When I joined WeWork nearly three years ago, I consciously embarked on a radical departure from conventional architectural practice. I entered into the world of products—in this case, office-space as a service. I immersed myself in a new universe of frameworks, tools, and operational strategies woven together from the worlds of tech, strategy, real estate, and design. This transition dramatically augmented my field of vision across the real estate development value chain. I experienced cross-functional collaboration unlike anything in which I’d participated prior and was thus able to empower my team to effect transformative outcomes for WeWork’s members.
Admittedly, WeWork had an outsize share of organizational challenges to overcome, many of its own making. Today the company is still contending with many daunting obstacles, further exacerbated by the impact of the COVID-19 pandemic. Nonetheless, the experience—along with the associated battle scars—I gained during my time there reinforced my belief that the shift from services to products could reinvent the way architects do business altogether.
In its June 4 report "The Next Normal in Construction: How Disruption Is Reshaping the World's Largest Ecosystem," McKinsey & Co. diagnosed the historical underperformance of the construction industry and identified likely forces that will shape the industry's transformation in the coming decades. (McKinsey classifies architecture and engineering as part of the construction industry, which accounts for 13% of global gross domestic product.) A key industry dynamic tied to slow productivity growth is a fragmented value chain, which has inhibited widespread digitization, standardization, and innovation.
In the past two decades, productivity in the global economy has increased by 2.8% annually. But for the construction industry, this figure has been less than 1%. Comparatively, the scorecard is bleak. However, at the onset of the century's third decade, significant shifts in the construction industry are already underway. Big players are investing more capital in research and development, where spending rose 77% from 2013 to 2017, according to McKinsey's report. Meanwhile, venture-backed startups like Katerra, Cover, and Apt are challenging the fragmentation of the value chain and pushing product-based approaches. Architects should not ignore the fact that today you can buy both minimalist notebooks and prefabricated houses from Muji, the Japanese consumer goods retailer.
McKinsey identifies four categories of emerging disruptions to the construction industry: industrialization, new materials, digitization of products and processes, and new entrants. Combined with changes in market characteristics, these disruptive forces, McKinsey posits, will establish nine industry dynamics: value chain control and integration with industrial-grade supply chains, product-based approaches, specialization, consolidation, customer-centricity and branding, investments in technology and facilities, investment in human resources, internationalization, and sustainability. I’ll focus here on the first two dynamics.
Value Chain Control and Integration with Industrial-Grade Supply Chains
Managing risk is a crucial focus of every player in the construction industry—a warranted preoccupation given the fragmented nature of the development value chain and the industry’s litigious nature. However, this omnipresent risk sensitivity establishes a low ceiling on the potential for collaboration and innovation among players, which is where the highest-value productivity gains are likely to be made. These inhibitors to in-depth collaboration are old news: Industry leaders developed alternative methodologies like design-build and integrated project delivery to mitigate these dynamics more than a dozen years ago. Nonetheless, the disjointed nature of the industry stubbornly persists.
One way to break through these ossified models would be for teams to focus less on project-based alliances along the value chain, as IPD does. Instead, teams should focus more on claiming ownership of even broader segments of the value chain, stretching downstream toward manufacturing and construction, upstream toward property development and asset management, or both. This shift may be unnerving for architects and engineers because it inherently suggests new, unproven business models and partnerships. However, architects must adapt, voluntarily or not, to maintain if not grow their market share due to escalating demands from increasingly sophisticated owners and municipalities on variables such as energy performance and cost.
Example Design Package from Cover on Vimeo.
As McKinsey’s report states, “Disruption could fundamentally change what it means to be an engineer or an architect in the construction industry. … The coming years will see these stand-alone professional-services firms closely collaborating with productized and branded developers, off-site construction firms, and highly specialized contractors as an integrated R&D-like function.”
Specific sectors of the industry are already well on their way. Hospitality behemoth Marriott International has committed to using modular construction methods to deliver 25% of its development pipeline by 2025. Notwithstanding the impacts of COVID-19, Marriott is assembling its AC Nomad project in New York with fully fit-out, furnished modules. Marriott expects to realize delivery cost savings upwards of 30% due to this and other strategies. While the details of its long-term deployment strategy are not public, I’d be surprised if Marriott does not roll completed design work into subsequent deployments.
Product-Based Approaches
One significant barrier to productivity growth in the AEC sector is also a fundamental feature of how the industry works: project-based development. For an analogy, consider how people purchased personal computers in the 1980s and early ’90s. At that time, the barrier to entry for technicians and retailers was extraordinarily low. Consumers researched local retailers who sold or built computers and then gave them their performance requirements. The retailers then sourced parts and assembled a product to meet the specifications. As the market matured and successfully productized offerings, these mostly one-off retailers and technicians fell by the wayside. Compared to today’s personal computer marketplace, the ’80s and ’90s seem like the Wild West.
Product-based approaches carry the opportunity to synthesize needs and leverage assets—physical, intellectual, or otherwise—across the development value chain. Beyond this, they offer architects an invaluable resource long sought in project-based practices: performance feedback on built environments that can be leveraged to improve future outcomes. In product-based organizations, this isn't an additional service in need of an effective champion; it's obligatory. Assuming the risk of delivering a turnkey solution—irrespective of the product's scale—significantly tightens the feedback loop with end-users, customers, and stakeholders. In the best cases, a virtuous cycle of deployment, inspection, and adaptation, can lead to considerable company growth, driven by customer satisfaction that, in turn, can propel further growth and scale. For buildings, the impact that such scale can have on issues of sustainability, health outcomes, affordability, among many others, is potentially enormous.
While not every building typology is suitable for productization, many segments of the industry are ripe for this approach. Single and multifamily housing, hospitality, healthcare, and transportation infrastructure are among the sectors best poised for transformation. Some demand for bespoke buildings, regardless of whether their typology is well-suited to a product-based approach, will always exist. However, as with personal computers, product-based approaches to buildings guided by skilled designers offer the opportunity to broaden access to high-quality, high-performing, and cost-effective built environments to addressable markets of unprecedented breadth.
The shift that I describe is incredibly challenging. Despite that difficulty, the opportunity to effect change at scale is both too great and too consequential for architects not to situate themselves squarely in pioneering new avenues and bring value to the built environment. As a way forward, here are a couple of paths architects can consider: Design pathways to transform market sector and process expertise into digital platforms and tools; and seek opportunities to break out of the prescribed architecture and engineering swim lanes. Again, none of this is easy. Nonetheless, this transformation is both possible and necessary.
This story has been updated since first publication.
The views and conclusions from this author are not necessarily those of ARCHITECT magazine or of The American Institute of Architects.
