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Can construction industry rise to online challenge?

Shadowed by an impending shakeout in the sector and dogged by a lack of technology awareness, analysts say construction marketplaces are tackling one of the most challenging areas of the new economy.

Business-to-business marketplaces targeting the construction industry have their work cut out for them.

Shadowed by an impending shakeout in the sector, faced with trying to streamline one of the more highly fragmented industries, and dogged by a lack of technology awareness among building-material suppliers, construction marketplaces are tackling one of the most challenging areas of the new economy, analysts say.

On one hand, the financial potential of construction e-business is striking. According to Forrester Research, online commerce for the $43.2 trillion global construction industry will reach $43 billion in 2004.

But the numerous challenges facing the nearly 100 construction e-business players will force many to bow out before the true rewards are realized, analysts say.

The sheer size of the construction industry and the vast amount of subcontractors, general contractors, suppliers, laborers, developers and architects that make it up make it fragmented.

Fragmentation happens when a particular sector or industry is controlled by numerous players. In the construction industry, the top eight companies in terms of market share control less than 20 percent of the industry, allowing more companies to have a shot at the market. In the aerospace market, by contrast, the top companies control over three-fourths of all trade within the industry.

"The fragmented industry is one of the biggest challenges facing marketplaces," says Steve Kafka, an analyst from Forrester. "It's so fragmented that you can sell down to the level of a single individual."

Tim Clark, an analyst at Jupiter Communications, said the problem of fragmentation is real. "The biggest general contractor in the U.S. has less than 5 percent of the market...and the majority of construction professionals are on job sites, not at desktop computers," which he said underscores the need for marketplaces to provide wireless services.

A route to efficiency
Analysts and e-business professionals see the Internet as a way to streamline the industry to drive out inefficiency and lower costs. Currently, marketplaces in the construction industry, with a few exceptions, provide only auctions and procurement tools and services.

But because a single construction project can involve hundreds of people in disparate teams, a marketplace needs to provide enhanced services such as community building and information management capabilities.

For marketplaces to take on the challenging construction industry, analysts say they must provide construction professionals with the ability to track their projects online.

"The right solution is one that helps professionals manage their projects," Kafka said. "Auctions and procurement just won't fly here...Also, instead of a VP of purchasing, you have individual project managers, so the needs of the industry are much more disparate."

A company that analysts point to as one marketplace that goes beyond the regular procurement and auction offerings is San Francisco-based Buzzsaw.com. It offers project management tools, resources for project design collaboration, and an exchange for goods and services.

Carl Bass, chief executive of Buzzsaw, says the reason his marketplace provides a wide range of tools and services is clear: "We've had it since the beginning because you can't do one without the other. The idea of sharing information...is just as important as commerce in this industry."

Besides Buzzsaw, analysts point to another San Francisco company, Bidcom, as a further example of a marketplace providing services and tools that help building professionals with project management and online exchange services.

Marketplaces are key
Analysts and e-business players say that marketplaces that are not providing an assortment of marketplace services will inevitably fail or be acquired during an expected shakeout.

With the number Will B2B's magic last?of business-to-business companies aimed at the construction industry swarming the market, analysts say the majority of them will fold within six to nine months.

The shakeout "will be the day of reckoning for most of these companies," Kafka said. "The market is overly crowded right now with marketplaces offering the same services. They all jumped into the industry before it was ready to adopt e-commerce."

Others see the size and fragmentation of the building industry as more of an opportunity for these marketplaces.

"Construction is big enough that there will be room for multiple players," Jupiter's Clark says. "In addition, there are so many sub-niches that a Net market can carve out a home in a narrow vertical--pipe fitters, for example."

Another challenge construction business-to-business players face is the lack of Internet and technology acceptance within certain sectors of the industry, particularly in the supplier community, analysts say.

"Suppliers are not an Internet-oriented community," said Buzzsaw's Bass. "Many of them are still based on legacy and enterprise resource planning (ERP) systems. Marketplaces need to build a bridge between the legacy and ERP systems and the Internet."

More Internet adoption
Outside the supplier community, Bass said he sees adoption of the Internet more as a way to collaborate among project managers, architects and contractors than as a way to buy and sell goods.

When Randy Dolph's latest architectural project had many changes and the team needed a tool to ensure everyone had the latest design documents, the chief information officer of a Chicago-based architectural firm turned to Buzzsaw.

"We used their collaboration tool for sharing our architectural designs," Dolph said. "Traditionally, we would have weekly client meetings in our office. Because there was so much change early on with this project, weekly meetings were not enough. We needed almost instant access to the designs."

Though analysts and other industry observers say project management coupled with auction, procurement and basic exchange tools and services can translate into major savings for construction companies, it will not be the silver bullet needed for many in the business-to-business sector to be successful.

"There will only be a handful of marketplace companies left after the shakeout," Bass said. "But those still standing will be handling a good proportion of the construction business. It will take some time, but I foresee at least 20 to 30 percent of construction business will be done online."