Top 4 Challenges Facing The Construction Industry

Robert Leeds

Population growth statistics paint a rosy future for the construction industry. With the global population predicted to hit 9 billion by 2050 – and two out of every three people living in cities by 2050 – the demand for construction has never been greater. Worldwide, construction is already one of the largest industry sectors, accounting for more than 11 percent of global GDP and expected to grow to 13.2 percent by 2020, according to a 2014 PwC report.

But focusing on this strong demand obscures a more precarious reality. Underlying challenges in productivity, profitability, performance, labor, and sustainability could derail the industry’s growth.

Today, the construction industry is at a crossroads. Companies that address these challenges head-on and re-imagine their business processes will be poised for significant growth. Businesses that fail to take the challenges seriously, however, will face an uphill battle for viability.

Challenge #1: Poor productivity and profitability

Currently, the barriers to entry in construction are low, creating a saturated marketplace with heavy competition. This competition is shrinking profit margins and constraining essential reinvestment in new technology and better business practices. Stagnant construction labor productivity is compounding this problem. While other industrial businesses have benefited from a 100 percent increase in labor productivity, productivity within the construction industry has remained stagnant over the last 50 years.

Why is productivity stagnation? According to a Construction Owners Association of America (COAA) study, 63 percent of direct labor time on mega-construction projects is spent waiting for materials and equipment, traveling to the area, taking early breaks, and planning how to do the work. This lack of productivity is reflected in the bottom line, where typical margins for construction companies range between 2 and 8 percent. Consequently, construction companies find themselves trapped between shrinking profit margins and stagnant productivity, unable to generate the profit necessary to invest in critical technology.

Challenge #2: Project performance

The opportunities in construction are growing, but so is project complexity. With companies already operating under razor-thin profit margins, a single production surprise can wipe out profits for the whole company. Design complexity compounds this problem. As designs become larger and require greater efficiency, construction companies struggle to keep up.

The lack of on-time and on-budget projects is telling. According to an Accenture study, only 30 percent of large projects in the energy industry are delivered on budget, and only 15 percent of projects are completed on time. Worse, the 2015 KPMG Global Construction Survey found that more than half of all construction companies experienced one or more underperforming projects in the previous year.

Challenge #3: Skilled labor shortages

The construction industry is bracing for a dramatic reduction in workforce. The Associated General Contractors of America (AGC) found that 74 percent of the total respondents believe there is a crunch in skill trades, and 53 percent said they were unable to hire construction professionals such as supervisors, estimators, and engineers.

Prior to the recent recession, the U.S. construction market consisted of two generations: the traditionalists and baby boomers. Now, the workforce has split into four generations: traditionalists, baby boomers, Generation X, and millennials. This present labor diversification is a challenge because of stark differences in work ethic, attitude, outlook, and behavior between the generations, reports PwC. Traditionalists have nearly all left the workforce and baby boomer retirement is in full swing. Furthermore, the recession drove many skilled craftsmen to leave the industry and never return. By 2020, millennials are expected to represent half of the global workforce– many with little to no experience or interest in the construction industry.

The combination of increasing project complexity and decreasing experience is a risk multiplier, increasing the risk of deliverable delays, quality construction problems, and employee safety concerns.

Challenge #4: Sustainability concerns

The construction industry is the top global consumer of raw materials. The industry generates between 25 to 40 percent of the world’s carbon emissions. This volume of natural resource utilization is not sustainable and could compromise the environment for the sake of growth. Climate change and water management are two environmental issues that pose a growing challenge to the construction industry. Achieving targets for global carbon dioxide emissions reduction will be a major challenge for the construction energy in rapidly developing countries like India and China. Smart planning and sustainable design could reduce energy consumption and pollution, but require a new approach to project management– an approach that the construction industry on a whole is not yet prepared to undertake.

Next steps: Embracing disruption and preparing for the digital future

The construction industry is at an inflection point, analogous to the move from landline telephony to cellular technology. Digital technologies are disrupting the industry, providing new opportunities to address the challenges of poor profitability/productivity, project performance, skilled labor shortages, and sustainability concerns. Digitization of the construction industry is not a question of if or when—the changes are happening now.

