McKinsey Blather on AEC Investment Trends, Adoption and Startup Management
Perhaps the main reason we hire consultants is to leverage the best practices they learn from other firms in our industry. If that’s the reason an AEC firm might hire McKinsey, I’d say save your money.
McKinsey’s latest paper is a vague attempt to hype up AEC investments made during the recent tech bubble of 2020-2022 using aggregate data that mashes public and private investment dollars. They hint at imminent breakthroughs via sexy tech like AI, AR, VR, without admitting their costs are exorbitant and unlikely to be widely adopted anytime soon. They also talk up generic SaaS metrics without any actionable recommendations beyond common sense.
Accelerating digital adoption in AEC, as with other late/slow adopter markets like healthcare, will require outside forces from governments and regulators. Deal structures need to reduce the number of stakeholders per project that raise complexity and slow decision making.
McKinsey employs a lot of smart people, but I suspect because AEC hires McKinsey so infrequently, they don’t put much effort into AEC. They must mailed this one in.
The State of AEC Investment in Digital
McKinsey acknowledges that AEC is “slowest to digitize” but infrastructure modernization by governments, labor shortages, and demand for “data transparency and integration” are “accelerating digital adoption”.
A sly ‘how to lie with graphics” makes their global investment total of $50B in 2020-22 appear to be an 85% increase. The total dollars are combined public and private, m&a and deals of all types. 85% would not be unusual during a tech investment FOMO.
These factors may have incentivized investment, particularly during a tech investment boom. But they provide no proof these factors have incentivized adoption: “…it is hard for AEC tech companies to grow efficiently due to several dynamics among AEC customers, including fragmentation, low IT spend (relative to other industries), and entrenched analog ways of working.”
Drivers of AEC Investment
The reasons McKinsey cites behind all this investment includes:
- Public infrastructure investment. Yes, governments are going to spend more and encourage next generation infrastructure. But they’re not requiring digital anything for building such infrastructure. Even the requirement to prove legal rights to work can be on paper.
- Decarbonization. Largely incentivized through tax breaks, but without a carbon tax treaty across national borders, it’s hard to believe this moves the dial.
- Labor shortages must be addressed. True, but as long as the industry can quietly hire the undocumented without meaningful consequences, no big changes are being made. Not to mention a construction management generation that actively resists digital methods. Architects and Engineers are more willing to join the 21st century.
- Regulation. McKinsey seems to be aware that the Covid pandemic did force more digital adoption. But they left off the part where digital was discarded just as soon as regulations were relaxed. At least for public projects, requirements for legal work documentation might be a more lasting incentive. (UK Building Safety act, Sweden ID06 law, etc.)
- Interoperability among software. While some AEC software vendors appreciate that data sharing grows the market for everyone’s benefit, they are a minority. Most of the bigger firms have no interest in integration, open APIs or interoperability. We’ve seen the same dynamic in healthcare, where the US government has had to force the market to adopt data standards and sharing.
- Proptech interoperability (like digital twins). Not surprisingly, the sexy VR/AR/AI technologies get a big mention, but as a method of blurring categories. Did McKinsey combine proptech with AEC to make the investment numbers bigger?
Friction on Digital Adoption
Some usual factors are mentioned delaying adoption.
- Fragmentation. Too many cooks, GC’s, subs, contractors, stakeholders, etc.
- Multiple buyers within each firm. Nobody knows who’s on first, or the guy on first is playing a different game from the guy on second.
- Low margins, encouraged by project owners, with justification given the quality and safety record of the industry.
- Low IT spend (1-2% of $R)
- Buying for projects vs enterprises
What they leave out are what, in my opinion, are much bigger obstacles:
- The cultural aversion to digital technology in field operations.
- Too much family ownership of small poorly managed firms.
- A lack of competition at the local level.
- A reliance on poorly paid undocumented workers.
- A reflexive resistance to all regulation of all types.
Then a Whole Lot of Useless Advice
McKinsey seems to have scraped all the startup enthusiasm sites for its recommendations to vendors, none of which are unique to AEC:
- Have a bold world changing vision (BHAG anyone?)
- Achieve great product/market fit (never heard that before)
- Supercharge the sales team (whatever that means)
- Have a scalable revenue model (got it)
- Create innovative “routes to market” (what, Facebook?)
- Value net retention and customer success (never heard that before)
- SaaS metrics help (really?)
- Optimize marketing and sales spend (good idea!)
- Optimize pricing and track impact (I wish I had an MBA…)
- Lean on data for process improvement (well, I am selling software and data, so OK)
- “Strengthen the business-building muscle” (huh?)
No Conclusions Worth a Damn
If McKinsey really claims to be able to guide the world to a better future, they proved the opposite here. In this paper, they avoid all the real difficult problems with the AEC market that delay digital adoption. Instead, they suck up to the VC and M&A community who funded the last bubble of solutions. The startup leaders just need to try harder. There’s not a single recommendation worth reading here.