Succeeding in the Next Normal

by Stephen P. Mulva, Ph.D., CII Director

In early 2016, I began speaking about how the business model in the capital projects industry was eventually going to become obsolete because of its inherent inefficiencies. The thinking behind what would replace it eventually became known as Operating System 2.0 (OS2). While much has been written in The VOICE about OS2, I'd like to explain why I believe COVID-19 and the current uncertainty in our industry is both necessitating and accelerating a shift to a different commercial model for engineering and construction. In short, I believe - more than ever - that adoption of OS2 (or a similar business model) will be required for any company wishing to succeed in the "next normal."

McKinsey & Company published a research report on June 4th entitled, "The next normal in construction; how disruption is reshaping the world's larget ecosystem." I encourage you to read it as it contains a number of interesting observations and possibilities for the engineering and construction industry over the next 10 to 15 years. While I don't agree with all of the report's predictions, I do think that it provides an excellent diagnosis of the current and future economics of our industry (see the synopsis contained in the inset).

My belief is that success in the "next normal" will belong to those firms able to shift from (being, or relying upon) vertically-integrated conglomerates to (being, or relying upon) trusted, strategic alliances featuring a cadre of specialist providers. In the alliance world, the distinction between "owner" and "contractor" will eventually be forgotten as investment in new facilities begins to enter projects through new channels. The transition of our industry's commercial model to strategic alliances (known as a "digital neighborhood" in OS2) will be complete when three areas are addressed:

Risk. Preliminary studies have shown that 41 percent of the cost of a heavy industrial capital project are wasted on transactions. Much of these costs can be traced to an imperfect understanding of all kinds of risks. When multiple parties are involved, risks can cancel - or amplify - each other, much like waves on a lake. In order to lower transactional costs, multiparty computing is being employed to ananymously share, pool, and potentially monetize risk. We're not just looking at project risk either, but portfolio/corporate risk as well. 

Supply chain. Risk presents itself at each layer of the supply chain - and each additional layer exponentially increases the number of interfaces, thereby complicating logistics. COVID-19 is accelerating the integration of digital tools, especially concerning the supply chain. This is an area where OS2 can help suppliers and other stakeholders gain visibility to ensure better control and integration on projects. Having a secured platform using a common data format lowers risk.

Lifecycle investment decisions. One of CII's companies recently described a situation where a critical piece of their infrastructure was nearing 100 years old, but the cost to replace it was approacting (an unaffordable) $10 million, generating an interesting question: "How do you justify this kind of investment?" Today's project investment tools are inadequate in such an environment; OS2 is looking at ways of integrating finance with facility lifecycles of any duration.

Not coincidentally, these three things are the initial research priorities for the OS2 Industry Affiliates Program (IAP) research program, which has been underway since July 1019 at the University of Texas at Austin. 

Despite the trying times, we should try to view COVID-19 as a catalyst that motivates our industry to be different than before, and yet, more successful than ever. I'm highly confident that we're going to get there - it's just the transition that causes difficulty. The benefit of CII and CURT taking on OS2 is that we understand the industry's starting point and we have members who have a shared vision that propels us forward. We just need you to get involved in this journey to a better business model. That's what will ensure your success in the "next normal."

Date posted: August 7, 2020