The industrialization of construction and the application of proven manufacturing technology and best practices will help companies drive reliable outcomes and improve margins. Digitization will increase productivity, eliminate waste, and mitigate the adverse impact of on-site surprises.

Digitization will change most everything, including the competitors and the barriers to entry. The end result: a more productive and profitable industry that builds more sustainable assets. Construction companies must take steps now to join the digital future and stay ahead of the competition—or risk being left behind.

To learn more about how to tackle these challenges, read Building a Sustainable World, How to survive and thrive in a digital construction economy.

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About Robert Leeds

Robert Leeds has been with SAP for four years and has over 16 years of business development and marketing experience with enterprise software across a variety of industries and lines of business. Prior to SAP, he held a variety of positions across small software start-ups, acquisition agglomerations, and large tier 1 technology companies. Robert’s goal is to help customers understand the value of SAP’s solutions in the terms of their industry.

Five Stories About The Disruptive Power Of Digital Innovation

Jennifer Scholze

Have you heard that shoe shopping is going digital, driving an expected profit increase of 30%? Do you know how real-time customer insight and personalized interactions can lead to five percent revenue growth? Or how digital innovations can be used to predict earthquake damage and provide better disaster response? Digital transformation is leading to rapid changes across industries. New technologies such as the Internet of Things (IoT), Big Data, and machine learning dramatically change the way customers are doing business.

To help inspire you, here are five stories about companies using digital technologies to transform their businesses, and in some cases their industries.

1. Shoe shopping using virtual reality to increase profits

Aimiqi is a shoe company with a bold goal: to connect people and processes by using digital R&D machine learning to create a whole new consumer experience and respond to changing market requirements and fashion trends. Previously, only five percent of design proposals would reach the production stage, and there was significant overstock and waste. Using digital innovations, including product lifecycle management and virtual reality, the company is now able to collect and analyze customer requirements to design products that truly fit market needs. Customers can design personalized shoes with the desired color and the right fit, then virtually test the product and place an order. Aimiqi is seeing 25% reduction in design time and 40% reduction in overstock and expects to see a 30% increase in profits.

2. Predicting earthquake damage to reduce human casualties

Japan’s Hakusan Corporation is a leading manufacturer of seismometers. The company wanted to transform smartphones into seismometers to measure building movement during earthquakes. With more than 6 million people in the Asia-Pacific region affected by earthquakes last year, better prediction of building damage will help with disaster preparedness and mitigation strategies in earthquake-prone countries in the region. Using digital innovations, the company is now collecting and analyzing seismic data instantaneously to accurately pinpoint and predict damage to buildings, then share the data with first responders and authorities to provide help where it is needed most.

3. Using 3D printing to get closer to the customer

Jabil manufactures parts for transportation equipment, industrial machines, and medical diagnostic machines. The company works with 250 of the best known global brands in manufacturing and wanted to improve its competitiveness by increasing its nimbleness and personal approach to customer relationships. The company is using digital innovations – including 3D printing – to create personalized products closer to their customers’ locations. To date, Jabil has qualified and produced 100+ functional 3D-printed parts for end users. This new capability is leading to more innovative product designs, new business models, and happier customers.

4. Connecting people, plants, and machines for sustainable farming

When Rogerio Pacheco, owner of a midsized farm in the south of Brazil, decided to invest in a tractor with infrared sensors from agricultural machinery maker Stara, neighboring farmers thought he had lost his mind. But in just two years, he was able to recover his investment. Today Rogerio is Brazil’s second largest producer of soybeans. “High productivity and sustainable farming practices are only possible with technology,” he says. “I was able to increase the yield per acre without having to cut down trees, maintaining the balance between cropland and forest on my farm.” The IoT revolutionized Stara’s business model. Previously, it viewed the machine and the farmer as separate entities, but, by using the IoT, it can now connect machines to people and plants. Stara’s tractors already had sensors, and by implementing a digital innovation system to make use of the data collected, Stara can offer data analytic capabilities to farmers so they can gain better insights and make better decisions.

