Clark Ellis: Hello, and welcome to the Built Revolution podcast, brought to you by Continuum Advisory Group. My name’s Clark Ellis. I’ll be your host. I’m a principle with Continuum Advisory Group, and have been consulting in the construction industry since about 1998. I’m very excited to introduce this podcast, this series, which we hope will continue to build on the legacy that Continuum Advisory Group has, in driving revolutionary change in the construction industry, and helps us fulfill that as our mission. Our very 1st guest really personifies that mission. We have Stephen Mulva, who’s the director of the Construction Industry Institute, out of Austin, Texas. He’s here to talk a little bit about the Institute, and about one of his critical elements that he’s working on right now, and bringing people together in the industry to drive change. So, Stephen, welcome to the podcast, and I’d love for you to give us a little bit more background on yourself, and on CII and its role in the industry.
Stephen Mulva: Sure, Clark. Thanks. Really glad to be here. Thanks for the invitation. CII, I feel like, has played a really great role for almost 35 years now. Really, started out of the 1970s hyper inflation, and even given that backdrop, the cost of construction projects were far outpacing inflation, and the business round table said, we really had to do something with this. They commissioned a 3 year study. One of the recommendations was to have a national institute to study and do research and development to improve capital projects. CII was really the outgrowth of that. There was a professor at the University of Texas, named Richard Tucker, who took that upon himself, and with 29 companies, they started CII in 1983. I think we’ve really been about improving the capital project. Ever since then, starting in safety and productivity, we began the front end planning. Today, a lot of the best practices in the industry that people who are in the industry know, they really got their formalization from CII. Personally, I’ve been at CII for 10 years now. The 1st 8, I was one of the associate directors responsible for our benchmarking metrics program, and the last 2 as the director of CII. I think there’s not a better place for me. I’m so passionate about this industry, what it can accomplish for society, what it can accomplish for companies that are participating in it. I think we’re about, we’ve done a lot of great things, and we’re about to do even more great things, going forward.
Clark Ellis: Fantastic. Fantastic. I agree, it’s a group that I’ve known about for quite awhile, and I’m very excited to get to have a better relationship with CII. Also, I’m really excited about the subject matter of today’s podcast, because this is really what I think all of us in the industry that are trying to prove it, as CII, and Continuum Advisory Group, has got to be excited about the idea of reinventing the business model for the construction space. Which, correct me if I’m wrong, but that’s really what you’ve articulated as the moon shot for CII, and your leadership.
Stephen Mulva: Yeah, Clark, I think that’s right. When we started this, and I would say really, over the last 3 decades, we’ve largely looked at the managerial and the technical aspects of project improvement, but this past summer, working alongside with some of your colleagues at Continuum. We ran 3 different workshops, different parts of the country. What we discovered was, we’re only really addressing part of the problem that, as you suggested, we really need a different business model for our business of planning, engineering, design, constructing, operating, the modern facilities of the economy. That’s what’s got us so excited today about just exactly how we’re going to go about doing that.
Clark Ellis: Fantastic. I’ve been watching. Unfortunately, I wasn’t able to make it to the natural conference in August, but a number of my colleagues were, and I watched a number of the presentations on the CII website, and I really focused on your keynote that you gave at the national conference in August, down in Orlando. You really laid out, I think, a compelling case that the industry itself must change. You talked about the fact that we’ve been, actually, in a slightly negative productivity curve for the last, well, really, the postwar era, while pretty much every other industry has leaped ahead, in leaps and bounds, in some cases, in terms of productivity. Our industry’s lagged behind, and in fact, has has a slowly disintegrating productivity curve. You made a compelling case that, if the industry doesn’t figure out how to dramatically change that, that we’re in a point where, due to a lot of factors, visibility, transparency, technology, etcetera, the industry’s ripe for change to come from outside. That could have, and will have, significant impact on the industry. I thought there were 3 main points to your presentation that were pretty fascinating. You talked about the need to flatten the supply chain, stretch each dollar, and shrink for agility. I want to take each of those separately, but before we do that, what would your reaction be to the idea that change has to happen, and that we kind of have, the industry’s faced with a choice about whether it accepts it from the outside, from a disruptor, or is able to disrupt and change from within.
