Beyond IPD: The Integrated Enterprise Challenge

December 12, 2013 · by Henry C. (Peter) Beck III

This may be a moment of transformation for the industry, particularly for architects.

As contractors move upstream, they will take the first steps toward an integrated enterprise, which may result in their appropriation of the creative design function. This may be a moment of transformation for the industry and particularly for the architectural profession.

Updated Dec 12, 2013

As I engage in various A/E/C forums, I’m struck by the similarities between our industry and others going through massive changes. While we struggle with the legal barriers to integration, including file sharing, insurance issues, assigning liabilities through evolving integration contracts, the patchwork of state licensing requirements, etc., customers demand that we redefine our practices and business models. They insist that we radically improve our value proposition by capitalizing on recently innovated tools. Other industries, including music recording, publishing, residential brokerage, and now car dealers, have all gone through monumental changes despite the legal barriers they faced at various points in their evolution. So what can we learn from them?

First, we have repeatedly observed that despite the legal barriers, innovative participants ultimately prevail in changing the practices and business models of any industry in order to meet the evolving needs of new and existing customers. Second, such transformations are usually enabled by the invention of some innovative technology that opens up the possibilities, but the technology alone is rarely sufficient to drive the change. For example, retailers were slow to adopt credit card readers during the 1970s because they received little benefit while absorbing all of the cost, just as movie theaters are reluctant to adopt digital technology today. Therefore, the third lesson we can learn from other industries is that transformative change must be driven by consumer demand that usually involves some combination of improved quality, lower price, and greater convenience.

An excellent example of these characteristics is the explosive growth in music distribution through Apple’s iTunes and similar services. This transformation has completely disrupted the recording and music distribution businesses despite the legal barriers. Through innovations in storage technology and digital transmission, we can not only acquire the same quality of music we’ve come to expect, but we can do so at a far lower price, in the greater convenience of our own home, and without being required to purchase a lot of other songs (on a CD) that we are hardly interested in.

Drivers of Change

Let’s first look at our own industry and study the drivers of change before we evaluate the enabling technologies. What keeps participants in our industry up at night? What are their strategic nerves? Judging from articles generated by the Construction Users Roundtable as well as data from the annual Survey of Owners conducted by FMI, owners are intensely frustrated by the waste generated in the delivery process due to both the lack of coordinated and complete information and the poor alignment between practitioners. Completing and coordinating design continues to be pushed into the shop drawing review phase or even worse, into construction, causing change orders and delays that aggravate customers. Architects feel pain around insufficient information from contractors to perform their work correctly the first time as well from the responsibility they assume for the accuracy of the documents when they are not sufficiently compensated to coordinate or complete them (even if they had sufficient knowledge to do so). Finally, look into the eyes of a project superintendent at the end of a project, after several sleepless nights, and you will find a deep motivation for change. When asked the cause, superintendents are quick to respond that too little of the project was properly defined early enough to avoid confusion among the subcontractors, resulting in poor quality and additional costs.

With such deep motivations to change, why has so little happened?

Up until this point, we have not had the means to resolve these problems. With the advent of building information modeling (BIM) technology, we now have the opportunity to rethink both the processes and the business models. No longer must we rely on clouding changes or using light boxes to resolve design coordination errors after the fact. Emerging macro BIM tools enable us to evaluate building models during programming to optimize the solution by rapidly studying myriad alternatives before design begins. Micro BIM tools such as Revit and MicroStation enable us to define accurate models of the project with appropriate input from all participants to improve significantly both the coordination and completeness of the resulting information. In essence, macro BIM tools will answer the question of if we want to proceed with the project by optimizing the building through inference modeling, while micro BIM tools define how to build the building by accurately defining and coordinating nearly every detail for construction. We also have tools such as Innovaya and Navisworks that bridge platforms by overcoming the lack of industry standards for design details and estimating formats. All of these tools are rapidly developing our capacity to optimize the design for a better return on investment (macro BIM), while improving project definition before construction (micro BIM) to enhance coordination and completeness and thereby minimize subcontractor contingencies, change orders, and delays.

Industry Evolution

So how will our industry evolve given the drivers and enabling technologies described above? Recently, the industry has advocated the virtues of integrated project delivery (IPD), by which project participants engage earlier in the process through new types of agreements that promote cooperation. While certainly an improvement, such models are merely half-steps designed to preserve the status quo in permitting disciplines to remain independent. One model promoted by the American Institute of Architects creates a limited liability corporation incorporating the key disciplines but then allocates risk and reward in the conventional manner resulting in traditional behaviors. Another IPD model promoted by the Associated General Contractors of America and others shares the risk and reward among disciplines to motivate cooperation and mutual responsibility among the owner and the various practitioners.

This latter approach is a step forward, but with few exceptions, architects and owners are reluctant to assume partial responsibility for the contractor’s cost and schedule risks, resulting in slow adoption of this form of IPD. Can you imagine many owners or architects willing to assume some of the risk for the accuracy of the contractor’s foundation estimate or a subcontractor’s curtain wall? For that matter, why should any owner assume responsibility for the obligations of either discipline just to foster improved cooperation between them?

