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Why Small Construction Companies Must Consolidate
Published on 11/17/2016 | Strategy
In today’s construction industry, more than 90 percent of companies have fewer than 100 employees. This is about to dramatically change.
The construction industry is at an inflection point, analogous to the move from landline telephones to cellular technology. Digital technologies are disrupting the industry, providing new opportunities to address the challenges of poor profitability/productivity, project performance, skilled labor shortages, and sustainability concerns. But smaller companies simply cannot afford to make this digital transformation. They also cannot afford to fall further behind. The result: consolidation is sweeping through the construction industry.
Already consolidation has impacted the industrial and civil segments, leaving only a few large players remaining in each region. In commercial construction, new contracting models and partnerships (e.g., public-private partnerships) are increasing the amount of work a group can perform, causing non-innovators to lose market share. Although residential construction yet to experience significant disruption, urban population growth will drive change here as well.
Over the next decade, Construction Today predicts that 50 percent or more privately held businesses will consolidate. It is not enough to simply understand the trends driving consolidation. It is essential that businesses understanding the new opportunities created by consolidation– and how companies can harness these changes for dynamic growth.
How digital disruption is driving construction company consolidation
Digital disruption is upon us. 3D printing and robotics, for example, requires 30 to 60 percent less building materials and products can be completed 50 to 80 percent faster. The market for portable and modular buildings is growing as digital technology powers faster completion rates. Portakabin, a UK-based construction company building, uses 3D building information modeling (BIM) and a factory-like setting to construct portable and modular buildings 50 percent faster than conventional buildings. This allows Portakabin to obtain a higher level of precision, delivering construction on time and within budget.
The Internet of Things (IoT) is powering new efficiencies and smarter asset utilization. For example, CCC, a large Middle Eastern contractor, faced weak demand in 2008. The company had two choices: become more efficient or go out of business. Today, CCC uses IoT to monitor and improve the utilization of its assets, saving approximately $15 million per year.
From supply chain to workforce planning, there are tremendous opportunities to streamline business processes in construction. Lean processes, perfected in the industrial industry, provided a framework for optimization and reduced waste. Today’s business networks power seamless communication of information on a global scale. The World Economic Forum estimates that lean principles and methods could reduce completion times by 30 percent and cut costs by 15 percent.
Adapting business models to these technologies, however, is a costly process and one that smaller construction companies simply cannot afford. The result: Companies must look towards consolidation, mergers and acquisitions in order to remain competitive in the current marketplace.
Consolidation benefits: reimagining business processes & workflow
Consolidation should not be viewed solely as a strategic move for survival. It is also an opportunity for companies to shed antiquated processes and reimagine their business models. Entire categories of work can be eliminated through automation. Advances in computing power, connectivity, and sensor technology are opening doors to eliminate ever more complex tasks, such as quantity takeoffs, scheduling, and forecasting. Improved accuracy and lower costs from automated processes provide a competitive advantage for early adopters.
Consolidated companies can leverage mobile and IoT technologies to automate productivity reporting and profitability analysis in near real time. Instant feedback allows workers to understand how they are performing and enables competition through gamification.
Digitization is also enabling the emergence of an open talent economy that connects people and jobs in a borderless workplace. For example, contractors will be able to scale operations rapidly by filing talent gaps from trade workers to management through a virtual talent network. Acting as a virtual union hall, the talent network will maintain training and certification records to validate the qualifications of the candidates. Resourcing processes will need to reflect this paradigm change, allowing resource managers to tap into not only the company’s on-payroll talent, but also identify best-of-breed contractors, alumni, freelancers, and open source talent, map them against demand, contact them, and engage them anywhere in the world, anytime.
Next steps: embracing a digital future
The digital future is here. Businesses that consolidate must be prepared to continue evolving. To harness new opportunities for growth, every firm needs a clear digital strategy and innovation framework. SAP works with construction companies to power their digital transformation through strategy alignment, opportunity assessment, solution roadmap, value realization, and governance.
New cloud-based technologies and engineering software will play a critical role in supporting construction companies as they consolidate, reimagine business processes, and embrace a digital future.
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