Navigating the digital future: The disruption of capital projects
Digital
technology is disrupting capital projects. Companies that want to emerge as
leaders must transform their organizations now.
Productivity in the construction sector has stagnated for decades, with the average
capital project reaching completion 20 months behind schedule and 80 percent
over budget. Some overruns result from increased project complexity and scale,
but another factor also looms large: all stakeholders in the capital-projects
ecosystem—project owners, contractors, and subcontractors—have resisted
adopting digital tools and platforms. These include advanced analytics,
automation, robotics, 5-D building information modeling (BIM), and online
document-management or data-collection systems. Meanwhile, companies in sectors
ranging from government to manufacturing have significantly reduced costs and
schedules by aggressively pursuing digital solutions.
The situation is
rapidly changing, however, since construction-technology firms have
garnered $10 billion in investment funding from 2011 through early 2017.
This surge has stimulated development of a wealth of tools and solutions for
all project phases, from preconstruction through operations. The cost and
productivity benefits that these innovations can offer are too large to ignore.
While digital tools are not the only improvement lever available to
construction stakeholders, and while they will not solve all productivity
issues, they will spur the greatest performance improvement.
Construction has the
benefit of learning from many other industries that have undergone significant
digital transformations over the past five years. Experience in other
industries shows that companies that have been quick to embrace emerging
technologies and develop new platforms—the first movers—have gained a strong
competitive advantage. We expect the construction sector will follow a similar
pattern, giving industry stakeholders an imperative to launch digital
transformations now. With thousands of tools on the market, however, many
companies struggle to identify a portfolio of digital solutions that truly
addresses their major pain points. Even more companies falter during
implementation, often losing momentum after the pilot stage or finding it
impossible to launch digital initiatives across multiple projects.
To overcome these problems,
capital-project leaders must create a tailored digital strategy focused on
business value and integrate it into their operating models. Equally important,
they have to develop internal capabilities and organizational structures that
support wide-scale innovation. These are daunting challenges for any
organization, but even more so for those in the immensely fragmented,
risk-averse construction sector, where companies begin every new project from
the drawing board. A strategic new approach to digitization can help overcome
them.
Digital transformation is essential in capital-project
delivery
Builders have
traditionally been at the forefront of innovation. Each generation of
structures, from ancient pyramids to 20th-century skyscrapers, arises from more-sophisticated
construction techniques. Over the past 20 years, however, the industry has
fallen behind. In fact, a recent McKinsey Global Institute (MGI) analysis of 22
major industries showed that construction was second to last for overall
digitization rates, ranking above only hunting and agriculture. With
construction clinging to manual processes as other industries advance,
the sector’s productivity is now about half
that of the total economy
Many organizations may
hesitate to use digital tools because of the nature of the construction
industry. The landscape is fragmented, with multiple public- and private-sector
owners, investors, contractors, and subcontractors. These organizations often
differ starkly in terms of capabilities and management approach. With each
project following a bespoke model, it is difficult to establish universal
standards and processes. Industry fragmentation also makes it difficult for
stakeholders to share information for data analysis.
Another problem is that
the current contract model burdens some companies with a disproportionate share
of risk. Such players have little incentive to introduce untested tools or
processes, fearing that they might delay timelines or otherwise jeopardize
their ability to fulfill their contractual obligations. They do not think about
the many benefits they could lose by holding back. Digital tools may also
decrease the frequency of change orders and claims—often a major component of
engineering and construction (E&C) companies’ profitability—by providing
real-time performance insights, improving planning, and minimizing project
alterations. If E&C stakeholders focus only on this shift, they may have
difficulty thinking about the other ways that digital solutions can help them
increase profits.
For capital projects in
the public sector, regulatory issues may also discourage digitization.
Government agencies have long required companies to follow standard procedures
when responding to a request for a proposal, and these leave little room to
introduce innovative strategies.
Several leading E&C
companies have begun to digitize, but their efforts are often limited to pilots
or become bogged down in complexity, especially when dealing with the vast
stores of information that digital tools provide.
