Sound foundations

The booming construction industry has enormous potential as a market for IT vendors, but selling systems in this fragmented...

The booming construction industry has enormous potential as a market for IT vendors, but selling systems in this fragmented sector can prove a challenge.

Construction is big business, with a turnover of more than £70bn a year, and has so far avoided being affected by the downturn that has hit so many other sectors, such as finance and telecoms. That makes it an attractive market for IT vendors. Moreover, many construction firms are now looking for more flexible, integrated systems that will give them better real-time information about their businesses.

The downside is that construction is not an easy sector in which to sell systems. For a start, there are three separate subdivisions within the overall industry: the architectural and design companies; the consulting engineers and surveyors, and the contractors. Each has its own systems requirements.

"These are completely different businesses," says Ian Hamilton, managing director of the Construction Industry Computing Association, set up 20 years ago to promote IT in the construction industry. "With design firms, their main bill goes on salaries, but the contractors are different. They often have a high turnover, but it is money spent on subcontractors, plant hire and so on."

According to the CICA, contracting firms spend less than one per cent of their annual turnover on IT and many of these firms are small. "About 87,000 UK construction firms are one-man bands," says Hamilton. "They probably bought a PC three or four years ago and use it for standard office software. The lifeblood for a contractor is their central accounting system."

Hamilton believes, however, that the usual characterisation of small construction firms as slow to use new technologies is not correct. After all, he points out, they were the first to use mobile phones. That was because these devices offered real value, whereas present technology doesn't yet have a great deal to offer small building contractors. Among the larger firms, there is greater interest in more integrated, networked systems.

"Construction is not an easy market," says Hamilton. "It's high risk and low profit, which means the IT vendors have to convince some very hard-nosed people of the value of their systems. When the vendors look at this market, it looks like a nice big slice to go for, but when they look more closely, it is not necessarily so attractive. A lot of them end up packing up their tents and going back to insurance or wherever."

Innovative approach
Christer Kaller, CEO of Project Planning Software, agrees that the fragmented nature of the construction industry has contributed to the low take-up of IT. "It becomes more difficult for one company to invest enough to gain competitive advantage when the market shares are relatively small," says Kaller. "The potential, however, is tantalising and it just needs a couple of players to exploit it before the industry works in a completely new way."

Some firms are looking at innovative ways of working. Structural engineering firm Ove Arup, for instance, known for projects such as the Sydney Opera House, is using software from Autonomy to build a knowledge management system. Unusually for this industry, the focus was not on hard return on investment. "We didn't do a formal ROI," says Tony Sheehan, group knowledge manager at Ove Arup. "It was almost self-evident that this would improve efficiency. We got it through with no trouble."

Engineering and construction companies need technical and management expertise to design, build and maintain complex projects under enormous time and cost pressures. Several industry-specific systems have been developed within this sector, mainly to handle contract work, job estimations and the industry-specific aspects of project management. There are also some niche applications, such as protecting valuable vehicles and plant equipment.

But many of the present buying trends within the construction industry are common to other sectors, particularly the need to upgrade or integrate existing systems. "Over the past 20 years, individual departments within construction firms have built their own systems and the time has come to make all those systems work together," says Steve Schultz, construction industry director at software firm Deltek Systems, which provides systems for project-based companies.

Data management
Like other industries, construction firms can choose to implement a single, ERP-style system or opt for a layer of middleware on top of their existing systems to enable better access to the underlying data in their legacy systems. One company that has gone for the latter approach is Laing Limited, a subsidiary of construction giant John Laing, which has implemented a middleware-based approach to enable business managers to gain a more universal view of the company's operations. Group IT director Ken France and his team have restructured various legacy systems to provide improved access to data at an intermediate layer, using Cognos query and reporting software.

Companies such as Deltek, which deliver an ERP-style integrated approach, have the advantage of years of experience in the industry, particularly in industry-specific areas, such as systems to handle building contracts. "We have developed methodologies in our accounting system to handle contracts," explains Schultz, "and on the other side, construction contractors used to bid for work more or less by putting a figure on the back of an envelope. Today, they have to negotiate for projects, so we have developed a CRM-based system to help with that process; that is the hottest software we have, because it helps people win new business."

While Deltek believes its industry knowledge is vital, the vendors of more generic systems, unsurprisingly, take a different view. "We consider generic finance packages more useful because they tend to be stronger on things such as financial analysis," says Diane Noy, senior sales executive at Sun reseller Foundation Systems, which sells its business software through specialist channel partners in the construction sector.

"Construction firms now want real-time accounting on all their projects. They want a clear view of their profit and loss against budget, so if something is going off track it can be addressed quickly," she says. Noy acknowledges, however, that it is important to have sales staff with a thorough knowledge of the construction sector. "We don't have a vertical market product as such, but we have very configurable systems, able to deal with firms' contract needs, and we have strong sector knowledge, so we understand their requirements," she says.