Stephen Mulva: Sure. Well, let me just start by saying that we’re one of the last sectors of the modern economy to really move into this century, or really take a strong look at the business practices and the managerial practices we’ve been using for, really, more than a century. In fact, today, the stock market on the Dow crested 23,000, and you look at the big gainers, and the ones that didn’t gain. Largely, it’s the companies in the engineering and construction market that are still not benefiting. That’s unfortunate, because we’re really the builders of the economy. You can’t have energy or health care or transportation, or really anything without having a capital project, 1st. So, in some ways, our industry’s the bottleneck. What’s happening is that companies in other sectors of the economy are saying, we can’t move our businesses forward because we’re stuck with the construction industry that can’t run at the same pace. You guys are walking, and we’re trying to run over here. It’s just not compatible. I think we have to change, and they’re getting a breaking point. They’re getting to a frustration with us that they’re going to strike out on their own. Some of them already have. Some of these people like Elon Musk, and Bill Gates, and others are just saying, we’ve got to come up with a different solution for our assets and our facilities, and how we go about planning them, building them, designing them, maintaining them, and it’s time to get on with that. Your contention that it may happen from the outside, I agree with that entirely. But I also think it’s a call to action for those of us inside the industry that know, hey, why don’t we get on board with this, and try to figure out a better way to go about it.
Clark Ellis: Yeah. I think that makes a lot of sense. I’ve got my own thoughts, but I’m curious, what do you see as some of the reasons that the industry is in the situation that we’re in, where we’ve got this flat to deteriorating productivity curve? To your point, I thought that’s a great word, you said we’re a bottleneck, to the other elements of the economy. What are some of the factors that we’ve got to change in order to reverse that?
Stephen Mulva: On the flat productivity curve, the main thing I would say there is we’re looking at productivity but we’re not questioning the means and the method. A good way to illustrate that is, we’re not questioning how to dig a ditch, we’re coming at it with the same approach to production, and in this case, I’ll just use an example of shovels and wheelbarrows. Well, we can dig a ditch with 100 people, with shovels and wheelbarrows. The question we’ve been asking or saying in productivity is how do we get these people with their shovels to shovel faster, and to move more dirt? It’s really the wrong question. We have to question the methods of production. If you look at any other sector of the economy, that’s exactly what they do. I mean, you go all the way back to, originally, cars were handmade one at a time, a very cottage industry. Henry Ford comes along, and he changes the methods of production, puts it on an assembly line. Manufacturing has just continued that to this day. In fact, they’re at the point where they call it industry 4 point 0, where the robots on the factory floor now talk to each other, because again, they’re always questioning the methods of production. We’ve got to question not only time on tools and productivity, but we have to question how are we going about putting work in place, and doing these kinds of things.
Clark Ellis: I think that makes sense, and in many ways we’re not, we haven’t even started the process, in other words. We’re still working on the same process, we’re just trying to make that process a little bit more efficient. 2 percent, 3 percent more efficient. We’ve got to come at it from much larger goals. I thought one of the interesting things is, you talked about, in your speech, on your flattening of the supply chain, I thought you had a really interesting analogy there. Really interesting example, of how a very large and famous company was able to deliver a new product, in a totally different way, and really, by focusing on flattening supply chains. Is that something you can expand on?