5. Operating a mine based on financial margins, not tonnage

Roy Hill’s entire business and operating model is designed to deliver 55 million tons per year with a margin focus rather than a reliance on tonnage volume, as is typical in mining, and its technology strategy is aligned to achieve its unique business outcome. For example, Roy Hill’s Virtual Warehouse concept is built on the transformative idea that, if you adopt a systems thinking mindset starting with an integrated operating model, then apply disruptive digital technology that has been chosen for its ability to deliver sustainably against the margin-focused business model, and overlay that with advanced planning and scheduling and a flow approach to inventory, it removes the obstacles from the supplier to the maintainer of the equipment.

The old ways of doing business are clearly over for companies that want to grow and thrive. Digital technologies surrounded by innovative thinking are driving new business models and processes that ignite a successful path into the future. We see organizations across and even between industries working together to design approaches that better balance demand with production, focus on profitability, yield more efficient operations, and interact in new and exciting ways with customers.

Are you changing your industry using SAP applications and platform technologies? The SAP Innovation Awards 2018 is your opportunity to share your story and be recognized as a digital transformation leader. New this year is a Digital Disrupter category for a company that uses SAP’s innovative technologies to drive radical change in its industry, generate significant business value, and improve its competitive positioning. 

Go to the SAP Innovation Awards website and start at the About page to learn more about award categories and judging criteria. Then follow the simple steps on the “how to enter” page. Get started today! Entry submission has already begun.

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About Jennifer Scholze

Jennifer Scholze is the Global Lead for Industry Marketing for the Mill Products and Mining Industries at SAP. She has over 20 years of technology marketing, communications and venture capital experience and lives in the Boston area with her husband and two children.

Digitization Is Crucial To Achieve UN Global Goals

Daniel Schmid

Concern, hope, enthusiasm: This was the mixture of sentiments that I perceived during the World Economic Forum (WEF) Sustainable Development Impact Summit in New York City last month.

More than 700 leaders from more than 70 countries took part—including government, business, international organizations, research centers, and not-for profits. Panelists included Salesforce CEO Marc R. Benioff, Mars president Jean-Christophe Flatin, Roche vice-chairman André S. Hoffmann, and Royal Philips president and CEO Frans van Houten.

Concern

Former U.S. Vice President and Nobel Peace Prize winner* Al Gore pointed out, in a panel discussion titled “Global Progress through Partnerships,” that the past two weeks saw two record-breaking climate-connected storms. Hurricane Harvey crossed the Gulf of Mexico, which was over four degrees warmer than normal, resulting in enormous amounts of rain. The rainfall totals in Houston were a once-every-25,000-years event. The monsoon in South Asia also brought 70 cm more rain than normal, with one-third of Bangladesh underwater.

Gore said, “We are departing the familiar bounds of history as we have known it since civilization began.” In contrast, other areas are experiencing devastating droughts: 80 percent of Portugal is in drought, and 70 large fires have burned in the western part of North America.

These conditions also create climate refugees. “Long before the civil war in Syria started, the worst drought in 900 years of record-keeping destroyed 60 percent of farms. One and a half million climate refugees entered the cities,” Gore pointed out, adding that this is a contributing factor to the war in Syria.

Hope

“But,” Gore added, “we are also meeting in a time of extraordinary and unprecedented hope.” The World Economic Forum was incremental in building the success of the Paris Agreement, and will continue to play a key role in implementing it. “Public private partnerships are the keys to putting in place the solutions we need.”

The day after the U.S. government announced it would leave the Paris Agreement, Gore said, political and business leaders, states, cities, etc., doubled down on their commitment, saying “We are still there!” SAP is one of the companies that is strongly committed to climate action: We plan to be carbon-neutral by 2025.

According to Gore, there are additional reasons for hope: Technology becomes better and cheaper all the time, a phenomenon known as the “cost-down curve.” Gadgets can now be run with wind or solar energy, and efficiency is better than ever. “The Fourth Industrial Revolution is also a sustainability revolution,” Gore said. Technology is key to meeting the sustainable development goals.

