Despite widespread adoption of SaaS-based construction collaboration platforms and wider acceptance of SaaS, no company has achieved real dominance across any major regional, national or vertical AEC market. Why? [Warning: this is a longer-than-usual post!]
By revenues and (notwithstanding recent restructuring) by manpower, Aconex is the biggest player in the Software-as-a-Service (SaaS) based construction collaboration market, but its prominence has been achieved on relatively modest revenues and, in recent, years, continued losses. The Melbourne, Australia-based company was one of several that launched during the dot.com boom of the late 1990s and early 2000s, all hoping to ride an architecture, engineering and construction (AEC) e-business wave generated by faster internet speeds, increased use of IT, and growing enthusiasm for collaborative working. Of course, the dot.com bubble soon burst, puncturing plans for rapid growth and stock market flotations; vendors instead had to settle into longer campaigns to achieve market dominance (which, in my view, is different to ‘leadership’ which is prone to all sorts of definitions depending upon how a vendor justifies its leadership claims – see September 201o post: Does “industry leadership” matter?).
Yet, despite apparent consensus on the value of SaaS-based construction collaboration platforms and wider acceptance of SaaS, no company has achieved real dominance across any major regional, national or vertical AEC market. Why?
I have been asked this several times, and there is no quick or simple answer. There are numerous often inter-related or overlapping factors that are beyond the control of individual vendors (a complex market structure, global recession, etc) and then vendors may mistime or miscalculate their strategies.
- Fragmented customer base – Choices about collaboration systems are made at both project and enterprise levels, by consultants, by main/general contractors, and by the ultimate owners of assets (or sometimes by multi-company groups comprising two or more of these). Few of these firms dominate their markets, so there is fierce competition at every level in the supply chain; it is therefore difficult (impossible?) for a vendor to agree strategic deals with most of the leading companies that will give it, in turn, a dominant market position in one country or region. Equally, many consultants, contractors and clients/owner-operators are in competition with similar firms, and may consciously select a rival platform to maintain a perceived differentiation.
- Continuous ‘pilot projects’ – Particularly in the early days of collaboration, systems were often selected on a trial or pilot basis, with no guarantee that a system would be deployed on subsequent projects. Indeed, often rival systems would then be tested for comparison purposes (notwithstanding the difficulties of comparing performance across even apparently similar projects), drawing out the final selection of a preferred system still further.
- ‘Project churn’ – As AEC supply chains are reconstituted for subsequent projects, competitive marketing and sales processes – already often protracted and time-consuming – often had to be repeated. This limits the vendor’s ability to market the system to new customers and their supply chains.
- ‘People churn’ – Similarly, with many construction people employed only for the duration of a project, personal preferences count for nothing if they are no longer in post when it comes to their employer company selecting a system for its next project.
- Product sale complexity – Simple self-service approaches to buying online collaboration have not worked (at least not yet – Woobius and some other low-cost platforms have tried; post). Particularly at the higher-end, collaboration platforms are still sold like consultancy services, with their precise configuration and delivery capable of almost infinite variation, and with considerable scope for negotiation over what is provided and at what price. Without more “commoditisation”, buyers find it difficult to make consistent comparisons between the different offerings.
- ‘Low hanging fruit’ – Vendors’ sales people will often chase one-off project opportunities (I recall colleagues sifting through published contract leads to identify potential customers) where the cost of a collaboration system will be regarded by the customer/team as an overhead of project delivery. This reactive, project-centric approach to sales is different to the more strategic approach needed to secure corporate deals, which will also be more complex and time-consuming to negotiate. For example, I understand Aconex secured some major project deals in Australia with global mining firms like Rio Tinto, but did not then convert these into longer-term enterprise deals.
- ‘Lock-in’ – If and when a vendor does successfully negotiate a longer-term relationship with a customer so that its system is used on multiple projects, the customer may, when the deal comes up for renewal, be reluctant to move to a rival platform. In-house users and supply chain partners would need to be retrained; data might need to be exported from the previous system and imported into the new platform. As a result, the potential risks of switching supplier may outweigh the benefits, creating a technology ‘lock-in’ that looks like customer loyalty, but isn’t.
- Strong service relationships – Of course, vendors can also build a strong bond with a customer by being responsive to their technology needs, ensuring high levels of customer service, and offering financially attractive long-term commercial deals. This can mean a steady and predictable revenue stream for the vendor as they nurture their loyal “cash cows” while consistently replace ‘churned’ projects; here, genuine customer loyalty may mean experienced collaboration users do not switch to any emerging market leaders.