With great value at stake, companies must
transform rapidly
As
construction-technology solutions begin to disrupt project management,
companies that do not innovate will find themselves at a disadvantage. A recent
McKinsey analysis suggests that existing digital technologies, when applied
comprehensively and efficiently, can reduce overall project costs by as much as
45 percent. Although this will not entirely eliminate construction’s
productivity gap with other industries, digital solutions will produce more
improvement than will any other lever. For E&C companies, the stakes are
particularly high, since these cost reductions will soon determine whether they
capture solid margins or experience financial struggles as competition
intensifies. For owners, digital cost savings will be essential to completing
projects more rapidly and within or below budget.
For incumbents in the
E&C industry, rapid transformation is critical to stay ahead. These firms
are facing increased competition from technology companies, both established
ones and start-ups, that have recently expressed interest in infrastructure
projects, viewing them as ripe for disruption and a logical extension of their
existing portfolios. Although incumbents have the advantages of market share
and brand recognition, they could lose ground to digital natives unless they
move now.
There may be even
bigger gains for companies that are first to market with new platforms, such as
those for project management or material supply. Just as Amazon changed retail,
Netflix changed entertainment, and Tesla is changing the auto sector, the
digital leaders in construction could put the industry on a new path and set
the standards to which others aspire. The real question is not if this will
occur, but when.
Digital innovation within capital projects can take many
forms
With change inevitable,
stakeholders should focus on capturing value from digitization and the extent
of their possible gains. Although capital-projects leaders may be tempted to
implement any tool that appears promising, this blanket approach falls short
because each company has unique needs. A better and more systematic method for
determining the right solutions involves first identifying a company’s most
acute pain points, as well as the opportunities it would like to pursue.
Managers can then evaluate which digital tools will help them achieve their
objectives, following an approach that classifies them on two levels :
·
Clusters. Most digital tools fall into
one of three clusters: on-site execution, back-office integration, or digital
collaboration. As their cluster names suggest, tools within on-site execution
and back-office integration are used to add value and create opportunities in
these settings. Digital-collaboration tools can be used in any setting,
provided that they facilitate communication and interaction among members.
·
Tasks. Within each cluster,
companies should take the categorization a step further by classifying tools
based on the specific improvements that they facilitate. Again, tools will fall
into major groups. Within on-site execution, for example, most tools assist
either with execution in the field or with tasks related to contractor
management or supply-chain management.
This two-step
categorization can help companies identify the right tools to address
long-standing problems and estimate potential savings. For instance, tools
within on-site execution may help increase productivity, eliminate cost
overruns, and create more transparency about performance. An analysis of
construction projects across industries shows that these tools can produce
savings of up to 20 percent, but the gains may be much higher. With information
like this, companies can make informed decisions about the investments that
will bring the greatest business value, allowing them to build a portfolio of
solutions that can be integrated seamlessly into their operating models.
Some digital solutions provide universal
benefits
Although owners and
E&C companies face unique challenges that will influence tool selection,
certain ideas and solutions benefit virtually all organizations. We recently
published another article, “Imagining construction’s digital future,” that describes some of the most important
technologies that can increase value in major projects. Building upon that
work, we have identified five basic areas where all companies must add solid
digital capabilities to catch up to industry leaders:
·
Digital-project
controls and work-front management. Companies may experience delays and cost overruns
because stakeholders look at different data sources when monitoring
performance, resulting in conflicting progress reports. A cloud control tower
helps eliminate these issues by providing real-time information about critical
activities in a central database that all employees can access. For instance,
the capital-projects unit of an electric-power company wanted to improve
portfolio management and reduce costs across a pipeline of more than ten
projects. It developed a control tower that provided real-time information on
key performance indicators. The tower also created performance visualizations
by consolidating data not available at the site level (such as cost reports)
and information from all E&C companies across locations. The company then
used the control tower to identify issues related to cost, schedule, and
quality as soon as possible, allowing it to take immediate mitigation actions.
The control tower helped reduce costs by over 20 percent and decreased labor
hours required for installation by over 15 percent.
·
Capital-portfolio
management. Construction
stakeholders, particularly project owners, often struggle to manage diversified
capital portfolios. Many widely available software programs can help, including
those that track total portfolio expenditures, monitor progress, and flag
potential issues that could raise costs or extend timelines. Some software
programs also help with decision making, such as those that compare the projected
results for two potential portfolios. In one portfolio of small- to mid-size
projects, a company determined it could achieve potential savings of 20 to 30
percent through restructuring.