Stephen Mulva: Sure. I mean, one of the problems we face in our business is that it’s become increasingly fragmented, and you hear that a lot, but that’s also because it’s become incredibly specialized. So, if you go back 30, 40, 50 years ago, you’d have a general contractor that would install an elevator. Well, the elevator’s become extremely advanced, and so the people who make elevators, they have their own crews, they do their own design. That’s just, we call that fragmentation, but it’s really specialization. The modern world is demanding that. Smarter elevators, smarter transportation systems, on and on. What that causes us, in a capital project to do is this proliferation of the number of companies that are involved. If we use our current business model, and our approach to managing it, we’re trying to herd lots of cats. I always talk about, if you have a 400 million dollar project, there’s 400 organizations, all with, they’re all contracted to each other in their various forms, and all different types of legal agreements. It’s kind of inefficient. It actually leads to extremely high transactional costs. What the modern economy does, is it flips that on its head, thinks differently about what those working relationships are like, what those legal relationships are like. The manufacturer that you’re talking about is one of, I think the example that I used was Boeing, one of the largest commercial aircraft makers and defense contractors. They have the same situation. The aircraft that they’re making has become, every year becomes more and more technologically advanced, highly sophisticated. That requires them using even more specialist people and companies to design that, put it together, supply it, so basically, what they did is they flipped the model on its head. In the past, they had been, the owner was commanding control, top down. These are our engineering standards, these are how we want those to interface with our companies. We’re going to 3 bids and a buy, we’re going to put out a solicitation, you’re going to respond to it with a proposal, we’re going to try to beat you down on costs, eventually issue you a purchase order. Again, takes tons of times, lots of transactional costs. Boeing flipped that on its head. They said, no, we’re going to support everybody above us. We’re going to let them do the design, so a lot of supplier led design. We’re going to prequalify our key suppliers, so they, this is basically building off the automotive framework of having 50 tier 1 suppliers in their case, and a whole host of, maybe, say tier 2 suppliers. Then, we support them. We work at the interfaces where they’re having difficulties or they’re experiencing some conflict. We come in and we try to help the situation, move it forward, and do it quickly. That’s led them to radical cycle time reduction on the order of 30 to 40 percent. Radical cost reduction on the order of 40 to 50 percent. It’s just sort of embracing the fact that we have this specialization, but just thinking about it in a different way. It’s not a huge shift, and it’s a shift we can make in capital projects, but we just have to go ahead and make the shift, just like other industries have done.
Clark Ellis: I think you’re right. That makes sense. Really, almost since I started in the consulting industry, I’ve worked with specialty contractors, RCMs and GCs, EPC contractors, owners, architects, engineers. One of the interesting things, it’s become more and more prevalent across all the different types of construction that I’ve been involved with, is all these specialists continuing to say, louder and louder, if you, and in this case, you could be a GC, it could be another specialty contractor where you’ve got a sub to a sub, or it could be the owner, or the architect. If you would allow me to do my job and get out of my way, stop putting obstacles in the way, I could be more effective. So, to a large degree, I think a lot of the specialist, and those with unique capabilities and knowledge, they’re, frankly, they’re beyond any one person or one entity to be understanding at that level. In other words, a GC can’t understand all of those disciplines in enough detail to actually execute. Not can the architect understand as they’re specifying every aspect of the building, understand each one of those aspects in the same way that a specialist in that particular area would. So, there’s a huge appetite utilizing that expertise more officially, I guess is one way to look at it.
Stephen Mulva: Yeah, I think that’s exactly right. You definitely see the leading companies getting more into, they will call it value added services, but like in heavy industrial construction, process control makers make valves and things, they’re getting into engineering because they’re able to correctly design systems with their products in mind, and then working with the eventual end users, and you’re right, a lot of the generalist firms don’t see these conditions as frequently as the people who actually make the products. That was, at a basic level, that’s my elevator example is, people who make and design elevators, let them design the installation into the building as well. It probably is going to end up being more straightforward and less problematic than if you let the architect do it, who may or may not see that many installations of that particular type or variety all that often.
Clark Ellis: Absolutely. That makes perfect sense. So, in a way, it’s flattening the supply chain, it’s also kind of turning it on its head in order to flatten it. You’re getting the power to make the decisions in the right places. Is that a fair statement?
Stephen Mulva: Right. Well, one of the issues with the commanding control from the top down is you basically engineer into multiple layers. I just call it a pyramid scheme, because you have the owner at the top, and you have layer upon layer. In most projects, you’re looking at about 10 to 12 layers. Again, all contracts in between them, it takes time and cost. The modern economy’s about a single thin layer. You just let whoever’s out there come and apply their knowledge, their skills, their products, services, onto that thin layer, for whatever’s needed. That way, you’ve basically matched the need with the people who can supply the capability. If you do it at that level, you don’t, you basically cut through all these layers of reporting and costs, and you basically get rid of all the transactional costs. That’s the easiest way to flatten the supply chain, is put them all on a transactional platform. Now, in Boeing’s case, they use a system called Exostar. It was designed for aerospace and defense, but really, it’s been broadened past that. It’s been used in other types of industries. That’s essentially one type of an operating system, where you have all these different specialist firms able to collaborate. Technology’s there for us in capital projects today. We have many examples of lots of firms collaborating to design a BIM model. 3D CAD representation, or the actual, digital twin of what you’re building. We’re at a point where the technology’s there, but now our business model’s lagging behind. We’ve just got to bring those 2 more into sync.