Some of the larger firms in this sector have implemented full ERP systems from suppliers such as SAP and JD Edwards. But vendors such as SAP are rethinking their approach to the sector.

"There has been a fundamental shift in the information needs of many construction companies," says Paul Eggleton, business development manager for discrete industries at SAP. "Given that, SAP sees an opportunity in an industry that is one of the largest in the UK, but that has traditionally been risk-averse and slow to invest in technology."

Eggleton agrees with Noy that construction companies now want more than straightforward, historical accounting systems. "There has been a significant change in business models in this industry," he says. "There are a lot of joint ventures now; companies need to manage those, so that risk and profits can be distributed equitably. There is also a big change in that companies don't just build structures such as hospitals, they often also run them, so they need to be able to look at potential costs and profits over 20 or 30 years."

As well as central business systems, one of the biggest areas of IT development within this sector is in handling the supply chain. Strategix is a software supplier focused in the supply chain area, with a number of customers among manufacturers that supply goods to construction firms, such as Danish door fittings distributor Carl F Petersen. Like many other such suppliers, Carl F Petersen sources its products from the Far East. "It can take up to six weeks to deliver goods from the manufacturers, but customers want their goods next day, so firms like this need good predictive software to get their ordering right," says Strategix marketing director Andrew Yuille. "The customers we deal with are looking to become more efficient and ensure they have stock in the right place when it is needed."

Clear benefits
Supply chains in the construction industry are complex, involving relationships with many different suppliers, partners and subcontractors.

"About 80 per cent of delays on building projects are caused by people working to information that isn't up to date," points out Mark Oliver, managing director of BuildOnline, which sells centrally hosted project collaboration services. Oliver says the low margins in construction mean services like his have to demonstrate savings clearly. "We can show that the hard savings alone, for example, on postage, couriers and phone calls, outweigh the costs," he says. "But the real savings come from avoiding costly errors."

Construction firms are increasingly turning to hosted IT services as a way to avoid expensive bills for internal IT support. This is the case at Space4, a Birmingham-based firm that manufactures insulated panels for its parent company, house builder Westbury Homes. Space4 has implemented a central manufacturing accounts system from Navision that is hosted by and accessed via Citrix thin clients.

"We wanted a minimal IT infrastructure," says Ken Packwood, e-business director at Space4. The system has not only worked well, it has provided Packwood with an interesting lesson. "I'm used to bigger systems and what surprised me most with this was what we got for the money," he comments. "Compared with larger systems, we knocked a nought off the price, but only lost about ten per cent of the functionality. It's really good value for money."

Further information

Market size
The UK construction industry represents more than seven per cent of the UK gross domestic product, with a turnover of more than £70bn a year. It employs 1.3 million people.

In the construction industry, just more than 1,000 key firms produce 23 per cent of output. The sector is expected to grow by an average of 2.7 per cent a year for the next five years; 51 per cent of turnover is new work; the remaining 49 per cent is repair and maintenance work (source: Tetrarch).

There are 7,000 architectural firms in the construction industry and 9,750 other property professionals, such as quantity surveyors. There are 6,000 product manufacturers and 5,000 contractors of significant size. There are a further 158,000 contract firms in the UK, but few of these employ more than seven staff and many are one-person firms.

Traditionally, the construction industry has fared badly in times of economic downturn, but in the present climate, the sector is doing better than some other sectors, such as finance and telecoms. It remains buoyant, mainly due to the continuing rise of house prices and to government spending plans in the health service and other public services. In the 12 months to June 2002, new house orders rose by three per cent from the previous year (source: DTI).

Main players
The main emphasis, as in other sectors, is on integration, automation and cost reduction.

Major IT players in the construction sector are similar to those in other key business areas, but with fewer very large companies, the ERP vendors, such as SAP and JD Edwards, are less dominant than in some sectors. Mid-range business systems are more in evidence. Microsoft dominates in office applications.

Industry-specific vendors, or vendors with industry-specific modules, include Ramesys, Deltek Systems and Foundation Systems. Many construction firms use CAD software.

Market drivers
Construction is a low-profit, high-risk industry. Many construction firms, particularly the larger firms, are looking for systems to provide better, real-time information about their businesses. Their key aims are to improve estimating, ensure projects run to budget and handle stock and subcontracted labour more efficiently.

Construction has always been regarded as a low investor in IT. Design and architects' firms generally spend between three and ten per cent of their turnover on IT; contracting firms spend only about 0.3-1 per cent of their turnover on IT, according to the Construction Industry Computing Association.

But the sector is buoyant and firms are investing in IT, ranging from integration software to extranets, that will enable greater online collaboration on building projects.

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