The Impact of IT on ProcessesReturn on Investment in RE/AEC

November 16, 2001

John D. MacomberHarvard Design School

BuildingVision.net

George B. H. Macomber Company

RECI_2001 Harvard Design School

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John Macomber Background

• Construction CEO – George B. H. Macomber Co., $250 mm GC

• Cisco, MIT Media Lab, Children’s Hospital

• Real Estate Partner– 2,000,000 SF

• Academic Thought Leader– Harvard: E-Commerce and the Internet in Real Estate and Construction– MIT: Strategic Management in the Design and Construction Value System

• Dot.com Entrepreneur– Collaborative Structures, Inc. (sold to e-Builder)

• Consultant, Director, and Angel Investor– BuildingVision - Pursuing industry transformation

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Objectives Today

• Identify a problem with respect to Information Technology in Real Estate, Architecture, and Construction

• Propose a way to break the problem down into smaller pieces

• Share research and Return on Investment (ROI) models from other industries

• Stimulate your thinking

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The Productivity Paradox

“We see computers everywhere except in the productivity figures.”

- Robert Solow, MIT, 1987 (subsequently awarded Nobel Prize in economics)

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Personal Effectiveness Example

• My assistant and me in 1991

• My assistant and me in 2001

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RECI: Four Themes

RECI Topics• Business Models for Owners• Building as Computer• e-Learning and Knowledge

Management• 3D Object Oriented Models

Other construction efforts and research centers

• CIFE CII Lean CIRT

ROI and TEI in other industries• Giga, IBM, Accenture,

PriceWaterhouseCoopers

About AEC / RE in particular

• Large• Fragmented• Project based; one of a kind output• Many entities per project• Few economies of scale• Few barriers to entry• Hi risk, low margin• Lack of standards• Hostile to technology

So what’s the problem?

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Where’s the Overlap?

Solutions Seeking Markets

“Computers are cool”“We could do _______”

“Get rich quick”

(vendors, entrepreneurs,academics)

Business Issues

TimeCost

QualityCompetition

(new and established principals at risk)

Query: Can anything of value emerge out ofthis intersection where we can describe a process tochange and an ROI to measure?

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Analytical Framework # 1:The Construction Value System

Owner/Operator

Labor Subcontractor

Engineer

Constructor

Designer

Sponsor

Distributor

End User

Permanent Finance

Project Finance

Land and Permissions

Consultant

Labor

Material

Material

Building ProductManufacturer

CASH FLOW

PRODUCT

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Who gets paid to think about the whole system?

• Many rational types are upset that the whole system is not optimized from the point of view of information flow.

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ROI Example: Life Cycle Info Management

Plan & Design

Procure & Construct Operate Dispose

Nominal Sums

Duration of Phases 1 yr 2 yr 10 yr 1 yr 14 yrBaseline Costs - Old way 10 100 1000 5 1115

PROPOSED BENEFITAbility to use information from prior phase 0 5 15 1 21Add to asset value 0 0 0 5 5 Total Benefit 0 5 15 6 26

PROPOSED COST

Added cost to embed info which benefits other phases 2 3 2 0 7

Net Benefit of Info per Phase -2 2 13 6 19

Minor impact

Long Payback

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Analytical Framework # 2: Why Bother? Or,

Who Retains the Value from Innovation?

Closed Book Open Book

Non Traditional:

Design - Build Build - Operate - Transfer Design - Build - Finance Engineer - Procure - Construct -

Operate - MaintainTraditional:

Design - Bid - Build - Claim

Basis of Payment:

Form ofContract:

e.g. ChipFab

e.g.School

Objective:Control; look out for single firm

Objective:Coordinate andoptimize system

User trend???

Opportunity for higher

margins

Capture theValue

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Where is the Leverage?

Follow the money. What kinds of projects and owners will realize the most leverage from investment (by someone) in information sharing?

Volume of Projects in Transition ($ size x quantity) (proxy for impact in size or repeatability)

Owner/Operator Sensitivity to “Time to Revenue”(proxy for likelihood to accelerate)

High

High

Low

Low

Rigorous market segmentation would also analyze by:

• Political sensitivity• Affinity for (or hostility toward) technology• Size of market• Complexity of deals• Interest in life cycle cost data

Pharmcos

Power

Manufacturing

MuseumSmall volumeHomebuilder

Large volumeHomebuilder

Office Developer

Bridge

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The Opportunity Depends…

• On who you are• O/O, Prop Mgr, GC, AE, Sub, Distrib, BPM, Investor, SW or IS

provider, Fin Services firm (Bank, Equity Fund, Insurance Co.)

– On what you are trying to do– Strategic: Restructure the industry– Tactical: Reposition the firm for sust comp advt– Operational: Grow revenue or decrease cost

• On what’s hot in the project portfolio» Time to revenue» Repetition of processes» Reduction of Cost

– On what you are talking about

PSWS, CAD, Accounting, Scheduling, more

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Hard to Measure

General Purpose Technology

“Information technology is best described not as a traditional capital investment, but as a ’general purpose technology.’…Such technologies are economically beneficial mostly because they facilitate complementary innovations.”

Complementary Innovations “Earlier general purpose technologies, such as the telegraph, the steam engine, and

the electric motor, illustrate a pattern of complementary innovations that eventually lead to dramatic productivity improvements….For example, the telegraph facilitated the formation of geographically dispersed enterprises; while the electric motor provide industrial engineers more flexibility in the placement of machinery in factories, dramatically improving manufacturing productivity by enabling workflow redesign.”