·
Next
generation 5-D building information modeling (BIM). Contractor management is
difficult because documentation and project data tend to be scattered among
different sources. 5-D BIM—the combination of 3-D physical models of buildings
with cost, design, and scheduling data—can improve execution. While this technology
is still developing, it is now sophisticated enough to be applied to most
projects. In an extremely complex project, users may limit the use of 5-D BIM
to specific subsections. Our experience shows that 5-D BIM can help companies
in numerous ways. For instance, it can produce savings of up to 10 percent of
the contract value through clash detection and reduce project life span and
material costs by about 20 percent. During a project at an airport, 5-D BIM
reduced construction time by about three to five months by providing faster
clash detection and better visualization of the proposed structure, reducing
rework.
·
Advanced
analytics. Using machine
learning, data-ingestion engines, and innovative pattern recognition, managers
can now rapidly sort through millions of data points. With this capability,
companies can compare the impact of hundreds of performance drivers on project
or business outcomes. They can also identify the obstacles that raise costs and
timelines. In some areas, advanced analytics may
produce savings of up to 25 percent. The capital-projects unit of an oil and
gas engineering organization used advanced analytics to identify drivers of
efficiency loss, create benchmarks, and assess other factors that could affect
performance. The analyses identified 15 to 25 percent productivity improvements
for ongoing projects and 10 percent engineering savings across the
organization.
·
Next-generation
surveying and prefabrication analysis. Virtual-reality tools help users view designs and
prototypes, allowing them to interact with them as if they had already been
constructed. That means they can see the exact size of various components
before physical assets are fabricated. Similarly, advanced surveying tools help
users understand as-built conditions and compare them with designs. For
instance, one tool uses a drone and 3-D imaging to create a regular cadence of
precise, millimeter-level surveys of construction progress.
While these five
capabilities will provide many benefits, companies may not capture maximum cost
reductions from digitization until they implement complex solutions that
require greater digital skills, including those that rely on autonomous
vehicles, automated construction processes, and 3-D printing. All these
technologies are already creating significant value at some companies, although
their use is still limited.
Capital-planning stakeholders must take action now to
become digital leaders
Although many companies
have implemented digital programs, most have not been able to quantify the
benefits, making it difficult to gain more widespread support and buy-in across
their organizations. But with potential cost reductions of up to 45 percent on
each project, both owners and E&C companies must now build a clear business
case for digital investments by implementing top-down initiatives to identify
opportunities, measure progress, and share successes.
A review of past
digital initiatives suggests that many fail because project leaders in the
field are reluctant to implement new technologies, believing that they will
increase costs and risks while conveying few benefits. To counter this
perception, a company’s CEO and board members must take ownership of the
digital transformation from the outset, focusing on three building blocks:
strategy (linked to business value), project enablement, and enterprise
transformation.
Strategic direction and control
As a first step, CEOs
and board members should create a comprehensive strategy, communicate it
throughout the organization, and develop a transformation road map with
tangible objectives. They should also install a transformation management team,
providing it with decision-making authority and the full support of senior
leadership.
When evaluating
potential solutions, a company should prioritize investments based on their
ability to address its greatest needs. It should rigorously assess value using
a systematic approach that helps estimate potential cost savings. The two-step
assessment described in the previous section, which calls for tools to be
classified based on the cluster in which they fall and the activities that they
facilitate, is one option.
As leaders set their
strategy, they must also realistically assess their company’s digital
capabilities—an analysis that will prevent them from selecting tools that grab
headlines but are too complex for their organization to implement. Generally,
the assessment will show that a company falls into one of three
categories—digitally nascent, emerging, or capable—based on its digital
investment levels and experience .
A company’s digital
maturity level will help determine near-term digital priorities. Consider field
tools. A digitally nascent company might simply deploy basic tools that
increase collaboration and transparency about a project’s progress. At the
other end of the spectrum, digitally mature companies might focus on field
tools that fundamentally change operations, such as on-site 3-D printing or
autonomous vehicles. Communication is also critical during the strategy phase,
since leaders must build support from all staff, including project managers in
the field, to ensure that they use the proposed solutions.
