Clark Ellis: Welcome back to Built Revolution, and episode 2, where we complete our conversation with Stephen Mulva, director of CII, on the transformation of the construction industry. Thanks for joining us, and enjoy.
Stephen Mulva: Can we be a profit center in some of it? Then, what parts of it do we want to leave to the experts?
Clark Ellis: That makes a lot of sense. The final moment that you references was shrink for agility. Now, agility is something that our company has been studying, and understanding, and also seeing a need for, increase dramatically in the business world. So, I found it kind of an interesting thought. You didn’t just talk about agility as something you do. You talked about specifically shrinking for agility. Can you elaborate on that, what you mean by that, and how that really applies to the conversation?
Stephen Mulva: Sure. So, I think at a basic level, we’re entirely to large to scale at which we build, and design is entirely too large. That stems from a couple things, but classically, engineers are trained in something called the 6 10ths factor, which I don’t know if you’re familiar with that from your time in school or not, but what it basically says is, if you double the size of something, the cost doesn’t double. The cost is raised to the 6 10ths power. So, the way it works out is, if you had a, let’s just say, a refinery that could produce 100,000 barrels a day, and you wanted to then make 200,000 barrels a day, the cost wouldn’t go from 2 billion to 4 billion. It would go from 2 billion to 3 point 1 billion. What that causes engineers and designers to think about is, well, if we just build this thing as big as we can build it, look, we’re going to save money. Ultimately, this is going to be less expensive. By doing that, you get an ever bigger facility. I work for a big EPC firm. We got to the point where we had a gasoline fractionator that was going into Saudi Arabia that was 372 meters tall. It was so big and so heavy that there was no barge or transport vessel in the world that could move it, and so we actually commissioned to have a vessel built, to move it from Germany to Saudi Arabia. I asked the guys who were doing this, I said, why don’t you just build 2 of these things and daisy chain them together? They said, oh no, that would cost us a lot of money. I said, more than.
Clark Ellis: Commissioning.
Stephen Mulva: Commissioning a new.
Clark Ellis: Specialized. Yeah.
Stephen Mulva: They were, they said, oh probably. They hadn’t done that analysis, and yeah probably. But more than that, nobody’s ever done something 372 meters tall. How cool is that going to be? I thought, this isn’t like the Eiffel Tower. It’s not like people are going to fly into Saudi Arabia to go see this gasoline fractionation column. The part that we’re discounting there is what most people in business would know as economy of scale, which is, can you buy a lot more things that are repetitive? One of the things we definitely see this in, heavy industrial construction is over 70 percent of the items that we put into a plant are specialty ordered. They’re not even off the shelf, or things in the standard catalog. They’re things that are based on minute calculations, down to a 10th of a decimal point. So, it’s, we want a 37 point 3 horsepower pump, and you say, well why don’t you just use the 40 horsepower pump? Well no, we did a calculation, and we want a 37 point 3 horsepower pump. That kind of thing eliminates the ability to have economy of scale. But the other thing it limits is what we call economy of repetition, and that is, in a manufacturing environment, your productivity goes way up when you can do things in repetition. The 4th time you do anything, you’re 40 percent more productive. Think about the last time you moved into a new house, right, and the 1st time you mowed the lawn, you were pretty slow. You didn’t know where all the sprinklers were located, you didn’t know the best way to position, or pattern to mow the yard. But by the 4th time you did it, you were 40 percent faster, because you’d experienced that a few times, and you knew how to do it. So, by shrinking, we get more agile, we get more flexible, we get more options from the supply chain, especially if we can use standard, off the shelf components. As we do that, all we’re doing is just going more of the smaller units. Now, there’s an optimum there. So, the question on that 100,000 barrel a day facility is, instead of doing 1, do we do 2, at 50,000 each? Do we do 10, at 10,000 barrels each? What’s the right scale? That’s one of the things, all good research professors would tell you, that’s why we need research, so that’s really why CII exists, is to figure out this vexing question. Where is that inflection point, or where are those lines crossed between the 6 10ths factor, economies of scale, and economies of repetition? But, we are seeing different areas of this where shrinking fragility, building at a much smaller scale could actually yield a lot more benefit and speed. I think, I forgot who the author was that said speed kills. I think that’s really appropriate for us, because some of these mega projects are taking 4 and 5 years to do, and that’s, some of the public projects are taking upwards of 15 years. People can’t even forecast what the capacity’s going to be. We have a new highway that’s opening in Austin, and the day that it opens, they’ve added a lane to the main north, south highway in Austin. The day that it finally opens, there’s going to be a traffic jam on it. Why is that? Well, because this project was contemplated originally 12 years ago, and the urban planners had no idea that the city was going to grow as fast as it did. The day that the expansion opens, you have a traffic jam, and there’s going to be a lot of frustrated people with that.
Clark Ellis: That is the quintessential example. I, living in the Raleigh area, it seems like there’s always orange barrels on the various highways around town. Have been since I was in college in the 80s. We still have traffic jams. That’s the point, is the point of time between the planning and the actual deployment is so long that you’re almost guaranteed to be under capacity at all times. Can’t catch up.