Erik Brynjolfsson (MIT)and Lorin M. Hitt (Wharton).

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Popular Press = Research Results

“While our production function analysis does not establish causality between IT investments and output, our results seem to indicate a a substantial positive contribution of IT toward output in this product area….On the one hand, the popular press is replete with stories of successful strategic use of IT. On the other hand, the research results do not seem to bear out the positive contribution of IT. Our results seem to be consistent with a growing recognition that the prior work in this area did not contend with the difficult measurement problem involved in this area.”

- Tridas Mukhopadhyay et. al., Carnegie Mellon

“Companies using IT to change the way they conduct business often say that their investment in IT complements changes in other aspects of the organization…To be successful, firms typically need to adopt computers as part of a “system” or “cluster” of mutually reinforcing organizational changes. Changing incrementally, either by making computer investments without organizational change, or only partially implementing some organizational change, can create significant productivity losses as benefits of computerization are more than outweighed by negative interactions with existing organizational practices.”

- Brynjolfsson & Hitt

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Everything is Measurable

Immeasurability is an illusion caused by three misunderstandings:

• The object of measurement is not understood.

• The concept or meaning of measurement is not understood.

• The methods of measurement are not understood.

Douglas Hubbard, CIO Magazine, 1997

Measurement is possible.

• If something is better, then it is different in some relevant way.

• If it is different in some relevant way, then it is observable.

• If it is observable, then it is countable.

• If it is countable, then it is measurable.

• If it is measureable, you can value each unit, and therefore value the benefits.

– Chip Gliedman, Giga, 2001Source: Giga Information Group

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Total Economic ImpactTM (TEI)

Costs

Flexibility

BenefitsR ISK

Total Economic

Impact (TEI)

Source: Giga Information Group

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Applying TEI - 1

Step 1 - Define the Scenario

• Implement new idea vs business as usual

• Compare vendors, sourcing, technologies

• Offer new solution

Step 2 - Define the Timeframes

• Over what time do the business benefits accrue?

• Giga recommends three year max for ebusiness initiatives; too much uncertainty

Step 3 - Define the Benefits (a)

• Without an analysis of the benefits, it’s impossible to know the requirements.

• Without an analysis of the benefits, the wrong technologies may be explored and quantified.

• Once the scale of benefits is known, a cap is placed on the potential IT spending.

Step 3 - Define the Benefits (b)

• User productivity• Effectiveness toward

revenue growth• Organizational efficiency• Customer satisfaction

(intangible…measure changes in behavior; tangible).

Source: Giga Information Group

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Applying TEI - 2

Step 5- Quantify the Flexibility

• Additional platform capabilities

• Easier expansion• Easier

implementation of multiple interfaces

• Easier to integrate• Vendor flexibility

Step 6- Evaluate and Quantify Risk

• Vendor• Product• Architecture• Culture• Delay• Size

Step 7- Communicate the Results

• ROI - Return on Investment

• NPV - Net Present Value

• DCF - Discounted Cash Flow

• IRR - Internal Rate of Return

Step 4 - Define the Costs

• Hardware and capital equipment

• Software purchase and configuration

• Maintenance of current environment

• Financial impacts (leases, depreciation)

• Learning curve• Planning costs• Application Migration

costs• Consulting and

mentoring costs

Source: Giga Information Group

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TEI example: IT Investment in Const Mgr/Des Builder

Baseline Change Extend AfterRevenue 100,000,000$ 50% 150,000,000$ Cost of Work 85% 85,000,000$ -2% 83% 124,500,000$ CM Fee, Design Fee, GC's 10% 10,000,000$ 2% 12% 18,000,000$

Gross Margin 5,000,000$ 7,500,000$ Sales General Admin 2% 2,000,000$ 0% 2% 3,000,000$ Amortize IT Investment -$ 1,000,000$ 1,000,000$

$3mm - 3 years

Net Income 3,000,000$ 3,500,000$

Costs• Hardware, software• Populate database, build rules• Train & Hire

Benefits• Grow revenue• Reduce cost• Earn higher fees

Flexibility• Can pursue many types of work• Can play many roles

Risks• Data or rules incorrect• Customers might not care• Might not be able to keep value created

Potential TEI 50%?

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IT and Economies of Scale

• More power to the big firms?– New economies of scale

– 3D object libraries

– Procurement tech

– Knowledge Mgmt

• Or more power to small entrepreneurs?– Power of individual

– Common resource base

– Entrepreneurial support

• - Both.

Expected Change in Distribution of US Construction

01020304050

Size of Firm (Ann Revenue)

Pe

rce

nt

of

Wo

rk p

ut

in

pla

ce

Now

2010

It’s about People, not Technology!

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Bibliography

www.buildingvision.net

jdmacomber@buildingvision.net

web.mit.edu/1.46/www

www.gigaweb.com

www.ibm.com/e-business/overview/

Eric Brynjolfsson - MIT

Tridas Mukhopadhyay - Carnegie Mellon

The Impact of IT on ProcessesReturn on Investment in RE/AEC

John D. Macomber

Harvard Design School

BuildingVision.net

George B. H. Macomber Company

RECI_2001 Harvard Design School