Next-step in Construction Technology Platforms : McKinsey’s report

While the construction technology industry is still packed with players offering point solutions or inadequate suites, McKinsey’s latest annual effort to map and surmise the construction technology landscape shows that the industry is moving toward platforms and foretells that a combination of multiple platforms will coexist in the arena. As the global COVID-19 pandemic forces various construction companies to digitize and use technology to make sure the safety of their workers and boost productivity, this dynamic will likely only proceed to accelerate. There are significant opportunities to generate value for both strategic and financial investors that are assessing consolidation plays.

The ongoing pandemic has also had an impact on the construction technology industry. As thousands of health experts heroically battle the COVID-19 virus, construction industry leaders are also charting a path toward making sure their employees, contractors, and end-users safe. Indeed, the volume of short- and long-term pandemic-driven construction industry issues will be solved with technology.

Top construction businesses were already investing heavily in technology prepandemic. By requirement, contractors, architects, engineers, and suppliers have quickly moved to working and collaborating digitally—from video-call site meetings to charging digital orders. While there has already been a rapid development in collaboration technology uptake, the pandemic has also triggered a sharp shakeout. Many contractors see shrinking backlogs and more aggressive bidding environments, which have analogously affected the construction tech industry. Construction technology players have been forced to lay off workers and cut costs to manage cash flow. Continued dilemma on recovery timelines and the risk of virus resurgence could drive an additional wave of insolvencies among smaller players, further stimulating the trend toward industry consolidation.

Taking the good with the bad, McKinsey expects that the continuing COVID-19 pandemic will drive a net speedup in the use of technology, and the construction industry will advance its transformation from a highly complex, fragmented, and project-based enterprise to a more standardized, consolidated, and combined one.

These investment trends, linked with end users’ frustration with integrating the proverbial sea of point solutions, have inspired a clear shift toward the development and launch of integrated platforms rather than point solutions. McKinsey defines platforms as technologies that facilitate visibility into the management of business or operations processes through native abilities and seamless integration with other technologies to aggregate data and process control in a single place. Presently, 20 percent of companies offer solution suites directing more than five use cases, compared with just 13 percent in 2017.

Platforms are attractive because of their capacity to increase customer stickiness compared with point solutions. The more points and interfaces with other tools offered, the greater the likelihood the platform will become critical to day-to-day operations for customers’ companies, increasing switching costs and increasing profitability through reduced churn and increased pricing leverage. From an industry point of view, the growth in platforms implies that large businesses will need to continue to scale to remain competitive, while smaller groups offering point solutions will need to simultaneously analyze their integration with the broader ecosystem in addition to the main value proposition of their technology. Failure to account for these trends could adversely affect revenue enhancement and, more broadly, competitive positioning in the sector.

There is compelling economic logic for platforms, and McKinsey sees many other industries moving in this direction. This does not, however, signal the end of point solutions. Even among platform competitors, there remains place for multiple winners in the broader construction technology market. Most of the present platforms have grown from a core foothold in a given customer segment such as general contractors and architects or a project phase such as construction execution or design and engineering. As winners emerge in each of these focus areas, other competitors looking for growth will either need to cross segments and compete against a different incumbent platform on that incumbent’s “home turf” or create the capability to integrate across multiple platforms easily. Given that the most successful incumbent platforms are owned by some of the industry’s largest and most well-capitalized technology firms, we believe the most likely outcome will be the continued growth of multiple, interconnected platforms in the future.