Getting what you pay for

Paul Cossell, ISG Chief Executive Officer

I recently spoke at the Financial Times’ Future of Construction Summit, looking at how our industry can better embrace collaboration and counter the competitive mentality that many believe perpetuates the cyclical boom and bust nature of the sector. The debate was encouraging. My fellow panellists and I are all passionate exponents of collaborative models and the benefits they bring, the nods of approval from the audience suggested a consensus of agreement on many of the points we discussed – so why am I still left feeling uncertain that the message is really hitting home?

Well for one thing, it could be the very composition of the attentive audience. We were in London, one of the most diverse cities on the planet, but the broadly homogenous nature of the attendees certainly raises a flag. Without genuine diversity in our workforces, how can we ever expect to bring the new ideas and radical thinking that we so desperately need to transform our industry? Another reason was the sense that we’ve all been here before, and yet things are moving at a glacial pace – even factoring in climate change! We know the answers to the problems we face and can clearly articulate what must change – but then nothing materially happens to deliver that transformation – see Lathan and Egan for reference. 

Reflecting after the event, I’m more convinced than ever that to breakout of this perpetual cycle, we need to radically rethink our whole approach to the built environment. Short term decision-making is the blight of our sector’s commercial sustainability, but also the enemy of innovation, value and societal benefit. The biggest manifestation of this short termism is price. When the primary driver for a project is cost – we’ve already taken a retrograde step. If we remove the fixation on up-front capital cost and place this within the context of operational lifecycle, we can have a more purposeful and informed conversation with customers. 

At a logical level - we know that it makes no sense to install a component within a building that doesn’t have longevity or has significantly lower efficiency levels than a high-performance unit at a marginal price premium. Yet, if capital cost (CapEx) is the driver, the winner is always lower specification and a less desirable outcome in so many ways. The oft-cited statistic, showing the operating costs (OpEx) of a healthcare facility roughly equate to the capital construction cost every 2.5 years, shows the scale of this issue in extreme situations. There is general agreement, however, that servicing and maintaining a building throughout its operational life accounts for significant multiples of the initial capital cost. 

So why do we focus so much energy on CapEx, and give less scrutiny to the larger OpEx considerations – which have such a profound impact on cost, both commercially and to the environment?  The reality is that we consistently confuse cost and value, and our historic processes and hierarchies undermine logic-based decision making. 

When you think about it, it’s completely counterintuitive how the procurement model works within our industry. We deliver assets with an operational lifespan that dwarfs many of the products in the sectors we serve, yet the tendency is still to focus almost exclusively on the front-end cost. This mindset may work for fast fashion and commodity consumer items, but the strategic OpEx value case has never been more important in the context of lean operations, climate considerations and dynamic working practices.  

What does give me a sense of optimism is that we know how to get there – it’s through collaboration and better relationships – the recent national summit reaffirmed that view. The preconstruction period is so critical to successful outcomes. Involve the right people around the table at an early enough stage and you provide oxygen for smart ideas, and the time to explore different solutions and scenarios. It’s also an approach that I know definitively works and delivers significant efficiencies. It perhaps won’t surprise you to know that the industry I’m referring to is the global technology sector. Here, data, logic and creativity converge. It’s where the best idea always wins, not the most senior person in the room. 

Bold, supportive organisations recognise the benefits of collaboration, and care not for hierarchical processes. They simply want the optimum solution based on data and logic, and what’s important in this sector is where they are going, not simply what they need now. This longer term, strategic view affords a different perspective on the CapEx vs OpEx debate. When you’re building a 60MW hyperscale datacentre, the operational costs of this power-hungry facility can dwarf the initial construction costs, so it pays to make the right whole life decisions and focus on the bigger picture.   

Whether it’s a datacentre, a new hospital, an office or a school, an over-reliant focus on one singular element in the procurement process may prove more costly than you think. You tie the hands of your delivery teams, leave no space for innovation, extinguish the prospect of real value and leave a costly legacy. Collaboration is an obvious counterpoint to this scenario and is proven to deliver – the real question is whether there is the appetite to make a change and do things differently. That’s the start of a revolution I’ll be pleased to witness transforming our industry for the better.