Stephen Mulva: Right. And in a commercial context, this is the thing. We actually had some CEOs that spoke at our annual conference, and they were saying, you guys are taking so long with the capital projects that the best business analysts we have in our company, we can’t think what the market condition is going to be like 5 years from now, when your facility’s actually done. If you could just shrink the scale of it, and you could be more agile and a lot faster, we could better align what we think the business climate’s going to be like 2 or 3 years from now, and you could fill that need. The other thing of shrinking for agility is, you know that the market forecast for 4 or 5 years from now is 100 percent wrong. There’s no way that’s going to be perfect, right? It’s either going to be be above that or below that. If you go to a smaller unit, you can just constantly reconfigure how many units you want to put out there. Somebody actually recently asked the question, okay well, what is the optimal size? I haven’t spent a lot of time doing R and D on this, but I think the preliminary thought or hypothesis on this is that it might be 40 percent. If the business analysts said, we need 100,000 barrel a day refinery, maybe you should think about 20,000 barrels. You might even think about building it in 2 trains of 20,000 each. Why is that? Well, for one, you know that you can do it quickly. You also know that you can for sure sell 40 percent of whatever the business analysts said. There’s no way you’re not going to sell out that capacity. But while you’re going through that process, either find the land, or give yourself the flexibility that you could go to 80 percent, or 120 percent, because they’re either going to be low or high, even 160 percent, and you could rapidly configure that. The other thing is, you could actually finance those future expansions off of the cash flow you’re getting from the 1st asset. When we’ve done this in repetitive building programs, so again you think Walmarts and McDonald’s and Costcos, this kind of thing, or hotel chains, the economic advantage, the return on capital employed when you do it in that form is 57 to 80 percent better financial return, because you’re leveraging the returns off the early projects on the future ones. So, shrinking for agility is a lot of those things, all rolled up into one.
Clark Ellis: So, essentially, that last point, I think, is a critical one. You really are almost converting something that’s been thought of as a one off, into a repetitive building opportunity by thinking that way?
Stephen Mulva: Right, yeah. And, in order to do that, requires also a shift from project management thinking, I think especially in the United States, all our management is focused on project management. The definition of project, I always tell my students, it means temporary and unique. Everything is a prototype. Everything is expensive. It’s amazing that this stuff actually works, because everything’s sort of a prototypical nature. If you actually get to shrinking for agility, then you start embracing program management, and even enterprise management. The question is, what part of the built environment, and the assets and the facilities spectrum should you do at a project level, should you do at a program level, should you do at the enterprise level? If you think about risk, for example, if you try to manage risk, all risks at the project level doesn’t work out, like geopolitical risk, or appropriation risk, or tax risk. These are kinds of issue that a project manager or project management team shouldn’t have to deal with, right? That should be handled at the business unit level, the program level, or the enterprise level. Something about is ABC Plumbing actually going to come out here, and do they have the skill sets necessary to put the plumbing in our new building? Yeah, that’s a risk the project management team should be taking on, but not geopolitical risk. By unbolting that, and putting it at the right level so they can manage it properly is also part of this shrinking for agility.
Clark Ellis: So, as we shift gears towards more of a wrap up, you’ve really outlined some fantastic ideas, and a really exciting vision. But really, in the scale of complexity or difficulty of change, some of these are more towards the 1 on a scale of 1 to 10, with 10 being difficult and 1 being easy, but a lot of them are further up towards that number 10, in terms of getting large groups of people across different organizations on the same page, and mobilized. Getting other people, maybe even, to define what’s in their economic best interests, differently. Just thinking of it in that context, what do you think is it going to take for the industry to really shift? What kind of a time frame are we talking here? Are we talking something we can achieve or see big leaps and bounds in 5 to 10 years, or is this something, is this a 25 year program?
Stephen Mulva: Well, I hope it’s faster than 20 years. I’d like to see it happen while I’m still working and all that. But, I would probably say, it’s like anything. There’s some low hanging fruit on your scale of 1 to 10. What we’ve been doing is putting together groups of companies and associations, and industry groups such as CII, to really tackle this from an industry perspective. We think we can get 80 percent of the benefit with 20 percent of the issues, and that’ll be the low hanging fruit. The stuff that’s closer to 1 on your scale than 10. If we do that, it’s probably going to take us 2 to 3 years of research and development work, and some pilot testing along the way. But I think we can come out of that, and actually have some demonstration projects in a 5 year timetable, that could actually show, yes, there are a lot of these concepts that I just talked about today do work. From there, the next set of improvements becomes a little harder. Probably takes more investment, maybe more time. So, this is a continual journey. If you look at high tech, or healthcare, or automotive, or aerospace, they’re still on their journey. The beautiful part for those other industries is, we can learn from them. We call it tech transfer. We can take a look at how they did it, emulate it to the conditions we find in our business, and we can actually reduce the cycle time. So, the transition it took in automotive, let’s say, was 20 years. Based on them and other industries, I think we can get a lot of the benefits out of this, in a 3 to 5 to 7 year timeframe, on those initial winds, and then maybe 10 to 12 years on the longer term.
