UNIVERSITY OF TARTU VILJANDI CULTURE ACADEMY Design and Development of Virtual Environments Tarmo Tähepõld Marika Graudina ICT IMPLEMENTATION IN ESTONIAN CONSTRUCTION INDUSTRY AND INDUSTRY RELATED BUSINESS OPPORTUNITIES FOR ICT START-UPS Master’s Thesis Supervisor: Marge Sults Approval for defense: /digitally signed/ Viljandi 2014 Acknowledgements The authors would like to express their gratitude to people who have been supporting them throughout the research process. The authors would like to thank Marge Sults for supervising the writing process. Special thanks go to Ergo Pikas who helped a lot with identifying the right people for the study and who provided key feedback for the study process and introduced the specifics of the construction sector. Also, the gratitude is expressed to Margus Sarmet who agreed to share the preliminary findings of his study conducted on a similar topic. Finally, thankfulness is expressed to all of those who have taken their time to be interviews or surveyed during the data collection process for this study. Abstract This thesis studies the implementation of information and communications technologies (ICT) in Estonian construction sector. The use of ICT is rapidly growing in different areas of business, changing the ways things are done and is the core of most of the innovation. Although Estonia is one of the leading countries in several ICT areas and often praised for its innovative mindset and effective implementation of different solutions, the construction sector is lagging behind in the sense of ICT innovation. The aim of the current research is to identify the hindrance posed by the construction industry to ICT innovation based on the experience of BIM implementation in Estonia. For the purpose of data collection interviews with industry participants, a survey and a preliminary testing of a minimum viable product of an IT solution built based on the findings from interviews were conducted. During the analysis the hindrances that need to be avoided and the hindrances that can be minimized and thus turned into opportunities for ICT start-up companies planning to enter the construction market were derived. The results of the study show that there are six main hindrances that are caused by the fundamental structure of Estonian construction industry. The authors argue that by avoiding these six hindrances and minimizing the other hindrances identified, the IT start-ups can achieve a competitive advantage when entering the market. TABLE OF CONTENTS Table of Contents Acknowledgements........................................................................................................................................2   Abstract..............................................................................................................................................................3   TABLE  OF  CONTENTS..........................................................................................................................4   1   INTRODUCTION............................................................................................................................6   1.1   Introduction.......................................................................................................................................6   1.2   General  outline  of  the  study.......................................................................................................10   2   Literature  Review.....................................................................................................................11   2.1   Generic  description  of  the  construction  sector....................................................................11   2.1.1   Waste  in  construction................................................................................................................................12   2.1.2   Information  Flow  in  Construction  Process.......................................................................................14   2.1.3   Innovation  in  construction......................................................................................................................15   2.2   ICT........................................................................................................................................................16   2.3   Minimum  viable  product.............................................................................................................18   2.4   ICT  in  Construction  Industry......................................................................................................18   2.4.1   Available  ICT  Solutions  for  Construction  Industry.......................................................................21   2.4.2   BIM.....................................................................................................................................................................25   2.5   Barriers  to  ICT  innovation  in  construction  industry.........................................................27   2.6   The  gap  in  previous  literature  review  and  relevance  of  this  study..............................30   3   Methodology...............................................................................................................................32   3.1   Data  Sources.....................................................................................................................................32   3.2   Research  design..............................................................................................................................32   4   Data  collection  and  results....................................................................................................34   4.1   Interviews  with  Industry  Practitioners..................................................................................34   4.1.1   Interview  Results.........................................................................................................................................36   4.1.2   Discussion  and  analysis.............................................................................................................................40   4.1.3   Conclusions  and  overall  implications  from  industry  interviews............................................47   4.2   Survey  of  the  Estonian  construction  market........................................................................47   4.2.1   Survey  findings.............................................................................................................................................49   5   MVP  Testing................................................................................................................................52   5.1   Relevant  background  knowledge  to  understanding  the  solution.................................53   5.2   Concept  of  proposed  IT  solution...............................................................................................54   5.2.1   Lynxreports....................................................................................................................................................54   