportunity is another driver of mergers and acquisitions, with several factors that are especially relevant to the A/E/C industry:
- The need for expansion into new markets
- The need to attract and retain talent
- The expectation of clients for global solutions delivered locally
- Technological change and the costs associated with technology implementation
Taking each in turn, the attraction of consolidation through merger or acquisition is obvious.
Expansion into new markets. The role of the economist in our daily news has grown to unprecedented proportions. We now all know of the issues of the euro, the trade deficit in the United States, and the relationship of debt to gross domestic product in multiple locations around the world and across the United States. Of course, the consistent message we hear is that slow growth at home is on the short- to medium-term horizon, and there is far greater growth in the markets of China, India, Russia, and Brazil. So these geographies have become attractive, especially to revenue growth-driven companies.
Attracting and retaining talent. The attraction and retention of talent plays directly into the macroeconomic news as much as it affects the strategic plans of organizations. This is for several reasons. First, whether they are publically or privately owned, service-orientated companies need to grow to survive. Talented individuals will stay in an organization only if they see career progression. Revenue growth is the means by which opportunity for personal growth of employees is created for public companies that need to remain attractive to shareholders as well as for private companies that require a buy-out plan for the owners. Without retaining the talent, you can qualify for the project but you won’t secure it.
Employees also read the news and know all about the economic realities of the industry. So geographic growth as a driver of revenue and a route to exciting work is expected from any strategy or vision a design firm creates.
Global solutions delivered locally. For both private and public entities, the revenue growth driver of retaining the best talent brings with it some risk and cost that inevitably lead to consideration of either home or overseas merger and acquisition potential. The ratio of home versus overseas buyers of U.S. firms seems to cycle up and down each year in support of this notion.
A further consideration is the cost and availability of the acquisition of talent that supports and drives global growth. The relative lack of investment in public education in the United States and continued recession of the A/E/C market here contrast with the situation in markets such as China. In the 1980s, China produced 30 times more engineers per annum than the United States; it now produces 60 times more. India also produces excellent engineers in large numbers. So not only is their market attractive by nature of GDP growth, but the talent pool is larger and the cost of talent is lower. This perfect storm of supply and demand is a draw that is hard to resist, and so the trend is set.
There are exceptions to this business fashion of global practice, and the fragmented A/E/C industry is broad and varied enough for the world’s largest economy, the United States’, to support many stay-at-home firms that seek small market share and are willing to expand and contract in accordance with their marketplace. The risks to these firms may not be related just to the attraction and retention of key talent or the issues of transferring ownership to the next generation. Also at odds are the expectations of clients as well as the efficiency improvements that lower-cost, highly skilled labor and technology-enabled process improvements can bring.
Technological change. Design, costing, and construction all rely on technology now. This applies to turning ideas into designs, to measuring and costing work, to manufacturing and now delivery sequence, and to operational feedback.
The single-model concept in which each party in the process inputs its skills into the virtual building allows optimization to such an extent that the process we use today will become redundant very quickly. The present system of data transfer is one major source of errors and omissions. These will soon be a thing of the past.
Similarly, the reworking of design, particularly the design and fabrication drawing processes that cause losses of time and add cost, will be a thing of the past.
Finally, the return of method-led construction will increase site productivity as test builds will be carried out in a virtual environment. Optimization will be the norm, and technology will allow thousands of options to be assessed from time, cost, and quality perspectives; therefore, how things are built and how things are designed will become one.
Technology is the glue that will join the industry together again, much as it was with the master builders of the past.
Construction productivity graphs show just how inefficient the A/E/C industry is, and this must change in the post-recession economy. New drivers of efficiency will be:
- Computational power will make design faster and more optimized.
- Site safety and productivity will make the site a place of assembly; fabrication will take place in manufacturing facilities.
- Procurement via framework agreements, integrated project delivery, or public-private partnerships will align design, construction, operation, and maintenance.
- Data will drive more informed decision-making and reduce prototyping of buildings to appropriately standardize solutions.
When these steps become standard operating procedure in a majority of firms, then the industry will be able to deliver buildings twice as fast as today and at half the cost.
If that is hard to imagine, then look at other industries such as telecommunications, and you’ll see it isn’t overly ambitious. If you view a photograph from a construction site 100 years ago, you’ll see that what it depicts is not very different from what you see on a site today. What other industry has seen so little change? In fact, if you consider that the Empire State Building was completed in 1931 after 15 months, you’d have to ask if such a building could be finished in half that time today.
The move to an efficient, safe, and reliable construction sector is occurring everywhere right now. When cost and schedule benefits result in modular solutions, off-site fabrication, just-in-sequence on-site erection, and operational feedback and maintenance, then the A/E/C industry will have caught up with its counterparts in supply chain and manufacturing.
