The Impact of IT on Processes Return on Investment in RE/AEC November 16, 2001

1. RECI_2001 Harvard Design School The Impact of IT on ProcessesReturn on Investment in RE/AECNovember 16, 2001 John D. Macomber Harvard Design School BuildingVision.net George B. H. Macomber Company

2. John Macomber Background • Construction CEO • George B. H. Macomber Co., $250 mm GC • Cisco, MIT Media Lab, Children’s Hospital • Real Estate Partner • 2,000,000 SF • Academic Thought Leader • Harvard: E-Commerce and the Internet in Real Estate and Construction • MIT: Strategic Management in the Design and Construction Value System • Dot.com Entrepreneur • Collaborative Structures, Inc. (sold to e-Builder) • Consultant, Director, and Angel Investor • BuildingVision - Pursuing industry transformation ROI - Macomber - Harvard RECI

3. Objectives Today • Identify a problem with respect to Information Technology in Real Estate, Architecture, and Construction • Propose a way to break the problem down into smaller pieces • Share research and Return on Investment (ROI) models from other industries • Stimulate your thinking ROI - Macomber - Harvard RECI

4. The Productivity Paradox “We see computers everywhere except in the productivity figures.” - Robert Solow, MIT, 1987 (subsequently awarded Nobel Prize in economics) ROI - Macomber - Harvard RECI

5. My assistant and me in 1991 My assistant and me in 2001 Personal Effectiveness Example ROI - Macomber - Harvard RECI

6. RECI Topics Business Models for Owners Building as Computer e-Learning and Knowledge Management 3D Object Oriented Models Other construction efforts and research centers CIFE CII Lean CIRT RECI: Four Themes About AEC / RE in particular • Large • Fragmented • Project based; one of a kind output • Many entities per project • Few economies of scale • Few barriers to entry • Hi risk, low margin • Lack of standards • Hostile to technology ROI and TEI in other industries • Giga, IBM, Accenture, PriceWaterhouseCoopers So what’s the problem? ROI - Macomber - Harvard RECI

7. Where’s the Overlap? Solutions Seeking Markets “Computers are cool” “We could do _______” “Get rich quick” (vendors, entrepreneurs, academics) Business Issues Time Cost Quality Competition (new and established principals at risk) Query: Can anything of value emerge out of this intersection where we can describe a process to change and an ROI to measure? ROI - Macomber - Harvard RECI

8. Analytical Framework # 1:The Construction Value System Permanent Finance End User Consultant Owner/ Operator Engineer Designer Sponsor Labor CASH FLOW Material Constructor Project Finance Labor Subcontractor PRODUCT Material Land and Permissions Distributor Building Product Manufacturer ROI - Macomber - Harvard RECI

9. Who gets paid to think about the whole system? • Many rational types are upset that the whole system is not optimized from the point of view of information flow. ROI - Macomber - Harvard RECI

10. Minor impact Long Payback ROI Example: Life Cycle Info Management ROI - Macomber - Harvard RECI

11. Analytical Framework # 2: Why Bother? Or, Who Retains the Value from Innovation? Basis of Payment: Capture the Value e.g. ChipFab Form of Contract: Opportunity for higher margins Objective: Coordinate and optimize system User trend??? e.g. School Objective: Control; look out for single firm ROI - Macomber - Harvard RECI

12. Large volume Homebuilder Power Pharmcos Manufacturing Office Developer Bridge Small volume Homebuilder Museum Where is the Leverage? Follow the money. What kinds of projects and owners will realize the most leverage from investment (by someone) in information sharing? • Rigorous market segmentation would also analyze by: • Political sensitivity • Affinity for (or hostility toward) technology • Size of market • Complexity of deals • Interest in life cycle cost data High Volume of Projects in Transition ($ size x quantity) (proxy for impact in size or repeatability) Low Low Owner/Operator Sensitivity to “Time to Revenue” (proxy for likelihood to accelerate) High ROI - Macomber - Harvard RECI

13. The Opportunity Depends… • On who you are • O/O, Prop Mgr, GC, AE, Sub, Distrib, BPM, Investor, SW or IS provider, Fin Services firm (Bank, Equity Fund, Insurance Co.) • On what you are trying to do • Strategic: Restructure the industry • Tactical: Reposition the firm for sust comp advt • Operational: Grow revenue or decrease cost • On what’s hot in the project portfolio • Time to revenue • Repetition of processes • Reduction of Cost • On what you are talking about PSWS, CAD, Accounting, Scheduling, more ROI - Macomber - Harvard RECI