Clark Ellis: That makes sense. That makes sense. Let’s shift gears, and talk about the 2nd element, or the 2nd key platform that you enunciated at the conference, which is stretching each dollar. This one is really unique because it’s very easy to read that or hear that, and just let it slide right by, because we’re always trying to stretch this dollar, we’re always trying to do things more efficiently. But, when I listened to your presentation, I thought it was really interesting, the way that you explained what you meant by that, and the examples that you gave there, as well. Maybe if you could expand a little bit more, because it seems to me, stretch the dollars, it’s a little too easy to sound like motherhood and apple pie, for people to dismiss it. But you meant something very specific.
Stephen Mulva: Sure. Local governments will talk about not, this is one of the reasons they don’t like online commerce, is that the dollars leave their community. They’re trying to stretch each dollar by reusing them locally, so they prefer you to go to a local store, buy something so they can accumulate that sales tax that goes into the pockets of the owners, who pay the people who work in the store. You get the idea. If you just send your money out of state or out of country, it’s gone. It doesn’t necessarily benefit the local community. Essentially, that’s what we’re doing in our industry. We send the money away, and we don’t really reuse it. We’re not continually stretching the dollar, and that manifests itself in 3 or 4 different ways. I think one of the 1st is pretty easy to understand, and it’s, I would just say, we’re living off the borrowing side of the dollar. You think about construction, we put construction work and material in place, and then we go bill for it, then 30 or 60 days later, somebody sends us a check. That means that you’re constantly, most contractors have to go get a line of credit, their cash flow gets a little wonky, they find themselves in some thin periods. It causes them to increase their transaction cost. Versus, say, a hedge fund with a ton of investment behind it. They don’t need to go get a line of credit. They’re already managing a ton of capital and assets. They could go ahead and do that more efficiently. 2nd thing is, we’ve got this distinction between Capex and Opex, which I think is really destructive. A lot of owner companies, traditional owner companies, they see the world in these 2 buckets, and so the objective is to minimize both Capex, and minimize Opex. Really, you want to minimize the total life cycle cost. How do you do that? Well, I think one way to stretch a dollar here is, just don’t use as many dollars, because you don’t actually have to have that large of a capital outlay. You can, there’s some new and even old financial vehicles we can bring to bear on this, if you just think about leasing, for example, you could actually lease pretty much all the equipment in a facility. I think about a manufacturing facility or a refinery, or something like that, but the suppliers, the people who make all that equipment, they’d be happy to lease it. In fact, that would actually help them stretch their dollars, because it would even out their cash flow. I’m continually worried about engineering construction firms that feel like they’ve got to go sell lots of projects, even if they’re not projects they necessarily want, just to justify their backlog, mainly because their money making opportunity’s a one time event. It’s that 18 months of construction where they’re actually putting work in place, and billing for it, and then it basically goes to zero. What you’d rather see, from a cash flow perspective, or, I took engineering economics, and the cash flow diagram, you probably remember that, you’d like to stretch that out over 20 or 30 years. When you get to that point, it’s just an operating expense. There’s not that one time Capex on the front end. I think that would enable us to do a lot more projects. In fact, that’s really the ultimate goal, here is, if we can do these things like stretch the dollars, flatten supply chain, and be more agile, we can build a lot more facilities. That means added opportunities for profitability for everybody who’s in engineering and construction. It means enhanced shareholder returns for owners, and enhanced benefits for, say, the general public, when it’s a public type use facility, say, like a hospital, or a school, or a road.
Clark Ellis: I think, you talked about something there and you came back to it, the separation inside of the client organization, essentially. The owner of Capex and Opex, and the idea that, in isolation, we’re going to minimize each, or we’re going to optimize each, and the reality is that that’s a flawed way of thinking about it, because there’s interaction between those 2 buckets. The decisions that you make in Capex are going to have a huge effect on your Opex, on down the road. Even vice versa, to some degree, in terms of how you operate the facility. So, how do you get owners to get it, and to think differently, and not only to separate the budgets, but in a lot of cases, you have completely separate groups that don’t even really talk to each other very much.
Stephen Mulva: Sure.
