The R-word has arrived. In his Brickonomics blog, my good friend Brian Green today talks, not for the first time, about “the recession in construction”, which he says “is looking increasingly desperate as the giant commercial sector appears to be heading for a nasty fall”.
Earlier this year, like many industry people, I was hopeful that the economic downturn would mainly affect the housing sector – I did, for example, point out the potential impact on businesses like Autodesk’s Buzzsaw considering a focus on the UK housing sector (see 4 June post Autodesk UK house-building research). However, as Brian suggests, the malaise seems much more wide-ranging, and I think it could well extend into the businesses providing IT services to the construction industry.
There are already signs this is happening. For instance, today (reports WorldCAD Access), Autodesk released preliminary Q3 figures with CFO Carl Bass saying: “The sharp downturn of the global economy is substantially impacting our business. Demand for our products fell dramatically in October in all geographies as the financial crisis worsened.” Customers are having difficulties in getting credit, projects are being delayed, and the strong US dollar isn’t helping. Q3 revenues are forecast to be down on the previous quarter, with “cost cutting to begin immediately” (see also news release).
Of course, Autodesk doesn’t only operate in the architecture, engineering and construction (AEC) sector, but a large proportion of its revenues come from that space. Also, the majority of its revenues are for conventionally-delivered software, often with significant upfront license fees, not Software-as-a-Service (SaaS) where costs can typically be spread over the period of software use (as well as Buzzsaw, Autodesk also owns SaaS construction player Constructware).
Nonetheless, if a global industry player is seeing signs of a recession impact, it is likely that others will do the same. The rosy forecasts for SaaS growth earlier this year (eg: SaaS market “to undergo very rapid revenue growth” (Ovum in May); McKinsey talks up SaaS again (April); SaaS on the rise in Europe (IDC in April)) were written before the recent global banking crisis, and while I believe that construction-oriented SaaS is likely to prove more resilient than conventional IT in a downturn (see Web-hosted software on the rise), vendors in this space will not be immune.
For a start, as Brian Green points out, it is no longer just the housebuilders that are feeling the pinch, UK commercial developers are also suffering, and a similar recession to that of the early 1990s could see £10 billion worth of work disappear, particularly in private offices and retail, and this could have a profound knock-on effect on contractors and project managers – all key markets for the leading UK collaboration vendors.
Enlightened organisations like Constructing Excellence have been warning against a knee-jerk return to lowest cost procurement. If adopted, such approaches will, I’m sure, also extend to the procurement of web-based collaboration tools. Customers will be even keener to get the time, cost and efficiency savings arising from using the tools but will not be prepared to pay the previous market rates, and may even skimp on vital consultancy or training support resulting in less effective (and ultimately more costly) deployments.
A word of warning, though, to those contractors looking to boost their low tender price by whacking in lots of sometimes spurious claims: the secure audit trails built into most of the leading solutions provide a detailed record of who did what and when, potentially heading off expensive (profitable) litigation.
Due diligence will also assume greater importance. Similar to the gloomy months after the dot.com bubble burst, potential customers will want to be sure that their chosen service provider is going to be around for the duration of their project(s) and will need to look much more closely at the financial resilience of the vendor. The leading UK vendors – eg: [my employer] BIW Technologies and 4Projects – are today profitable businesses, generating significant revenues from a broad range of customers (including non-UK clients), and have good forward order books; they also have solid managerial experience gained from weathering the 2000-2002 era of dot.com doubt. Some of the other vendors, though, may be reliant upon smaller, perhaps less internationally diverse portfolios, and could have less headroom in their accounts to withstand either a prolonged downturn or significant downward pressure on fees.
I expect the impressive growth rates (eg: Business Collaborator grows 20% in 2007; Asite finally returns to growth (26%); 4Projects turnover up a third; BIW grows 24% in 2007) achieved by some of the leading construction collaboration technology providers up to 2008 will slow significantly. If the broader industry projections about this possibly being a two-year UK dip are correct, then these vendors may have to extend their efforts to more buoyant overseas markets (BIW is winning work in Dubai; 4Projects is opening offices to serve the north American oil and gas market; Australian provider Aconex has a very widespread international network of offices) or on winning work in sectors of the UK construction economy – the London 2012 Olympics programme, CrossRail, public sector investment in schools, hospitals and social housing, etc – that are more immune from the recession.