Clark Ellis: Well, I think that makes sense. That’s, I agree, this is something that we’re kicking off that is, to some degree, a never ending process. But I do think there’s big opportunity available in the next 10 years, for sure. Now, I guess the final question, maybe the final thing to talk about is, if I’m involved in the industry in some fashion, regardless of my role, what’s the best way for me to get involved, and to understand how to interact with the content, be part of the process, add my creativity and thoughts to the dialogue, and start to help to carry the ball?
Stephen Mulva: Sure. That’s a great question. I think there’s, if you go back to the 1st Gulf War, the whole idea, Colin Powell, and all the people around back then was to build as large of a coalition as you could. Get a real diverse crowd. Get a large enough crowd to really move the ball forward. That’s what we’re doing. I think the best way we’ve learned to do that is to find these leading edge companies, but a lot of them, and also these industry groups, to move them forward. We think by doing that, and we’ve got several large, several industry groups that are involved in this, I think there’s about 8 to 10 of them right now, so Construction Users’ Roundtable, Lean Construction Institute, CII. We’re talking to AGC, we’re talking to some other associations as well, even internationally. It stands that whoever’s listening to the podcast probably works for a company that’s somehow involved with one or more of these organizations. So, the ability to input and participate through that is going to be there, even if their company’s not a direct investor or contributor into this development. I think we want to do that. We want to have as big of an umbrella and collaborate with as many people as we can. On the other hand, you can’t actually have 20 million people in a tent, or you won’t make any progress. So, where is the right size of that? If you make it too small, you may end up with competing platforms, and I think, ultimately, that’s kind of destructive. If there were 1 or 2 platforms, and the whole idea of this is, once we build a platform, to give it away. If you do that, then that really reduces the incentive for somebody to come up with a competing platform, because how do you compete with something that’s good, that’s also free? But, that’s really it. I think, if we’re able to do that, and get a lot of people rallying behind it, and that looks like exactly what’s happening now, I think we’re going to be successful. It’s a huge thing to take on, for sure. Some of the ideas that I’ve talked about today, and you’ve talked about, you could say they’re maybe a little utopian. But, I also think it’s sort of that issue where, even if we only get a 3rd or half done, what we’ve just talked about, we’re still way further ahead than we are today.
Clark Ellis: There’s no doubt. I mean, the construction industry in the US is typically the largest nongovernmental piece of the GDP, when taken collectively, it’s usually 8, 9 percent of GDP, and to your point earlier, it has a huge impact on almost all of the other sectors in the GDP because we have to have facilities in order for all those other sectors to work, whether it’s an office building, a medical office building, a clinic, a hospital, a refinery, a bridge. We’ve got to have structures and facilities built. To your point, even if we only get halfway there, we’ll have a huge impact on the industry, and on society as a whole. This is extremely exciting for myself and for my colleagues. I was just lucky enough to attend one of the workshops this summer in Detroit, and that, just the conversation that day kind of propelled me through the next month, by itself, so I’m very excited about what you’re articulating, and all the different groups that are getting involved. But what else would you like to articulate or to comment before we wrap up?
Stephen Mulva: Well, I think the point you just made is spot on. I mean, we’ve got to stop being the bottleneck for all the other industries to advance. Just recently, I had somebody who’s a retired general from the military come and talk to me about how fragile our nation’s electrical grid is. That there’s really 3 grids. There’s west of the Mississippi, east of the Mississippi, and then Texas. Texas always wants to retain its independence at some level. So, basically, he said, every time we have a natural disaster, every time we have a fire, every time something happens, we basically put back in place this infrastructure that, by design, the electrical grid is 100 years old. I mean, it goes all the way back to the days of Thomas Edison. But yet, we know the future for electrical is distributive. So, we have these business leaders, and these leading minds, like Bill Gates, they say the modern economy is so much predicated on the internet, and to have the internet function properly, you need a proper electrical grid that doesn’t brown out or black out, or is fragile. A tree falls in a wind storm and knocks out half of Alabama or something. You can’t have that and sustain a modern economy. So, this is, again, where it’s incumbent upon people in the capital project space to think about not just a better way to do electrical generation and distribution and transmission projects, but really think about, what does the next generation of these facilities really look like, how does that support the wider economy? Our role in this is really super critical. I always say we’re the basis of civilization, because without capital projects people, you don’t have any facilities to do transportation. How are you going to have clean water, or education, or anything else? But it’s also, that means, we have a large responsibility to the rest of the planet of people, to companies, to really get a whole lot better. They’re depending on us to do that, and so I’m eager to work on the problem. I know there’s a lot of people like you, and companies and groups that are easier to work on. It’s going to be a fun journey.
Clark Ellis: Outstanding. Well, Stephen, as always, it was a pleasure talking to you, and I really appreciate you being here for the beginning of the Built Revolution podcast, and we’ll look forward to many more conversations going forward, and lots of progress.
Stephen Mulva: Sure. Really happy to be here today, and to talk with you Clark. Again, it’s an exciting topic, and I’m sure we’ll continue the conversation again.
Clark Ellis: Thank you very much. That was Built Revolution Podcast, with Stephen Mulva, director of the Construction Industry Institute. Tune in next time. Thanks.