- Low SaaS commitment – It is easy to forget that provision of SaaS collaboration to the architecture, engineering and construction industry was not solely the preserve of new start-ups; firms such as design software giants Autodesk and Bentley also created online collaboration products, while Microsoft’s SharePoint has also been deployed as a collaboration solution. Historically, these firms already enjoyed significant penetration into the AEC sector, but they lacked expertise in and commitment to SaaS approaches to software sales, licensing, hosting and support. As a result, their solutions (eg: Buzzsaw, Projectwise), while initially popular among design users, failed to achieve the same degree of dominance as their on-premise CAD products.
- Fear of the M&A ‘downside’ – In other markets, leaders can emerge as they buy up competitors and take over their loyal customers. This has not happened in the AEC collaboration market. For a start, if a vendor bought a direct competitor, it would need to support two applications and two hosting infrastructures and then progressively move customers to a single solution. This runs the risk of antagonising users of the discontinued solution(s), while slowing development of its incumbent solution(s). And, for some of the reasons above, there is often little solution loyalty to limit ‘churn’ and make such M&A activity viable.
- Limited M&A appetite – Even if these issues could be satisfactorily addressed, there has been little appetite for merger and acquisition activity among the leading players (ignoring the mergers of then financially distressed businesses such as BuildOnline and Citadon). Most acquisitions have been by suppliers of other types of software (eg: ERP in the recent case of 4Projects) looking to grow some SaaS capability, with the exception of Conject’s acquisition of BIW in December 2010 (where there was at least a good regional ‘fit’). Given the substantial war-chest of up to Au$50m created by Francisco Partners’ investment in Aconex in September 2008 (post), it is perhaps surprising that the company has only made one small acquisition (of Grazer last year; post) and not looked to consolidate the market by acquiring a competitor or two.
- Global financial crisis – The past five years or so saw many AEC projects discontinued or delayed, consultants, contractors and clients going bust, with some regions or countries particularly badly hit. This had a knock-on impact on all project-based businesses, including collaboration vendors who, in some extreme cases, found loyal enterprise customers going into liquidation (eg: BIW suffered from the effective withdrawal of Nakheel from the Dubai market, and the demise of two long-term deals with major UK banks; Aconex was also hit by the Dubai downturn). The credit crunch has also increased competition on price, cutting margins and so limiting the ability of vendors to invest in marketing and sales.
- International structural differences – While many of the collaboration platforms offer generic functionality, there can be significant differences between industry structures, processes and terminologies. As a result, for example, US-developed systems were rarely effectively deployed in markets adopting more complex, UK-style approaches to construction project planning, design and delivery. UK-developed systems could be successfully deployed in the US, but buyers can be sceptical of non-US platforms – and the location of hosting facilities can be critical (EU businesses can be wary, for example of hosting their data in the US).
- Transient marketing – Provision of local sales and support can help but it is expensive and time-consuming to create a self-sustaining operation in a new country; and partner networks have, so far, had limited success (Aconex, Asite and 4Projects all have active partnership programmes – post). Aconex grew its global footprint very rapidly during the 2000s, but rarely deployed more than a handful of people in each country. Arguably, it could have achieved deeper market penetration by focusing on some key growth markets (China, Japan, India, etc), establishing local hosting and indigenous employees, rather than chasing distributed opportunities. It has invested heavily in recruiting US personnel to grow its north American business but the benefits have been slow to appear.
- Micro-management – Growing a SaaS business to become a major player in a country market is an achievement, of course, but then taking that business the next step so that it dominates a region or global market is a very different challenge, and one which company founders, used to hands-on micro-management, may find a step too far. It is also easy for small issues to distract such leaders (could the Hitler t-shirt debacle have been nipped in the bud by the Aconex chairman’s early resignation, for example?), though Aconex has been appointing some experienced US executives, so this may yet change.
- No ‘killer’ functionality – Across the main vendor platforms, fundamental file-sharing capabilities have become increasingly similar and there is often little difference between the user interface/experience. Vendors have therefore been trying to anticipate what other functionality or services will be valued by their customers and/or end-users. For example, BIW invested in developing its project cost control functionality, while R&D at 4Projects and Asite has been focused on building information modelling (BIM) capabilities, and, if/when data begins to flow more seamlessly between project participants, we could yet see demand for greater integration between collaboration and other systems such as ERP and HR, with facilities management also a potential growth market. Contract change control (eg: NEC3 management) has been a keen UK battleground, and mobile tools are also increasingly important. However, the ‘Killer app’ has yet to emerge that will encourage migration to the relevant market leader.
Have I missed any key factors out? What else has slowed this market and the emergence of a genuinely dominant market leader?