Part 1: Josh Johnson, Expert - Engineering Construction & Building Materials at McKinsey & Company in conversation with Board Director, Jaimie Johnston on our construction podcast

Michigan, Ann Arbor. And when I joined McKinsey, I came out of the auto industry with, you know, the wealth and, and kind of maturity of continuous improvement in manufacturing practices that it had, and got the opportunity to, you know, just build cool stuff, and apply a lot of that, that that kind of principle, to the construction site in the field with a lot of field productivity, lean construction execution, and just found it to be a passion of mine, I found the construction

industry to be incredibly interesting. And just a really, really, you know, awesome spaces ripe for, you know, good disruption, right, like bringing it into, you know, more modern styles of operations, that can, you know, improve the lives of the workers in the field improve, you know, the profitability of the projects for the contractors improve, you know, the speed of delivery for the owners just all around, right. So, it's, it's, that's what I do.

Like, at the end of the day, we are making something right, whether that something is a turbocharger or an engine or an airplane, or you know, a 50 storey tower, we are making something, and, you know, in a construction environment, you know, if you zoom out, it's much more of a job shop model. So, you know, if you go and get a bespoke tailored suit, right, or you go and get, you know, you buy a Ferrari or you know, a McLaren, right, they're building job shops for that car, that

component, right. Similarly, you know, for construction site, you know, it's a job shop, you are building a building, but you're building that thing in a custom way that is unique to that one job, and that you're going to take a lot of the similar, you know, kind of approaches and principles and disciplines that you use to build that one job.

But generally speaking, no two jobs are exactly alike, versus you know, your kind of continuous, you know, high volume, high speed manufacturing operations, where everything is standardized down to the seconds that it takes to screw in, like a screw and the torque value it takes to secure it, right. So, um, there's a lot of actual similarities, you just need to know what type of manufacturing you're looking at.

So I guess coming in from that different background, gives you a different perspective on what's possible and what's achievable, and maybe looking at through that lens allows you to more easily or more clearly see or distinguish the kind of the bespoke list that needs to happen from the ability to do things in a standardized way. So we've not spoken about that

before. But that's a that's a really interesting lens through which to look at construction, which I guess is I think is very helpful for this topic?

hugely, hugely inspiring. The downside to that sometimes is when we can get so caught up in, you know, the pride of the building something that we get locked into the method of how, right, you know, add that to, you know, the the very real industry dynamic of, you know, the fact that big contractors, you know, like the really, really big ones more than then execution engines are much more risk managers, right, and doing something new requires taking on, you know, a non negligible

amount of risk to learn and to sometimes fail while trying to do it. Right. And when you've got thin margins in the industry, like construction, failure is failure could mean

business. Right. So it's a, it's a, it's an, it's, it's an interesting thing to kind of look at it from a manufacturing perspective and see that, but it is also, you know, a real challenge for the industry, I think, to kind of adopt, you know, a different way of view just given the structure and, you know, the kind of way people work in the industry.

what I think. And then we'll take whatever data available that we have, combine that with the expertise that we have in the firm, and sometimes even, you know, external expertise, we have a whole network of, you know, expert industry, external advisors that we reach out to and make sure that we're, you know, bringing the freshest perspective. And then we'll just rapidly iterate on, on on the thinking until you know, it sharp and it's right, you know.

process before. But it's, it's aligned to a lot of the stuff that we've been doing here for a number of years, where we would describe this Design to work die and Design to Value workflow, where we're, you know, objectively getting data, analyzing it, processing it rapid iteration, that's all the language that I would recognize

in terms of our own process. I guess it's also dead interesting that you were trying to get people to talk about the business problems and the processes while they were still understanding and solving the business problems associated with COVID. So that's quite interesting, you're sort of capture the moment in time where people are still forming a view on the questions you're asking, and trying to get them to elucidate things, which probably

helped their thinking. And yeah, started the process of writing the document, probably helping people to understand what it was they were doing, which is a yes, fascinating thing to be involved in.