5.2.2   Customer  (individual)  problem  solved  by  Lynxreports.............................................................55   5.3   MVP....................................................................................................................................................................56   5.3.1   Content  and  features..................................................................................................................................56   5.4   Preliminary  feedback  from  MVP...............................................................................................57   6   Conclusion...................................................................................................................................59   7   References...................................................................................................................................60   8   Appendices..................................................................................................................................64   Appendix  1  Questions  for  the  interviews.............................................................................................64   Appendix  2  Screenshots  of  the  Lynxreports  software  MVP...........................................................65   Appendice  3....................................................................................................................................................................71 PDF  report  generated  automatically  by  Lynxreports  at  the  end  of  the  inspection.........................71   9   Summary  in  Estonian...............................................................................................................73   Non-­exclusive  licence  to  reproduce  thesis  and  make  thesis  public..................................74   We,  Marika  Graudina  and  Tarmo  Tähepõld..............................................................................74 1 INTRODUCTION 1.1 Introduction The relationship between country’s long-run growth and development has been well studied. With the support of growingly open economies, most industries and segments worldwide today are forced to admit that innovation is playing the vital role in effective competition and thus leading the economies to develop (this holds true country wise as well as business entity wise). As early as in mid-1950-s, a prominent 20th century American professor and economists Dr. Moses Abramovitz stated that in the most fundamental level there are only two ways to increase the output of the economy (production): 1) by increasing the volume of the input into the production; or 2) by coming up with new solutions to receive more output for the constant amount of input, ie by innovation. (Rosenberg, 2004) The latter becomes increasingly relevant when the country is facing scares labor force as a result of low birth rates and thus aging population. In case the economy (and thus the businesses within the economy) is not able to attract additional workforce from other counties, the input to the production in terms of labor force is decreasing instead of increasing, and thus leaves the economy only with the second option (to innovate). Therefore, investing into innovation and IT development is especially important for small countries with scarce labor force and with economize that are still catching up, Estonia being one of them. Additionally, the importance of investing in technology and supporting the innovation is ever growing with the roughly exponential improvement in technologies globally. In overall terms, one could say that Estonia has been very successful in recognizing these developments. The government’s strict policy today is to support and invest into ICT development. The main framework for government’s strategy for years 2014 – 2020 is defined in the latest version of Konkurentsivõime kava “Eesti 2020” (Competitiveness plan “Estonia 2020”), confirmed by Estonian Government on 8th of May 2014. In the article 9, the document states that “In order to increase the potential for creative industries, for ICT sector and for key technologies, it is necessary to contribute into sector wide integration and internationalization activities, but also in the area of financing. For achieving the additional value-added synergies between different fields, attention must be paid to human capital capabilities in its broadest sense. Successful cooperation requires the creation of the characteristics of people that are able to take into account the existence of a favorable environment. ICT and other key technologies serving as a foundation for other areas by supporting processes and initiating innovation have to be supported by taking the industry wide collaboration in adopting new solutions onto the whole new level”. Also, it recognizes the necessity to create measures for promoting co-operation between entrepreneurs and ICT sector representatives” (Eesti 2020, 2014). Estonia’s government’s support for ICT and the need to retain countries competitiveness while facing the natural constraints imposed by the size of the nation is reflecting already in numbers. In 2013, Estonia ranked 25th out of 142 countries based on the Global Innovation index, published in corporation with World Intellectual Property Organization, INSEAD, and Cornell University (Global Innovation Index, 2013). In 2012, Estonia ranked 22nd out of 157 countries based on the ICT Development Index (International Telecommunication Union, 2013). The major leap towards ICT development and innovation in Estonia can be also seen in country’s everyday business scene. BBC has even gone as far as it has praised Estonia as a new Silicon Valley. The number of start-up companies in Estonia per person is the highest in all of the Europe (Cassidy, 2014). The start-up companies have recognized the potential in different industries and are aiming to interrupt the way the traditional business is done. The industries affected by IT based startups are as diverse as ranging from banking industry (TransferWise) and payment providers (Fortumo) to taxi industry (Taxify) and agriculture (VitalFields). However, a deeper look into this fast developing innovative economy in Estonia shows that the development is far from equal across the industries. When contrasting the industry’s contribution into country’s GDP with IT innovation in the sector, construction industry is the one to stand out. In 2012, Estonian construction sector built for EUR 3 billion of which EUR 257 million was net profit. Its total contribution into country’s GDP was 7.4%. The sector employed more than 58,000 people (Majandus- ja Kommunikatsiooniministeerium et al, 2012). To understand the relevance of construction industry in the economy, one can compare the figures to the manufacturing industry as a whole in 2012 which produces EUR 10 billion in revenue while employing approximately 100,000 people. Despite its substantial share into country’s economy, the industry is today lagging behind in terms of ICT innovation. It is relevant to note here that by stating this, the