By Alan Littman
With projects becoming more complex and larger in scale, many architecture, engineering, and construction (AEC) firms are realizing that adopting technology for greater productivity and profitability is no longer optional.
According to the McKinsey Global Institute, “… the world will need to spend $57 trillion on infrastructure by 2030 to keep up with global GDP growth. This is a massive incentive for players in the construction industry to identify solutions to transform productivity and project delivery through new technologies and improved practices.”
It’s a whole new world, and the competitive landscape in the AEC space is challenging. The age-old practice of building a firm on the foundation of rock-solid relationships is changing. Firms are leaning heavily on technology to improve efficiencies to do more with fewer “arms and legs,” and to successfully navigate the talent shortage and achieve competitive advantage.
They may hear a recommendation from a colleague or attend an industry event and see different software and technology options. Not surprisingly, the topic of the cloud is trending. But while cloud solutions are rising in popularity, despite its growth, cloud computing remains well, somewhat nebulous, since AEC folks are experienced in AEC and not necessarily IT.
What exactly are the implications of a cloud solution versus an on-premise solution and how do you decide which is right for your firm?
When evaluating whether a cloud deployment is right for your firm, here are three things to consider:
- What are all of the associated costs?
- How will the purchase impact your firm’s cash flow?
- Is the solution easy to upgrade and optimize?
On-premise software is generally licensed as a one-time perpetual license. Firms often choose to account for this large expense as a Capital Expenditure (CAPEX). In addition to the licensing fee, the purchaser pays an annual maintenance fee of 20 to 22 percent of the license fee for access to on-going development code fixes, new releases of the software, and integrations. On-premise solutions require additional investment in hardware and software to run the application inside the purchaser’s IT infrastructure ahead of any implementation and there is a cost to maintain, upgrade, and test the software. Most importantly, the internal costs of securing the data and the clients’ data can run as much as the initial software purchase, especially given all the bad actors looking to steal data and files.
Some firms mitigate the internal costs of hardware and hosting by contracting for those services outside of their IT department. This too, has additional purchaser costs for support, security, and hosting services. The implementation integrations and deployment take 6 months to a year or more. The costs for an on-premise solution require a significant outlay of cash upfront for licensing, implementation, maintenance, and IT infrastructure. Return on investment (ROI) is usually achieved within 5-7 years of the initial investment. Capturing the ROI on annual maintenance and costly upgrades after the annual investment can take well beyond 10 years.
A cloud-based solution often does not require a large upfront license payment. Instead, the customer pays an annual or monthly subscriber fee that is generally accounted for as an Operating Expenditure (OPEX). There are no maintenance fees. The hardware, additional software, networking, hosting, maintenance, and security costs are included in the subscription and are the solution vendor’s responsibility. There is generally a fee to configure the solution along with integration fees. Because the solution is often built on one code base, the base solution has already been “implemented.” The costs and activities to implement are commonly referred to as a “configuration.” The vendor commonly conducts the integration through web services or an Application Programming Interface (API). The implementation and integration generally last 3-6 months, and customers often achieve an ROI within the first year.
CASH FLOW IMPACT
In AEC firms, cash flow is often tightly managed because of the lower margin services they provide. Unpredictable costs are most often associated with on-premise software than cloud-based solutions. The unpredictability has to do with the upgrade costs of professional services associated with an on-premise solution. Often the upgrade requires significant work to migrate the custom code created during the initial implementation. The vendor outlines the cloud-based solution costs upfront in the contract, and include upgrades and new releases as part of the subscription.
Another facet of cash flow is whether you treat the expense as a CAPEX or an OPEX. As mentioned previously, on-premise solution purchases often are treated as a capital expense. Therefore, companies use cash or lines of credit to purchase the software, hardware, and fund the implementation. This is cash that they might normally use to support other growth activities, such as making acquisitions and purchasing new equipment, etc.
A cloud-based solution purchase is usually funded by operating funds. The subscription fees often scale up or down based upon the usage of the system. Given the seasonal nature of the AEC industry, cloud-based solutions often allow for firms to bring down the subscription cost during the winter and scale up during spring, summer, and fall.
CONFIGURATION VERSUS CUSTOMIZATION
Most on-premise solutions allow for full system customizations—a firm can have developers change the code in the solution to fit its needs. This can be costly and will certainly lengthen the timeline to go live, but can be helpful when specific functionality can’t be found in other solutions. The biggest risk is that those customizations must be migrated and often redeveloped in order to be compatible with latest release or upgrade to the solution. Some firms customize so much that when a new upgrade is released, it is cost prohibitive to upgrade. It is not unusual to find a customer that has been running an on-premise solution that is behind in new releases and upgrades.
Many cloud-based solutions often are coded with best practice capabilities. The solution has a layer in the platform for configurations that enable custom workflows and data capture for each of their customers. This way, the cloud-based solution always upgrades the core code layer in platform seamlessly without any need for customers to reconfigure the custom workflows and data points they have configured into their specific instance of the system. Vendors typically roll out new functionality 4-6 times per year in a cloud-based solution versus only 1-2 times per year for an on-premise solution.
One advantage of a cloud deployment model is it can help firms “leapfrog” the competition by rolling out new technology quickly and easily—even as new emerging technology comes into play. For example, they can move to integrate new data streams from sensors—to make processes more intelligent and support remote monitoring of structures and equipment.
The influence of advanced technologies in the AEC market is quickly reaching an inflection point. Their breadth and capabilities are overwhelming, with deployments creating a mandate to connect and share accurate, real-time data across a broader project ecosystem. For AEC firms, understanding these technologies is critical and equally important is finding a technology model that best meets the needs of each organization.
About the Author
Alan Littman is chief of marketing and sales at Agile Frameworks, a company that provides an industry solution that fully integrates corporate, field, and lab information management activities in one platform across multiple engineering and construction disciplines to maximize efficiency, growth and profitability. For more information, visit www.agileframeworks.com.
Modern Contractor Solutions, May 2019
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