Project enablement
Even the most capable
companies should be careful to avoid overburdening staff or budgets during the
early wave of a digital transformation. They should include a limited number of
projects in the first wave of implementation, using clear selection criteria.
Managers should also define and manage the scope of each digital initiative,
noting the exact areas where it should generate improvement. After the first
projects have launched, companies can embark on additional implementation waves
that encompass more projects and generate greater impact. As leaders gather
feedback from staff, clients, and other stakeholders, they can adjust their
strategy as needed.
Enterprise transformation
Comprehensive digital
transformations—those that reach all business units and levels within a
company—are difficult to launch and maintain across project teams, which tend
to have different processes and goals. To generate value without disrupting the
core business, companies should consider establishing a “Newco”—a business unit
with the specific skills and resources to facilitate digital change across
multiple projects. Newcos typically ensure that agile and lean processes are in
place to support the tools, and they can scale up innovative programs more
quickly than can traditional business units. As other groups see the value that
Newcos generate, they will be more likely to appreciate and accept
digitization.
Companies in many other
industries have created Newcos to assist with digitization, often consecutively
migrating service lines to them. For instance, the banking and finance industry
made the transition to digital by creating Newcos. Within construction,
stakeholders could take a similar strategy, migrating projects rather than
service lines. As one example, the Newco might specify that all projects under
its mandate must use 5-D BIM, adjusting timelines, organizational structures,
and work processes to accommodate this shift.
Of course, strong
management will be essential for any digital initiative, but companies may
choose different approaches. Some may appoint a chief innovation officer to
handle all initiatives, while others may delegate responsibility for different
tasks to business-unit leaders.
Another crucial
prelaunch step involves the creation of implementation plans that describe how
the first few digitized projects should proceed. To help keep teams focused on
appropriate digital goals, the plans should specify all major performance
indicators and milestones. While developing their implementation plans,
companies should reassess their technology infrastructure and determine if it
will support their desired goals—not all legacy systems are compatible with
advanced tools.
Finally, companies must
consider revising their pricing strategies. They may need to emphasize the
benefits of digital solutions and innovative approaches to customers at the
project-proposal stage. Without buy-in from all major stakeholders on the
client side, it will be difficult to drive adoption.
Tips for maintaining momentum
Even though many
companies are firmly committed to digitization, their initiatives often lose
momentum, with staff returning to traditional processes after a few months.
Capital-projects leaders can avoid this problem by creating new organizational
structures and processes that promote innovation—either within a Newco or
within the existing business. Leaders should assign responsibility for
developing and coordinating execution of the digital strategy to specific
groups or individuals. In tandem, they must shift performance-management and
capability-building processes to place more emphasis on digital skills.
Outside hires may be
essential to fill some talent gaps. For instance, Newcos should be free to
recruit new staff with the skills needed for large-scale implementation. They
often begin by hiring a chief technology officer and later add data scientists
to support analytics and project-controls personnel who are experienced with
digital-project management.
Many businesses will also
need to revise their long-standing processes and timelines. Take project
planning. Most companies complete this phase relatively quickly, but they may
now need more time to get cloud control towers and other tools up and running
before a project begins.
With the
capital-projects industry on the brink of digital disruption, stakeholders must
transform their companies. Although digital tools will not eliminate all
productivity issues, they represent the greatest improvement lever available.
Companies that are slow to digitize, or that lack a bold, well-structured
transformation plan, will lose ground. To make the big shifts that digitization
requires, leaders must become less risk averse and adopt an aspirational
mind-set. Sophisticated, groundbreaking tools, including those that use
artificial intelligence, should be given full consideration, rather than
dismissed as risky. While each organization may pursue different digital
priorities, they must all share a commitment to large-scale change to
succeed—and that means altering business and operational models to support
innovation. Bold leaders and fast movers who aggressively support digital
programs will likely reap the greatest rewards.
October 2017
https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/navigating-the-digital-future-the-disruption-of-capital-projects?cid=other-eml-alt-mip-mck-oth-1710
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