Data analytics revealing whole-life cost and quality, collaboration embedded in organisations’ culture, and an increase in innovation are all set to transform the industry
How do you transform an entire industry? Sir Michael Latham, in his 1994 report, laid out the challenges for the industry and the case for reform more than two decades ago but little has changed.
Neither boom nor bust has provided the necessary impetus. The industry is too fragmented for government initiatives to have much effect. Individual companies can sometimes differentiate themselves and become best in class for a while but chief executives in most other industries would not get out of bed for a 4% margin. The structure of the industry seems an intractable barrier to change but I am optimistic that change will happen soon.
Let me tell you why …
This is the tantalisingly-named initiative of the Infrastructure Client Group (ICG), which brings together the leaders of the country’s biggest infrastructure projects and programmes. The ICG has rightly concluded that industry reform depends on procurement reform and that clients must lead that reform. The government in this context is just another client, albeit a very important one, given the proportion of the country’s infrastructure procured by government agencies. When the ICG sets out its proposals later this year, for the first time we will have a critical mass of clients in the industry setting out the reform programme.
I believe concerted action by that group would be sufficient to change the whole industry, if we all embrace that leadership.
Organisations need to embed collaboration in their cultures, through good leadership that embraces openness, diversity and constructive challenge, backed up by incentives that reward staff for collaborative behaviour
Construction more than most industries is bedevilled by information asymmetry. As each new build is unique, a buyer has limited clarity about what they are buying. Price becomes the only certainty. Price becomes the determinant of the buying decision. Quality is traded away for the lowest price. Lowest price leads to lowest margins, which leads to no investment and no innovation. But that is changing. As the industry starts to embrace technology, construction moves increasingly to an off-site factory environment, where quality is easier to assure. Data analytics will start to reveal the whole-life cost and whole-life quality of built assets. The long-run benefit of a particular material or design approach will no longer be simply a matter of engineering judgement but something that can be evidenced. The buying decision will be based on the outcomes data of what you have done in the past, not just what you are promising for the future.
Much talked about and now increasingly evident in the industry, there have been a number of recent examples of real collaborative success. Also encouraging is the development of collaboration tools, such as BS 11000 and the Alliancing Code of Practice. But collaboration doesn’t come easy. It requires full sharing of risk and reward, both between clients and the supply chain and between businesses in the supply chain. Organisations need to embed collaboration in their cultures, through good leadership that embraces openness, diversity and constructive challenge, backed up by incentives that reward staff for collaborative behaviour, both within the organisation and with partners. Encouragingly many industry chief executives, both in client organisations and main contractors, are now openly advocating such approaches and some have entrenched these principles in their organisation’s strategic plan.
Constrained by lack of margin to invest, the construction industry is almost 40% less innovative than other UK sectors on average, measured by resources committed to innovation activities. Lack of innovation has held productivity levels constant for almost 20 years. But increasingly it is recognised by clients that they are both the cause of this lack of innovation – by buying on price – and the beneficiary if innovation flourishes. That logic lay behind the government’s enthusiasm for the Construction 2025 strategy and its target of 33% lower costs. If clients, including the public sector, can start to buy on the basis of skills and capability offered, and outcomes evidenced, then for the best companies in the sector, margins will rise and constant investment in innovation should become the norm.
So I am optimistic that change will come soon. But it will require some important changes in perception and behaviour. In particular:
- We must all buy into the idea that lowest price is a false economy in the long run in this industry. This needs to be accepted by guardians of the concept of “value for money”, including the Treasury, the National Audit Office and the Public Accounts Committee, as well as the boards and shareholders of utilities and other major clients.
- Contractors need to rethink their side of the bargain, away from price for product to capability for shared outcome. They need to be willing to take more risks to do that and they need to work out how to evidence added value.
Latham fired the starting gun. Sir John Egan, in 1998, reloaded it and fired it again. The ICG’s Project 13 proposals will be the point the industry takes its first real step over the starting line.
Richard Threlfall is head of infrastructure, building and construction at KPMG