The following article originally appeared in the May newsletter to clients of FMI Corporation. Reprinted with permission.
Change is visible everywhere in the construction industry. Thought leaders within FMI and other places feel there will be more change in the next five years than in the past 50 years. And it will be disruptive, not incremental or cosmetic. Incredibly well-funded start-up firms are already trying to blow up the current value chains and rearrange traditional roles for their advantage. This happens as succession is occurring among senior leadership teams, as attracting true talent becomes more competitive, and new technologies demand attention.
Intersecting and impacting these forces are the changing workforce demographics. Generation X, which follows the retiring baby boomers, is not a large enough cohort to provide the historic succession patterns. Consequently, millennials must take some senior leadership roles, which require accelerating their work maturity and judgment through earlier, diverse experiences; formal mentors; and tailored training. Millennials, who now make up 50% of the workforce, are digital natives – a fortunate fact as more of our building and project management tools require some technology competency. Generation Z, next up, only knows a digital life.
No construction organization can deny these disruptive trends and survive and prosper. Enlighted companies that are traditional builders are responding with a series of moves. They are forming diverse senior leadership teams, who embrace, rather than curse, these turbulent times. They turn their anxiety into action. A profile of these winners is emerging: four to six members representing the major functions. The CEO, CFO, AND COO are frequently joined by the head of business development and, if large enough, by the chief technology officer and chief people officer. There is variety in age, gender and, increasingly, ethnicity. Most have degrees; many are MBAs. The median age is mid-40s. They are totally data-driven and completely aligned on strategy and culture. Their strategic direction – where they play and how they win – is developed by professional research, not gut feel or even historical choices. They are clear about their addressable market and which value proposition they must execute profitably. Their culture – who they are and how they behave – is value-based and developed by discussion and debate. Once decided, this culture is demonstrated and lived with religious fervor; the team will write a check to honor this value foundation.
These leadership teams are keenly aware of the march of technology, particularly the rapidly expanding applications for jobsite speed and productivity, including those enabled by AI, machine leaning, and robotics. They also see the steady growth of off-site build and on-site installation – prefabrication. They accept that the next era for builders will involve “constructuring,” a blend of construction and manufacturing. Consequently, these contractors, both generals and specialty subcontractors, are assessing and researching the right role for their company and the right supply chain partners, so they can protect and grow their market share in a world where pure technology companies, fully funded by sophisticated, highly successful technology venture funds, are beginning to enter the construction industry. Some construction firms are returning to self-perform; others (e.g., some large MEPs) are beginning to function as prime contractors, filling the traditional role of the general contractor and hiring all the other subcontractors, including a GC to manage the administrative and coordinating dimensions. Still others are acquiring design firms, as these pure technology companies do their own designs. No clear, single pattern has developed, however. Things remain in flux.
These developments are also shifting risk profiles, both for individual companies and for the industry itself. As roles change in the value chain, so do risks. And as large pools of highly risk-tolerant, experienced technology investors enter this mature, cyclical, fragmented industry, the basic risk restraints that underlie most decisions in this industry could change. A growing portion of work will not be the traditional performing contractors risking their own dollars. It will be funds which make multiple investments, underwrite big losses for many years as the portfolio company acquires market share (Amazon, Uber, Lyft), then hope for a “hockey stick” run-up in their returns, once the company is large enough, preferably dominating. This approach, still embryonic, is completely disruptive. There will probably be variations of this theme if one of these is successful. Wise teams know that responding to or leading change will be their primary work from now on. Recommit and buckle up.