had in the industry. A lot of it, you know, was done, you know, using industry surveys were, you know, given our given the work that we do, you know, we have access to a lot of, you know, the senior, most leaders in the industry and some of the larger players in the industry,

given our work. And so, you know, we're able to pretty rapidly put together, you know, a survey on something, to just get a really quick perspective, and it's never just, you know, one piece of data tells the story, it's always, you know, looking at all the different pieces of data, all the insights that they that they give all the implications of the math and then kind of stitching together the story in a way that that makes sense and aligns you know, with what's actually happening

on the ground?

only has been a few years? And it's

or any individual company, but globally speaking, the global construction industry, from a productivity standpoint, lags almost every other industry, you know, the construction, technology, adoption is really, really low compared to other industries, you know, all of that, and the productivity imperative, which I believe was out in 2015, to 2016 laid out the, the, the actual fact base behind that, and I think that was one of the first times at the global level, the industry

had a chance to say, Okay, what I'm feeling in my own business is not just me, it's also the rest of the industry. And here are some structural things that are that are present in

engineering and construction. In that report, we laid out that technology itself was the fact that the biggest lever for improving productivity in construction, you know, we've seen construction overall, kind of go through waves of productivity improvement or or technology adoption, right, like most, a lot of it started in the engineering and design space, where you had CAD programs, BIM, and, and you know, some of the financing things to make those kind of transactions and

technical work outside of the dirt, so to speak, much more, much faster and more efficient. And what the push there was, was that technology can also help make the dirt move faster, right, and the the players that were able to, you know, smartly and effectively deploy technology and both hardware and software on the job site, we're going to be able to capture the next step change in productivity

and profitability. So that was, you know, the kind of the productivity imperative laying out the the problem statement, you know, for the industry, here's what's going on ground level, here's what everyone's seeing, and here are some ways that you can improve it. The next series of reports also

dealt with technology. So, um, I believe, two years ago, we published one of our first perspectives on the construction technology industry, and understanding how that space was growing, what the ecosystem of use cases look like, you know, how they were evolving, and where they were connected. And really just drawing a map of the space and understanding, you know, how technology players were then serving the construction industry, as the construction industry kind of grew with this technology

adoption. We've also published a bunch of work on, you know, kind of adjacent industries. So real estate, we've published perspectives and building materials as it relates to the connectivity with the construction industry, and also on, you know, aside as their own sub industries, and then just specifically construction

related. Um, you know, we've publishedat the end of last year, October, our second Construction Technology article, which is talking about the the growth of Platforms, in the construction, technology space, and how that ecosystem is changing how the competitive dynamics are changing. And you know, what the implications are for construction players. The last perspective that I would say it's a bit of out of out of

chronological sequence. But we also published a pretty major report, and I believe it was July or August of last year, which was on modular construction, from projects to products, which was also, you know, kind of in the series of thinking on the construction industry and the different levers that were being brought to bear to kind of shift it in the direction that we think it's going.

that. So when we're talking later, we're clear what we're talking about when when you refer to Platforms.

platform, right. Um, you know, Instagram, which is owned by Facebook is still part is a separate application, but it's a part of that kind of like ecosystem of software, you know that that that serves a purpose. Similarly, there are, you know, different platforms of software, some have hardware integration, but there are different platform players in the construction

technology space. And we're primarily talking about that type of platform rather than, you know, a hardware platform where you have, you know, kind of different interchangeable parts and kits that can be then assembled in different configurations to build an asset.

