Digital Transformation: Enabling New Business Models for Construction
This is the eighth article in the Precision Construction series, which explores the application of the Internet of Things to digitally transform the construction industry, ultimately with the objective to improve labor productivity, reduce costs and enhance safety. The series began with Exploring Digital Transformation for Construction, followed by Simplifying Complex IoT Solutions, United Rentals Drives Efficiency & Excellence with IoT, The Solar Energy Project, Robotic Masonry, Mixed Reality for Construction: Applicability and Reality and Taking Environmental Monitoring to a New Level. Articles generally follow a five-layer framework, described in Simplifying Complex IoT Solutions, that makes it easier to understand digital transformation solutions. To learn more about the various technologies described in this series, visit PrecisionStory.com.
As construction equipment becomes increasingly digital, powered by computers and enabled by software, OEMs should consider leveraging lessons learned, as cloud computing and software-as-a-service have revolutionized the computer and software industries. One such lesson involves the growing availability of entirely new business models, from service contracts and assisted services to machines-as-a-service.
Contractors would do well to take advantage of these new models as they not only enable new capabilities to be attached to the construction equipment they utilize, but also expand financial options from capital to operational expenditures. Likewise, digital transformation also opens up the availability for contractors to also bring to market new business models by providing construction-as-a-service.
Start with products and services. This is a model where the manufacturer sells the customer a product and then upsells a service contract on that product. These service contracts include warranty, maintenance and access to information to help the customer better maintain the equipment.
Oracle, before it bought Sun Microsystems, was purely a software company. At the time, Oracle’s annual revenue was about $15 billion with $12 billion of that revenue for service contracts on the software sold in previous years. Only $3 billion was for software products sold that year. The margins on Oracle’s service business were extremely high because this was mostly a delivery of information..5B selling equipment and over $19B selling services for that equipment. And their services backlog in 2018 was over $185B, whereas their equipment backlog was $37.8B.
Figure 1: GE Aviation Services and Equipment Business
The software industry realized a long time ago that if a software company can connect into its customer’s servers, then the company can provide assisted services. For instance, the software company can advise the customer that it needs a particular patch for security purposes or to change a particular configuration.
In the world of heavy equipment, an example of offering assisted services is providing predictive maintenance. As part of its service, a construction equipment manufacturer will monitor its customer’s equipment, predict in advance when maintenance will be required, and ensure the personnel and any parts are available precisely when required.
A similar assisted service can be offered for fueling. For instance, the construction equipment manufacturer can make sure fuel is available when its customer’s equipment needs it. To further this example, if a fuel truck is on location, the equipment manufacturer can advise to go ahead and fuel up other equipment on site as opposed to bringing the fuel truck in again later.
Figure 2: ORBCOMM Predictive Maintenance Dashboard
The next evolution in the software industry was to software-as-a-service. In this model, the software company runs the software on behalf of its customers. This may be just the beginning of seeing construction equipment manufacturers expand their business models to include machine-as-a-service.
In fact, there are a few companies that are starting to offer machine-as-a-service business models today. For example, Kaeser Kompressoren is an industrial compressor company that now sells air by the cubic meter using compressors it owns and maintains by leveraging the Internet of Things to effectively offer “air-as-a-service.” It still sells and rents compressors to legacy customers, but its go-forward strategy is charging for the air that is used.
Figure 3: Air compressor company offers compressed
The logical next step from offering machines as a service is bringing to market “construction-as-a-service.” In fact, one could argue the industry is already in the process of transforming to a construction-as-a-service model via new modular prefabrication techniques.
Among other things, construction-as-a-service leverages standardization to automate manual operations, ultimately improving labor productivity and reducing costs. Worker safety is also enhanced, for example, as prefabrication construction is performed in a more tightly-controlled and monitored environment.
Just look at Coakley & Williams, a Maryland based general contractor. Their move to prefabrication was driven by a desire to get workers off of potentially dangerous scaffolding to make the job site safer. By building in their centralized warehouse, they could build the exterior walls in a much more controlled and better-managed environment, one floor at a time.
Previously, they were laying out a floor in 13 to 21 days. Now, by using their Autodesk Revit model and standardized procedures in their warehouse, it takes them about three to five days to lay out a floor. Most jobs they’re doing are between 40 and 80 panels per floor, and they are panelizing and setting around 20 to 30 panels per day.
Figure: 4: Katerra’s vision of the construction ecosystem
Katerra, a startup company founded in 2015, is taking pre-fabrication to the next level by becoming an end-to-end building services provider, incorporating technology and standardization to modularly prefabricate in their warehouse. In their vision, the subcontractor and general contractor are removed from the overall supply chain, as shown in Figure 4. To date, Katerra has raised $1.2 billion in funding to make their vision a reality.
The success of Katerra’s business model will put pressure on other construction contractors to adopt similar techniques in order to compete.
Vince Vasquez has more than 30 years of experience in enterprise sales, marketing and engineering. Working with 20 industry leaders, he is the co-author of Precision Construction, which teaches the fundamentals of IoT with a focus on the construction industry. He is also the co-founder and CEO of PrecisionStory, which brings Precision Storytelling—a new and innovative approach to enterprise storytelling—to market. Vince has an MBA from Stanford University, an MS in Computer Engineering from Carnegie-Mellon University and a BS in Electrical Engineering and Computer Science from the University of California, Berkeley.