Clark Ellis: You know, running those 2 different functions.
Stephen Mulva: Yeah, it’s a tough challenge. A lot of these companies, through mergers and acquisitions, have gotten even bigger, and of course, that makes the challenge of them talking more and more difficult. I think the fastest way that owners can do this is, really, I don’t want to say put pressure on their capital projects folks, but try to get them to think about how could they be a profit center for the corporation? Because right now, most of them view themselves as a cost center. We did a study that concluded in 2016, again with your colleagues at Continuum, where we looked at exactly that dichotomy. You had the strategic business units that were unhappy with the capital facilities group, and the project people and the business people, sometimes they’re like oil and water. They don’t speak the same language. How do we get them to speak the language of business? But basically what we found is the capital facilities folks largely found themselves were order takers. We wait for the phone to ring, they tell us to go build something somewhere, we go do that. We’re mature, we’ve been down that road before, and we do it in the tried and true fashion, because we’re all about being as predictable as we can and try to minimize risk, but they’re not being efficient. So, that’s really what the corporation needs to look for, or the public agency, is efficiency. That gets us back to be efficient with capital, but be efficient with the operations. If you start thinking of yourself as more of a value center, and I think the example I used at our annual conference was Walmart, they used to just take orders on where to build stores, and there was a point in time where they were building 450 stores across North America. They actually transitioned themselves, started with sustainability, but they actually learned that they could use the building to generate some profit, itself. So, most Walmarts that you go in today, during the daytime, they have no artificial lighting. Well, that’s to conserve operating expense. Some of them have wind or solar. Some of them generate more power than they consume, and at that point, the building, the asset, is actually a net positive. You’re not counting on income just from what you’re selling in the store, you’re counting on the facility itself to generate some income. I don’t think they’ve taken the full step to really lease out their entire facility, but you definitely see some corporations that are going to a more developer model. I know the US Department of Veterans Affairs, for a lot of their clinics, they now look to developers and they sign a 20 year lease to have this clinic space, just because it evens out their cash flow, and they are able to take a stronger look at that balance between what does it actually take to run the facility, and then what do we want in the facility itself. The more that we can do that, I think the better off we’re going to be.
Clark Ellis: It also, I think, underlines your point about specializations, earlier. Why should the VA, for example, be in the business of being really good at real estate management, and facilities management? They need to be really good at serving the veterans, in medical facilities, and other facilities, and the services they offer. By moving to that model, they’re able to focus on their core reason for being in existence. There’s a lesson there for a lot of different organizations. Public, private as well.
Stephen Mulva: Sure, yeah. I think there’s always that question of core competency, and of course, that really came to the forefront in the 90s. There were companies all over the place that asked that question. When I look at the capital facilities part for owners, the owner really does 3 things. They come up with an idea, and a lot of times, it comes out of a business unit, or product line, something like that. Hey, look, we’ve looked at the marketplace, there’s a need for something we could offer, it’s an idea. The 2nd thing is capital. Where are we going to get the money to do this? A lot of times, that’s from retained earnings, or they have a bond issuance, or they go get some debt from an investment bank. Then the 3rd one is operations, responsible for operating. Well, I think in the modern world, the traditional owner doesn’t have to do all 3 of those things. I think if you go forward 5 or 10 years, my prediction is that capital, the majority of the capital, maybe 2 3rds or more, will come not from a traditional owner, it’ll come from developers, or private equity, or investors of some type that will put money behind an idea which could come from anywhere else. We don’t have to look to the Fortune 500 blue chips for all the ideas. The ideas can be sourced, essentially, from anywhere, or just kind of a grassroots efforts. Operations, again, that can be split off. CII has a lot of great members that are in permanent, in plant maintenance kind of roles, permanent presence, and they’re working on behalf of the owner. The owners are doing that because they find that it’s more efficient, and they get the specialization that they need without taking on a staff of 30. So, I think all of those roles are going to get questioned as we go forward. it’s really going to be up to the organizations to determine what is their core competency, and in the facilities space, what parts of that do we want to take on? Can we be a profit center in some of it, and then what parts of it do we want to leave to the experts?
Clark Ellis: Thank you for coming to hear episode 1 of the Built Revolution Podcast. Please come back next time as we finish our discussion with Stephen Mulva, director of the Construction Industry Institute. Take care.