authors of this paper do not mean innovation in its all meanings. Construction industry is by its nature a creative industry and is thus innovative by its definition. However, the innovation in the industry is mainly product related, which is not in the in interest of this study. For the purpose of the current study, the authors define ICT innovation as a successful introduction of new IT solutions and/or related processes into the industry. This gap between slow ICT innovation and relevance of the industry into country’s GDP was recognized by the authors while searching for potential business ideas for a start-up project to be created in an academic environment during their final study year in Master’s program of Design and Development of Virtual environments in Viljandi Culture Academy. On the one hand, the industry proved to be huge by its share to overall economy. Also, a lot of work and processed that could have been automated were found out to be still carried out manually. Combined together, these finding indicated that there could be an enormous potential for ICT startups to target construction industry as a potential client market. On the other hand, however, a lack of new implemented ICT solutions in the sector and very slow innovation when compared to other industries in Estonia served as a caution. Thus, it became essential to study the hindrances to implementing new ICT solutions in construction market. No previous research investigating mentioned hindrances by construction sector in Estonia were found. Therefore, the authors of this paper decided to reduce this gap. This paper aims to answer the research question “What are the hindrances to implementing new ICT solutions in Estonian construction market?”. Also, as the author’s practical interest is to gain an insight into the potential success of their business idea, a secondary research question “What are the opportunities for IT start-ups entering Estonian construction sector?” will be answered. However, this will be done only to the extent considered reasonable in the context of this study. In order to answer the research questions proposed, a qualitative study among industry participants was conducted. To focus the research and to enable unified data collection, the research was built up on the grounds of BIM model.  BIM is the process of generating and managing building data during its life cycle. It is also a tool as well as a process and increases productivity and accuracy in the design and construction of buildings. BIM uses 3D dynamic building modeling software and operates in real-time. It supports the continuous and immediate availability of project design scope, schedule and cost information that is high quality, reliable, integrated and fully coordinated. (Forbes and Ahmed 2011) The decision for introducing the BIM model and building the research on it was based on the fact that BIM related ICT solutions for construction market were found out to be one of few solutions out in the market and also known by considerable share of industry participants. A study by Eesti Äritarkvara Liit (Estonian Business Software Alliance) in 2013 construction designers showed that little over 50% of industry practitioners are knowledgeable about BIM and that 8,13% have tried implementing it (Eesti Äritarkvara Liit, 2013). Even if these statistics are limited to only designers, it gives an overall indication of the level to what extent the solution is known. Given that there are already a limited number of construction companies in Estonia who have tried implementing the solution, it enables the representatives of these companies to share more detailed understanding about hindrances and obstacles encountered on the preliminary implementation process of BIM solutions. Also, an additional argument for introducing BIM was that most of the up-to-date academic research worldwide related to ICT innovation in construction market is covering BIM. Therefore, there is an opportunity to extend the existing research via identifying the limitations and aiming to fill that gap. In addition to the authors practical interest, the findings of the current study could be useful to other IT start-ups considering construction industry as a potential market in Estonia or countries similar to Estonia (ie countries where the ICT innovation in construction industry is lagging behind more than in innovation led construction industries in other economies). Also, given that government has stated the relevance of ICT development in all creative industries, it might be useful for them to learn about the hindrances they will have to face when working with the construction industry. The relevance of this study cannot be underestimated also when looking at the statistics for EU and US. Total construction output in EU amounted to €1,172 billion in 2012, and construction industry is said to be still one of the major engines of Europe’s growth. It represents 9.1% of EU GDP with more than 3 million enterprises providing jobs to more than 14 million workers. This constitutes 6.8% to overall employment without counting the indirect employment generated in related sectors. Altogether 43.8 million people in EU depend on the construction sector (European Construction Industry Federation, 2013). In comparison, in US the revenue generated by construction sector in 2012 was almost EUR700 billion being one of the US backbone industries while representing 7% of country’s nominal GDP (Euromonitor International, 2012). As of 2012, the U.S. Bureau of Labor estimated that 5.64 million Americans were employed in the construction industry (Plunkett Research, 2013). In addition, Seaden (2001) writes that “The economic space of construction is much larger than that defined by traditional statistical records because it comprises the design of buildings and infrastructure (engineering and architectural services), the manufacture of buildings products and of machinery and equipment for construction, and operation and maintenance of facilities. (Seaden & Manseau 2001, 184) The previous studies covered in Literature Review also show that the innovation lag in construction industry is a phenomenon for many countries. 1.2 General outline of the study First, a general introduction to the study is provided covering the research topic and relevant research questions for this study. Second, an overview about relevant previous research is provided. Third, a methodology for the research and choice of study design is introduced. This is followed by data collection and data analysis based on which implications for the future are provided. Based on the findings a concept of the initial business idea are improved to take into account the main identified hindrances to ICT implementation in Estonian market. This is developed further into a real minimum viable product (MVP) which is given for possible users to test. Then, a feedback from initial MVP testing and attitude from target customers is collected. This is to obtain better confidence that the conclusions drawn from the first (main) part of the study could be regarded as reasonable assumptions to build ICT solutions for construction market on.