14. Hard to Measure General Purpose Technology “Information technology is best described not as a traditional capital investment, but as a ’general purpose technology.’…Such technologies are economically beneficial mostly because they facilitate complementary innovations.” Complementary Innovations “Earlier general purpose technologies, such as the telegraph, the steam engine, and the electric motor, illustrate a pattern of complementary innovations that eventually lead to dramatic productivity improvements….For example, the telegraph facilitated the formation of geographically dispersed enterprises; while the electric motor provide industrial engineers more flexibility in the placement of machinery in factories, dramatically improving manufacturing productivity by enabling workflow redesign.” Erik Brynjolfsson (MIT)and Lorin M. Hitt (Wharton). ROI - Macomber - Harvard RECI

15. Popular Press = Research Results “While our production function analysis does not establish causality between IT investments and output, our results seem to indicate a a substantial positive contribution of IT toward output in this product area….On the one hand, the popular press is replete with stories of successful strategic use of IT. On the other hand, the research results do not seem to bear out the positive contribution of IT. Our results seem to be consistent with a growing recognition that the prior work in this area did not contend with the difficult measurement problem involved in this area.” - Tridas Mukhopadhyay et. al., Carnegie Mellon “Companies using IT to change the way they conduct business often say that their investment in IT complements changes in other aspects of the organization…To be successful, firms typically need to adopt computers as part of a “system” or “cluster” of mutually reinforcing organizational changes. Changing incrementally, either by making computer investments without organizational change, or only partially implementing some organizational change, can create significant productivity losses as benefits of computerization are more than outweighed by negative interactions with existing organizational practices.” - Brynjolfsson & Hitt ROI - Macomber - Harvard RECI

16. Immeasurability is an illusion caused by three misunderstandings: The object of measurement is not understood. The concept or meaning of measurement is not understood. The methods of measurement are not understood. Douglas Hubbard, CIO Magazine, 1997 Measurement is possible. If something is better, then it is different in some relevant way. If it is different in some relevant way, then it is observable. If it is observable, then it is countable. If it is countable, then it is measurable. If it is measureable, you can value each unit, and therefore value the benefits. Chip Gliedman, Giga, 2001 Everything is Measurable Source: Giga Information Group ROI - Macomber - Harvard RECI

17. Total Economic ImpactTM (TEI) Costs R ISK Total Economic Impact (TEI) Benefits Flexibility Source: Giga Information Group ROI - Macomber - Harvard RECI

18. Step 1 - Define the Scenario Implement new idea vs business as usual Compare vendors, sourcing, technologies Offer new solution Step 2 - Define the Timeframes Over what time do the business benefits accrue? Giga recommends three year max for ebusiness initiatives; too much uncertainty Applying TEI - 1 Step 3 - Define the Benefits (a) • Without an analysis of the benefits, it’s impossible to know the requirements. • Without an analysis of the benefits, the wrong technologies may be explored and quantified. • Once the scale of benefits is known, a cap is placed on the potential IT spending. Step 3 - Define the Benefits (b) • User productivity • Effectiveness toward revenue growth • Organizational efficiency • Customer satisfaction (intangible…measure changes in behavior; tangible). Source: Giga Information Group ROI - Macomber - Harvard RECI

19. Applying TEI - 2 Step 4 - Define the Costs • Hardware and capital equipment • Software purchase and configuration • Maintenance of current environment • Financial impacts (leases, depreciation) • Learning curve • Planning costs • Application Migration costs • Consulting and mentoring costs Step 5- Quantify the Flexibility • Additional platform capabilities • Easier expansion • Easier implementation of multiple interfaces • Easier to integrate • Vendor flexibility Step 6- Evaluate and Quantify Risk • Vendor • Product • Architecture • Culture • Delay • Size Step 7- Communicate the Results • ROI - Return on Investment • NPV - Net Present Value • DCF - Discounted Cash Flow • IRR - Internal Rate of Return Source: Giga Information Group ROI - Macomber - Harvard RECI

20. TEI example: IT Investment in Const Mgr/Des Builder Potential TEI 50%? Costs • Hardware, software • Populate database, build rules • Train & Hire Benefits • Grow revenue • Reduce cost • Earn higher fees Flexibility • Can pursue many types of work • Can play many roles Risks • Data or rules incorrect • Customers might not care • Might not be able to keep value created ROI - Macomber - Harvard RECI

21. IT and Economies of Scale • More power to the big firms? • New economies of scale • 3D object libraries • Procurement tech • Knowledge Mgmt • Or more power to small entrepreneurs? • Power of individual • Common resource base • Entrepreneurial support • - Both. ROI - Macomber - Harvard RECI

22. It’s about People, not Technology!

23. Bibliography www.buildingvision.net jdmacomber@buildingvision.net web.mit.edu/1.46/www www.gigaweb.com www.ibm.com/e-business/overview/ Eric Brynjolfsson - MIT Tridas Mukhopadhyay - Carnegie Mellon ROI - Macomber - Harvard RECI

24. RECI_2001 Harvard Design School The Impact of IT on ProcessesReturn on Investment in RE/AEC John D. Macomber Harvard Design School BuildingVision.net George B. H. Macomber Company