Data-driven decisions will also influence the design and construction process enormously in the near future. I often imagine explaining to my grandchildren in 20 years’ time how buildings were designed today. I imagine them laughing when I explain how architects chose a solution for a building, then waited weeks for feedback on the cost and energy efficiency implications of their design, only to see a subcontractor change it months later because of materials availability or buildability, with the owner footing the bill every step of the way. How on earth did we get here?
Imagine a simpler world where as the options are chosen, live costs and schedule dates are immediately available, where feedback on cost and performance are fed into the process along with data from previous solutions. Alternative solutions would be immediately assessed, and the owner could make informed decisions in real time. This is not so far from the way we can buy new cars online today, and so is not much of a stretch to imagine buying real estate and creating structures the same way.
My point is that the A/E/C industry is moving toward a point of convergence, and while that convergence may not be driving consolidation, consolidation surely will emerge from the consequences of the industry coming together.
Another driver of change in the A/E/C industry is legislation driven by social and political factors.
The move of populations to urban centers, which is a phenomenon occurring all over the world today, combined with the limitations of the urban environment to supply energy and water and deal with waste, is creating a demand for solutions that rely on innovation, knowledge sharing, and learning across geographic, technical, and skill boundaries. This scenario may sound idealistic, but the fact is that we will not meet carbon targets set in various legislations without some step change in the way things are done. Legislation at federal, state, and city levels around the world is being developed to reduce resource demand and increase efficiency.
What is clear is that there will be considerable sharing of policy and strategy by permitting and approval authorities worldwide so that the infrastructure of each city can encourage and support new development models. This is no simple task. But the means by which infrastructure can be delivered will require technical and financial models to be developed alongside new technical solutions because the present model will not support the changes needed to meet targets agreed upon at the government level in treaties such as Kyoto and the federal and state carbon reduction targets that have followed.
The user-pays model for these solutions may seem simple as an ideal, but when cities adopt closed-system solutions in which municipal water, power, and waste streams are part of a living cycle within which city building stock exists, then the current arrangements of supplier and consumer no longer work.
We are already seeing this with on-site power generation and water treatment at the building scale. When the building stock supplies neighbors across the private- and public-sector utility grid, then the system gets complex. The carbon tax is also simple in concept, but the supporting infrastructure will have a serious cash flow deficit as transmission and distribution systems need to precede the economic drivers that follow, and the investment in power and water generation may also be from public-private models, further complicating the accounting.
Much learning, sharing, research, and development needs to occur, and this will inevitably be supported through large integrated A/E/C organizations that currently don’t exist at sufficient scale to solve the problems we are facing.
It is easy to see that organizations like the C40 Cities Climate Leadership Group will be a forum for these smarter, more intelligent cities to share solutions and that large solution providers will be required to deliver city-scale solutions with funding arrangements that last a generation or more. The problem is that delivery vehicles do not yet exist at the required scale and so consolidation of the A/E/C industry has a long way to go.
What 2012 Will Bring
Change is essential, and the growth of firms that are providing integrated solutions is both welcome and inevitable. The scale and scope of integration will also grow as A joins with E and A/E joins with C. Continuous improvement contracts will grow as well because the idea of framework agreements that include key performance indicators and feedback from solutions in operation seems to me to be inevitable, beneficial, and effective in driving the pace of change. That the A/E/C process will eventually include facilities operations and maintenance and that also seems to be a very good thing.
The construction industry will improve its efficiency if for no other reason that it has to do so. As more construction work is completed in factory environments, on-site safety incidents will be reduced, as will the amount of labor required to perform building functions on a job site. What we will see are opportunities to innovate, a continual need for creativity, and systems that allow us to capture and re-use knowledge.
As an industry, we are faced with unprecedented challenges, and we will need to rethink, retool, and respond to them in an open-source, collaborative way within a consolidated and integrated industry. We know that competition is good for many reasons, but the A/E/C industry is competitive within a wasteful framework. Consolidation will bring opportunities to integrate and deliver coordinated change.
It’s a great time in history to be in this industry. We are at a time where change is inevitable because the industry has evolved its processes, means, and methods to a place that no longer suits the market’s needs.
I end on a note of cautious optimism. We are faced with a need for evolution in the construction space. We cannot be dinosaurs or we will die with the changing climate; rather, we need to evolve quickly into a thriving species that will adapt and develop with intelligence and confidence. This new construction species requires the fragmented industry to homogenize. The revolutionary changes we see today are just the beginning of a long evolution of shaping better outcomes.
In 2012 those who are creative, adaptable, integrated, and flexible will thrive, and that’s good for everyone in the long run. As Charles Darwin observed, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”
Steve Burrows is a senior vice president with AECOM’s building engineering practice with responsibility for the Americas. He was formerly with Arup, where he was a member of the Americas Regional Board, the Americas Property Market Chair, and leader of the San Francisco building engineering practice. Burrows is a registered professional engineer, and in 2009, he was awarded a CBE by Queen Elizabeth II for services to civil engineering overseas.