Owners have a right to demand that the disciplines live up to their own commitments and assume responsibility for each others’ performance. By capitalizing on these new technologies, contractors can and should begin assuming responsibility for the completeness and accuracy of the architect’s design. Architects can and should start to assume responsibility for the contractor’s costs and schedule, including means and methods. However, architects and contractors are unlikely to do so as independent entities in an IPD environment where integration occurs only at the project level.

The ultimate opportunity is to overcome the status quo and to merge the disciplines into one firm, thereby assuming responsibility for the complete design and delivery of the project and mitigating the perceived risk through the sophisticated use of these emerging technologies. Not only will the combined disciplines cooperate at levels never seen before to ensure complete and timely information along with accurate pricing and scheduling, but such an integrated enterprise will also be motivated to invest in mutually accepted design components for detailing and estimating, common mapping protocols between different BIM technologies, necessary cross-training to radically improve efficiencies at the project level, and so on. Such investments are expensive and must be amortized over many projects through an integrated enterprise model and cannot be cost effective in an IPD environment with no assurance that the parties will work together enough times to amortize the investment sufficiently. These emerging technologies offer the opportunity to improve across the disciplines, not simply within them.

If, as mentioned earlier, adoption depends on improvements in price, quality, or convenience, can you imagine the response from clients when one firm guarantees the performance of all disciplines along with no change orders? In order to make such commitments, the integrated enterprise must complete and coordinate building information to a much higher level than industry standard (which the new technologies make possible), resulting in significantly lower project costs as subcontractors reduce their contingencies. These are precisely the kinds of goals to which an integrated enterprise should aspire.

Motivation to Change

Most industry participants are very reluctant to merge both disciplines within the same firm. However, there is increasing evidence that some A/E/C firms may be motivated to change given new options enabled by these technologies. There may be a classic, up-market disruption brewing here as defined by Clayton Christensen in his book The Innovators Dilemma.

As contractors seek to limit their risk and gain more control over the completeness, accuracy, and timing of project information, they are naturally motivated to assume more of the design production process and perhaps even become the architect of record.
 
As architects seek to improve their margins and limit their risk, they are motivated to turn over responsibility for design production to the contractor. Architects will increasingly seek to limit their scope of services to the initial phases of the design process (schematics and design development), where the margins are far greater and the risk much less than that incurred in the latter phases. In contrast, design production looks ever more attractive to the contractor, who is increasingly required to assume most of the delivery risk anyway.

As contractors begin to move upstream, they will take the first steps toward an integrated enterprise, which may eventually result in such firms assuming the creative design function as well. This may well be a moment of transformation for the industry and particularly for the architectural profession.
 
It doesn’t have to be this way. Personally, I wish that architects would lead this transformation given their deep knowledge of design and their understanding of how buildings are put together. Otherwise, the design profession may continue down the same slippery slope experienced over the past several decades, and continue to yield their influence over the delivery process.

Positioned for the Future

Regardless, all architects must reconsider their current role in the delivery process. Here are a few steps to reflect on as you think about how to position yourself for the future:

• First, decide whether you want to become a pure designer delegating production to others or an architect leading the entire process. These are quite different paths in that the first turns most of the risk over to another party while the second seeks to mitigate risk through greater and more effective control of the process.

• The first path is pretty well defined with many successful examples. But the second path requires a fundamental change in your business model. Before choosing to lead the entire process, you must be prepared to take on new responsibilities and learn to manage more of the delivery process.

• The first step along the latter path is to build capital within the firm instead of distributing it annually. Builders require risk capital for a variety of reasons.

• Second, carefully select a contractor with the right culture to venture design-build projects together with a goal toward merging the firms at a specific time. Contractor selection is by far the most important and challenging step in the entire process. Culture assessments of both firms can be very helpful.

• The firms can be merged by forming a small, separate group to move forward as the ultimate surviving entity or by combining both firms completely. Each has its pros and cons that must be carefully thought through. Regardless of which method you choose, the merging entity must co-locate as quickly as possible.

• Third, the combined leadership team must adopt an investment strategy to differentiate the merged entity as an integrated enterprise. This strategy must cover technology adoption, cross-training, common formats for details and assemblies, mapping protocols between internal technologies, branding, and all other facets of the integrated enterprise. These are the opportunities that add significant value in the delivery process and that no two firms can afford to adopt by integrating a few times at the project level (through IPD).

Offering no change orders, jointly guaranteeing design and construction performance, and even merging with a contractor sound scary at first, but break the problem down into its pieces. You may find that in controlling more of the risk, you can actually reduce your exposure and enjoy better opportunities with fewer competitors, at least initially, if you begin now.

We cannot stop the impending transformation of the A/E/C industry, as so many have learned before us in other industries. Witness the medical profession, where control and profits migrated from doctors to administrators to insurance companies — and now perhaps to Washington D.C. But we each have a choice in deciding where and how to compete in the future. Let us choose wisely and not let our traditional fears and adherence to norms blind us from seeing the wonderful opportunities that lie ahead.


Henry C. (Peter) Beck III has been associated with The Beck Group and its affiliates since 1978, during which time he has held various positions. Since 1991, he has served as managing director. The Beck Group is an integrated builder offering project finance, design, construction, and development services through eight offices across the United States and Mexico. Beck is a Senior Fellow of the Design Futures Council and sits on the DFC Executive Board.

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