initiatives. So part of the reason we deliberately appropriate the term Platforms was that it it has a physical manifestation from things like automotive, but it also also has a software connotation, which may be confusing people. But I actually think it's incredibly helpful that that it shows just how linked these digital and physical things are. So we've always said, if you're developing more and more sophisticated digital technologies, the form of construction also has to keep

pace. So you can't get more and more sophisticated in the design processes, but still use traditional trades and techniques on site. So the two things have to have to move in lockstep. So just go back to the next normal, there's a couple of things particularly they get flagged in there that I'd like to learn a bit more about. So it talks about value chain consolidation, and integration and productization,

industrialization. So those are two areas that I'm particularly interested in, perhaps you can unpack them and explain a bit what you meant by those two topics,

right. I think the way that the way to think about it, you know, again, like if I were explaining this to my kindergartner is, you know, right now, you have a global industry, which is, you know, something like 13% of global GDP, like, it's massive, like if the construction global some construction industry were a country, you know, it would be the third largest economy in the world behind the US and China may be fourth, if you consider the aggregate output of the

European Union, right? So it is massive, but even within this huge pot of economic value, most competitors particularly in the in the contracting side, right? The large general contractors are having really thin margins on the projects themselves don't get lifted, go, don't get delivered on time and on budget

often, right. Um, so you have, you know, a an environment where the customers themselves are a bit dissatisfied, some of which, as you see with like, the big tech companies are starting to branch out into understanding how to build things themselves, right? Um, the current model, you know, as in an aggregate isn't working, right. And so you start to look at where in history, have we seen a similar industry structure? And what happened with that industry? What were what were the signs of

the change? And how did that change impact the structure of the industry, and see if there are any kind of lessons from history that, you know, the construction industry can learn and when you look at it from that lens, like just take all the ification words out and just look at it from that lens, you can see that there are a lot of of similarities between the early automotive industry, the early airline manual aerospace industry, and by aerospace, I'm not talking about like defense

contracting, I'm talking specifically about commercial aerospace. So you know, passenger jets,there are a lot of corollaries there. Right. Um, both of the affer mentioned industries when they started, were very job shop focused lots of small competitors with their own fab shops, building components or building you know,

finished goods. Lots of disparate distribution channels, right distributors everywhere that can get your sheet steel or screws or any kind of components to build your own design of something. And, you know, lots of different competitors, which means the margins overall for individual, you know, job shops weren't that great. And then what happened after a while you had a massive wave of

industrialization. So, different shops got much more, you know, either automated or disciplined in their processes, the efficiency of their production went up, that pushed them to the top of the heap in terms of competitiveness, so they bought some of their competitors and consolidated and got bigger, right when they got bigger. They

got even more professional. And so you have this kind of chain reaction effect of gobbling up some of these less efficient job shops by the by the players who are able to, you know, drive efficiency in their delivery better. And then cascade that, you know, a few a few years down the line, you know, a couple decades, you have at least in the US what like four, maybe

five, right? Major automotive manufacturers and the fifth one was just launched right with a bunch of Silicon Valley money, right, it wasn't just something that just popped up organically, it ended up itself is a disruption is a disruptive force to the existing model. Right.

And when you think of it, that way, you see a lot of the same markers of a need for change of you know, some of the more innovative companies, particularly on the ANC contractor side, um, you know, beginning to adopt technology and push it as a real driver for how they're going to deliver

projects. And you see a lot of this, you know, there's you see the rise in minimum popularity, certainly, um, function of both volumetric modular man construction methods, and also, you know, the, the pre existing prevalence of, you know, kind of prefabricated sub assemblies

behind the walls, right. Um, you know, you and I spoke about, you know, just the work that you guys did with the UK Government identifying all of those common components across their portfolio, right, like, there was 17, you know, something like seven or eight different toilets that they had, like, why don't we have just three or four,

right? And so when you when you look at all of these different pieces, and you compare it to where those other industries where you start to say, Hey, you know, if I were a betting man, I would say, Listen, you know, you're probably, you know, customers will only remain dissatisfied for so long until, you know, on aggregate, as an industry will only remain dissatisfied so long until the inertia starts to shift towards a change, what will that change

be? Well, if the projects aren't being delivered on time, and on budget, they want them delivered on time and on budget. And what does that mean, you need to get more efficient in your, in your, in your delivery processes? Well, the the player that gets more efficient is going to drive an outsize share of value, they're going to capture a lot, which means they're gonna get bigger, which means they're going to be able to gobble up some of the competition, right, and then you start to see this

