Research from McKinsey Global Institute shows that productivity in the construction sector has stagnated for decades. While there is an array of reasons, the low degree of digitization in the industry is the largest differentiator between construction and the industries that have significantly outperformed it in terms of productivity growth since the start of the digital revolution, such as retail, media, and manufacturing.
However, the industry is in the midst of change, with large amounts of capital invested in digital construction solutions and first movers adopting new technologies across the entire construction value chain.
A peer-to-peer roundtable of 18 senior leaders from the German capital projects and infrastructure industry met during the inaugural Global Infrastructure Initiative roundtable in Germany to discuss the opportunities, challenges, and implications of the digital revolution in construction. The group of decision makers from a wide variety of industries, including energy, real estate, engineering, and academia fostered a lively discussion. The group discussed how today it is more important than ever for incumbents to stay ahead of the curve and move quickly and boldly.
During the roundtable participants saw first-hand how digitization in construction is already becoming a reality through the live demonstration of digital surveying and digital twin technology leveraging robotics and drones on a construction site thousands of kilometers away.
The subsequent panel and group discussions covered several themes and revealed these key insights:
- The technology is available, but organizations need to increase adoption and pursue holistic digital transformations. The density and size of investments in technology startups in construction has grown significantly, and there are many solutions that provide the necessary technological backbone to drive holistic digital transformation of construction companies. However, players are slow to adopt them successfully. This is often driven by the hesitance of organizations to embrace the required transformation of mindsets and behaviors. For example, when running digital pilots, processes often remain unchanged, resulting in smaller than expected or even negative impact on performance. Only comprehensively revising existing processes will fully leverage digitization and create significant performance improvements. The idea of developing separate digital business units to run digitally-integrated construction projects and processes is viewed as a very attractive option to implement such holistic change.
- Long-term winners in the German infrastructure market will invest in technology today, yet there is little urgency to change. The pipeline of capital projects in the German infrastructure market is huge and exceeds capacity of engineering, project management, and execution companies by far for the next decade. It creates a regional market that supports high prices and satisfying margins, but no pressure to differentiate. However, it is expected that the citizen pressure on public entities and the construction industry to deliver more, better and cheaper infrastructure will grow significantly. Therefore, embracing digitization is not only a means to improve competitive positioning and increase profitability, but equally important to augment available capacity with existing resources in order to fulfill market demand. The regional industry can consider a change in business model – from purely monetizing the current opportunities to, instead, investing for a future where competition for market share will come from more digitized international players with better cost position.
- Investment in capability building is critical to realize the full potential of digital tools. The construction industry traditionally falls behind other industries when it comes to investments in R&D (1% vs. 3-5% in other industries) and IT (1% vs. 2-4% in other industries). This lag is also present in capability building and lower investment in human capital. Many construction companies invest in as little as one day of training per year as opposed to approximately 15 days per year in other industries. Increasing this investment is particularly critical for better adoption and effective use of new digital tools in ways that realize their full cost savings potential, which McKinsey estimates can be up to 45 percent of project costs. Moreover, processes and mindsets will not evolve if staff is not continuously prepared to implement new standards.
- Changing an entire industry requires change along the full value chain. Digitization presents a tremendous opportunity for private industry to increase their competitiveness. However, siloed solutions have proven to fail in complex supply chains—and construction supply chains are among the most complex. Therefore, companies must define common standards, adopt ruthless transparency, and integrate their digital supply chain end-to-end to successfully and fully materialize the potential improvements from digitization. At this point, though, many players along the construction value chain struggle to identify the natural leader in setting the standards among owners, general contractors, and E&C companies. One idea to drive digitization and shape true “digital projects” is to form a “network of partners” that jointly invests in the future.
- It is not only about cost reduction, but about increasing clock speed and capturing new sources of revenues. Often companies are focusing on cost reduction opportunities as the key source of value. However, there are several other metrics across project performance they should integrate into their evaluation of new technologies, such as shortened timelines. For example, the analysis of data collected across thousands of projects and millions of sensors will allow for E&C companies to solve problems in a fraction of the time it takes today and for owners to implement predictive maintenance programs during asset operations to save costs and maximize asset revenues.
Several of these topics will feature in targeted follow-up sessions, which we are excited to host in the future.