This was also consensus in the panel discussion “The Fourth Industrial Revolution: Technology-Driven, Human-Centred”: Panelists emphasized the opportunities technology brings, from artificial intelligence (AI) to improve working conditions to mobile phones in India that enable everyone to play a part in the economy (e.g. have a bank account)—even those who were formerly excluded. For girls in Africa, learning IT and coding skills bring hope for a better life.

My take? It is up to us to ensure that the opportunities technology offers outweigh the risks. To help drive awareness around the sustainable development goals (SDGs) and showcase examples of how IT can help contribute to them, SAP has published an interactive web book and iPad app as well as a free online course on openSAP: “Sustainability through Digital Transformation.”

Enthusiasm

The theme of most of the speeches and discussions I witnessed at the summit was “There is no planet B,” but also “Together we can make it,” meaning that government, public, and private-sector organizations need to cooperate to tackle the UN Sustainable Development Goals (SDGs). With partnerships and cooperation, they have the power to create positive economic, social, and environmental value through technology, solutions, and skills.

World Economic Forum founder and executive chairman Klaus Schwab described the summit’s intention: “What is needed is a true agenda for global public-private cooperation, with the objective not to defend individual interests, but to keep the destiny of humankind as a whole in mind.”

As a result of the summit, several major new initiatives that will advance public-private cooperation on the global goals were announced or launched, including:

These initiatives show the will to cooperate and the readiness to act of leaders from all over the world—let us all have a part in tackling the biggest challenges of the planet!

*The Nobel Peace Prize for 2007 was awarded to the Intergovernmental Panel on Climate Change (IPCC) and former US Vice President Al Gore for their efforts to obtain and disseminate information about the climate challenge. In Gore’s case, the award was grounded in his tireless campaign to put the climate crisis on the political agenda.

This story originally appeared on the SAP Community.

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Daniel Schmid

About Daniel Schmid

Daniel Schmid was appointed Chief Sustainability Officer at SAP in 2014. Since 2008 he has been engaged in transforming SAP into a role model of a sustainable organization, establishing mid and long term sustainability targets. Linking non-financial and financial performance are key achievements of Daniel and his team.

Human Skills for the Digital Future

Dan Wellers and Kai Goerlich

Technology Evolves.
So Must We.


Technology replacing human effort is as old as the first stone axe, and so is the disruption it creates.
Thanks to deep learning and other advances in AI, machine learning is catching up to the human mind faster than expected.
How do we maintain our value in a world in which AI can perform many high-value tasks?


Uniquely Human Abilities

AI is excellent at automating routine knowledge work and generating new insights from existing data — but humans know what they don’t know.

We’re driven to explore, try new and risky things, and make a difference.
 
 
 
We deduce the existence of information we don’t yet know about.
 
 
 
We imagine radical new business models, products, and opportunities.
 
 
 
We have creativity, imagination, humor, ethics, persistence, and critical thinking.


There’s Nothing Soft About “Soft Skills”

To stay ahead of AI in an increasingly automated world, we need to start cultivating our most human abilities on a societal level. There’s nothing soft about these skills, and we can’t afford to leave them to chance.

We must revamp how and what we teach to nurture the critical skills of passion, curiosity, imagination, creativity, critical thinking, and persistence. In the era of AI, no one will be able to thrive without these abilities, and most people will need help acquiring and improving them.

Anything artificial intelligence does has to fit into a human-centered value system that takes our unique abilities into account. While we help AI get more powerful, we need to get better at being human.


Download the executive brief Human Skills for the Digital Future.


Read the full article The Human Factor in an AI Future.


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About Dan Wellers

Dan Wellers is founder and leader of Digital Futures at SAP, a strategic insights and thought leadership discipline that explores how digital technologies drive exponential change in business and society.

Kai Goerlich

About Kai Goerlich

Kai Goerlich is the Chief Futurist at SAP Innovation Center network His specialties include Competitive Intelligence, Market Intelligence, Corporate Foresight, Trends, Futuring and ideation.

