Chair’s Letter: Service or Product?

Blog Author: Richard Saxon, CBE

The Office for National Statistics lists the construction industry as part of the service sector. This makes some sense in that we provide bespoke facilities to customers rather like a restaurant provides meals. However, our output is not a transient meal but delivers a very concrete asset which needs looking after for its whole life, a service we do not provide except reactively. We treat our output like a product, leaving the buyer to look after it. Owners are not often expert at this, generating waste and depreciation. Our landlord and tenant legislation dumps repair and maintenance responsibility on unskilled tenants, charging them to restore the property to its original state on departure or pay ‘dilapidations’.

One school of thought in considering the future of the industry is that it should be more of a manufacturing one, producing ‘products’. This supposes that one of our problems is the sheer flexibility of design and sitework to produce bespoke results. Standard products, potentially customised, would be far more cost-effective to make, goes the argument, faster, cheaper and of higher technical quality from offsite factories.

What the debate between champions of product and of service models misses is that industrial products are now hybrids of product and support service or have become entirely services to rent. ‘Servitisation’ is the term used. Transport products have led the way, with jet engines leased as power-by-the-hour, train sets paid for by performance contracts and cars leased on a monthly basis. The pressure for buildings to be provided as services is emerging from both demand and supply sides.

On the demand side, office tenants are attracted to co-working spaces where they have neither facility management responsibilities nor a long commitment. Tenants of Build-to-Rent apartments can get hotel-like service with all appliances thrown in. Government is now seeking delivery of ‘outcomes’, with the provider rewarded for performance in use against the business case. Value-based procurement will move us away from the idea of a conventional capital contract.

On the supply side, some providers of specialist technologies are offering ‘power-by-the-hour’ models. Philips provides light, not lighting, with customers renting the installation for charges which include the capital cost but also all operation, maintenance and replacements. The economy of LED lights makes the charges reasonable and the supplier recaptures materials on a circular economy basis. Siemens offers to do the same with Building Automation Systems. They will configure, install and manage a system with the economy it delivers making the cost attractive. Solar power systems are offered the same way. In each case, the suppliers are overcoming customer reluctance or shortage of capital by providing the funds and the kit, recovering it from the savings these innovations deliver. Some interiors and furniture suppliers lease their products too, reclaiming materials for reuse. One virtue from the suppliers’ point of view is that they now gain an income stream and share in value added, instead of competing for capital sales where margins are pressured.

Buildings are not really single artefacts but systems of systems. Apart from the long-lived structure and envelope (sometimes), the engineering services and fitout are relatively short life and incur high operation and maintenance costs. Servitising these elements, especially as they are part of the connected Internet of Things and become software-controlled, allows suppliers to monitor, maintain and upgrade them easily whilst demonstrating performance to the customer.

The convergence of demand and supply cannot be far off. An ‘integrator’ could put together a servitised offer for occupiers, assembling all the technology systems and linking them up to deliver the required outcomes. The integrator would need less capital to do this, paying only for the parts still bought outright. The occupier would get a managed space with optimised performance and lower whole life cost. Suppliers would have a stake in the success of the occupier enterprise, receiving performance-related income. They would thus be incentivised to understand better how they create value, feeding a cycle of continuous improvement and the circular economy cycle of recaptured elements.

In 1992 the government created the concept of the Private Finance Initiative (PFI) to get public buildings paid for by private finance and with the asset leased to the public sector for 25 or more years, complete with maintenance. This novel approach took public buildings off the hard-pressed Treasury balance sheet and supposedly harnessed the talents of the private sector to innovate to reduce whole-life costs. In practice the PFI became discredited as arrangements were cumbersome and commercially naïve with design undervalued. Private finance was comparatively costly, and maintenance had never been fully funded or understood by the public sector, leading to shock at the level of revenue cost required. The idea of servitised buildings could be a new approach to the same challenge but in the digital age. Capital is now far cheaper and operation and maintenance more sophisticated. We still have to develop a whole-life culture but that must come if we are to achieve a zero-carbon built environment. ‘Construction as a Service’ is a promising scenario.