chain reaction. Now, TBD, the level of consolidation, because still construction, at least in its current iteration is a huge, hyper, hyper local, you know, industry. So, you know, I'm not gonna sit here and say that there's just going to be one global contractor to rule them all. Um, but I will say that I would expect, you know, a lot more consolidation and a lot

more integration of delivery. So you don't have a lot of these problems that you have currently in construction, where you have issues either in delivery itself, or more often than not, you have issues with the handoff like the information handoff from, you know, the the front end engineering design phase to the detailed design or the detailed design phase to the surveying or you know, what's actually happening on site, versus what the engineers think should happen with site

conditions, you know, things like that.

things. So no one's going to build a factory that's big enough to make a 50 storey tower, there's certain things that mean, you tend to build the tower where the tower is going to be. And I was thinking, there's no mental picture for what this looks like, because no one's ever done it before. So it won't be construction, it won't be manufacturing, it will be this new thing that hasn't

existed. And so people struggle, but I think, yeah, the the bits we should be focusing on are the differences in terms of, say, cost density, the distributions

we've talked about. So but you think vertical integration of supply chains is gonna become one of the early steps that starts so you'll pick up all the trades you need, and consolidate them, rather than have a massive hierarchy of tiers that we certainly have in here in the UK, that introduces the handoff between the things, which introduced the inefficiency, you think that might be an early move towards this this new place?

right. Like I you know, I I do not know of a an EMC company that effectively, you know, at scale leverages project procurement across projects, right, like, No, I do not know I'm not saying that they don't exist, but I've not heard of someone you know, I'm making up a name right. You know, Josh is contracting company goes to cymax or CRH. LaFarge and says, hey, I've got a backlog of 30

different projects. And here they are in these geographies and I'm going to need 100 million cubic yards of concrete right over the next year. Let's talk about a bulk. You know, let's talk about a bulk preferred supply plan where you know, I'm going to go through you and maybe one or two others to make sure that I'm not single source, right? Like you don't hear of those types of things.

Could they be happening, perhaps, but it's not necessarily industry practice more often than not, you see, you know, project procurement for the project costs, because that's what's in the estimate. And that's how we're going to

go. And even you know, you know, kind of approaches like that are still much more focused on like the integrated manufacturing style, where you're looking at across, you know, your entire production, output, so to speak, right, versus here's the project, and I will deliver the project and I need the concrete for the project. I have the steel and the wood and the people for this project, right?

procurement. So once you get into that kind of stability and consistency, in the way you describe things, and where you buy things, that's what starts to open up these these bigger opportunities that you can't ever do when you're buying things project by project, as you say. So I can see, yeah, it's telling me there's a, there's a number of routes into this, but they're all pointing to the same destination. So obviously, we started with the physical components, and looking

for commonality there. But as you say, if you started from a procurement lens and say, Look, I want to start bulk buying things, because then you're becoming consistent, you get better rates, you go, Well, actually, I should lean into that standardization to further accrue benefits. So yeah, they're all sort of pointing in the same at the same place. And I guess the other the other part of that, then is the scalability

that you talked about. So even if you've got a contractual becomes a global behemoth. Currently, they would still only do it by, you know, there wouldn't be any more productive having done that, because they just be mopping up all these kind of low productivity outfits. The way it becomes properly scalable in the way that maybe technology is as you get those standardized processes, standard ways of

working. And that then starts to become a thing that you can you can achieve again and again and therefore get high productivity across multiple sites. So again, it's pointing in the same direction of standardization

consistency of approach. Yeah, we would certainly we've talked about a lot on this podcast, but it's Yeah, said right, and start you're looking at through a different lens, but you're coming up with the same answer, right, you're you're pointing at the same end state as a destination. So thanks for listening to Part One of Built Environment Matters with Josh Johnson. Please join us in a couple weeks for Part Two where we'll pick up this lively conversation.