Share your thoughts with Kai on Twitter @KaiGoe.heif Futu

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Finance And HR: Friends Or Foes? Shifting To A Collaborative Mindset

Richard McLean

Part 1 in the 3-part “Finance and HR Collaboration” series

In my last blog, I challenged you to think of collaboration as the next killer app, citing a recent study by Oxford Economics sponsored by SAP. The study clearly explains how corporate performance improves when finance actively engages in collaboration with other business functions.

As a case in point, consider finance and HR. Both are being called on to work more collaboratively with each other – and the broader business – to help achieve a shared vision for the company. In most organizations, both have undergone a transformation to extend beyond operational tasks and adopt a more strategic focus, opening the door to more collaboration. As such, both have assumed three very important roles in the company – business partner, change agent, and steward. In this post, I’ll illustrate how collaboration can enable HR and finance to be more effective business partners.

Making the transition to focus on broader business objectives

My colleague Renata Janini Dohmen, senior vice president of HR for SAP Asia Pacific Japan, credits a changing mindset for both finance and HR as key to enabling the transition away from our traditional roles to be more collaborative. She says, “For a long time, people in HR and finance were seen as opponents. HR was focused on employees and how to motivate, encourage, and cheer on the workforce. Finance looked at the numbers and was a lot more cautious and possibly more skeptical in terms of making an investment. Today, both areas have made the transition to take on a more holistic perspective. We are pursuing strategies and approaching decisions based on what delivers the best return on investment for the company’s assets, whether those assets are monetary or non-monetary. This mindset shift plays a key role in how finance and HR execute the strategic imperatives of the company,” she notes.

Viewing joint decisions from a completely different lens

I agree with Renata. This mindset change has certainly impacted the way I make decisions. If I’m just focused on controlling costs and assessing expenditures, I’ll evaluate programs and ideas quite differently than if I’m thinking about the big picture.

For example, there’s an HR manager in our organization who runs Compensation and Benefits. She approaches me regularly with great ideas. But those ideas cost money. In the past, I was probably more inclined to look at those conversations from a tactical perspective. It was easy for me to simply say, “No, we can’t afford it.”

Now I look at her ideas from a more strategic perspective. I think, “What do we want our culture to be in the years ahead? Are the benefits packages she is proposing perhaps the right ones to get us there? Are they family friendly? Are they relevant for people in today’s world? Will they make us an employer of choice?” I quite enjoy the rich conversations we have about the impact of compensation and benefits design on the culture we want to create. Now, I see our relationship as much more collaborative and jointly invested in attracting and retaining the best people who will ultimately deliver on the company strategy. It’s a completely different lens.

Defining how finance and HR align to the company strategy

Renata and I believe that greater collaboration between finance and HR is a critical success factor. How can your organization achieve this shift? “Once the organization has clearly defined what role finance and HR must play and how they fundamentally align to the company strategy, then it’s more natural to structure them in a way to support such transformation,” Renata explains.

Technology plays an important role in our ability to successfully collaborate. Looking back, finance and HR were heavily focused on our own operational areas because everything we did tended to consume more time – just keeping the lights on and taking care of our basic responsibilities. Now, through a more efficient operating model with shared services, standard operating procedures, and automation, we can both be more business-focused and integrated. As a result, we’re able to collaborate in more meaningful ways to have a positive impact on business outcomes.

In our next blog, we’ll look at how finance and HR can work together as agents of change.

For a deeper dive, download the Oxford Economics study sponsored by SAP.

Follow SAP Finance online: @SAPFinance (Twitter)LinkedIn | FacebookYouTube

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Richard McLean

About Richard McLean

Richard McLean, regional CFO for SAP Asia Pacific Japan, oversees all key finance and administrative functions for field and regional headquarters, supporting more than 16,000 employees. He has more than 20 years of experience in senior finance roles with leading global companies across a range of industries, including financial services, investment banking, automotive, and IT. He joined SAP in 2008.