Editorial: service‐led construction projects

Current research agendas encourage academics to support the construction sector in reorienting towards competing on the basis of added value rather than just cost efficiency (Barrett, 2005; Saxon, 2005; American Society of Civil Engineers, 2007). Such exhortations embrace design, production and facilities management and assume a need for the sector to shift its attention away from simple product delivery towards a broader view of satisfying clients’ needs. Thus, research emphasis is moved towards whole‐life considerations and to the service dimension of projects—a shift that reflects globally felt environmental, financial and security challenges.

Undoubtedly, this concern with adding value and the service dimension of construction projects has emerged along with trends within the manufacturing industry and manufacturing research. Academics and practitioners have identified the need for manufacturing companies to refocus and add services to their traditional tangible goods business (Gerstner, 2002; Technology Strategy Board, 2008; Baines et al., 2009). ‘Servitization’ of business (Vandermerwe and Rada, 1988) is an early label of the phenomenon, which by the end of the 1990s had reached great proportions (Wise and Baumgartner, 1999) and led to researcher interest in how manufacturers actually make the transition to a stronger focus on customer problems. The phenomenon has interested a variety of academic circles, with distinct literatures to match. There are authors who belong to the ‘environmental sustainability’ literature which focuses on product service systems (PSS) (e.g. Manzini and Vezolli, 2002; Mont, 2002); others have shaped the ‘customer solution’ literature, originating in the US (Galbraith, 2002; Sawhney et al., 2004); there is the essentially UK literature on ‘integrated solutions’ (as represented by Davies, 2004; Hobday et al., 2005), and there is the marketing literature (e.g. Vargo and Lusch, 2004; Cova and Salle, 2007; Jacob and Ulaga, 2008).

The business management literature is almost unanimous in suggesting to product manufacturers that they should integrate services into their core product offerings and it is replete with suggestions of how manufacturers should move forward. This could be seen as a transition along a continuum spanning two extremes (cf. Chase, 1981). In its simplest and cleanest form such a continuum would have pure product manufacturers at the one extreme and specialist service providers at the other. More recent contributors to this literature frequently talk in terms of a shift between the old mode of working and the new one (e.g. Oliva and Kallenberg, 2003; Gebauer and Friedli, 2005). This shift includes transforming almost every aspect of the way business is conducted: such as strategies, positions in the value stream, capabilities, organizational structures, as well as cultures and mindsets. The argument is that there is an economic imperative and that firms therefore have little choice. Supporting arguments are also found in that the generation of service revenues from an installed asset base can act as a buffer against fluctuating demand cycles (Windahl et al., 2004) and that service provision can provide a sustainable source of competitive advantage (Tukker and Tischner, 2006).

What is then the construction counterpart to the current insight that manufacturing firms can develop by covering the process from market assessment and product design through to manufacture, support and service delivery? The concept of service‐led projects, which is the focus of this special issue, refers to projects that are driven by a client’s business plan, complementing the delivery of a capital good with services as per the requirements manifested during the operations phase (Alderman et al., 2005). This kind of construction project will mostly be driven by the client’s wishes for delivering new or improved services to its own customers.

Much of our current theoretical understanding of product and service integration is developed from research conducted in the wider manufacturing arena. However, as construction can be understood as a particular mix of elements shared with either the manufacturing industry or the services sector, researchers in construction management are faced with problems of choice. In consequence, choosing between approaches from manufacturing researchers or from those who study services is hardly a straightforward operation. As described above, there is a strong movement among manufacturers, and no longer confined to leading firms in highly developed Western countries, towards incorporating services in their offerings of tangible goods and increasingly seeing their bundles of goods and services as projectified solutions to customer problems. Project management research has also recognized a variety of business logics that operate here (Wikström et al., 2009). Conversely, many service producers learn from manufacturers about how to standardize their products.

The argument can be made that construction contractors already share many characteristics with firms that are traditionally classified within the service sector (Bröchner, 2010a, 2010b). If this is so, it is possible to speak of adding services to services and integrating forward in a service chain in order to come closer to those who actually use built facilities. It is not immediately obvious which aspects of the manufacturers‐moving‐into‐services literature are relevant, and it would be foolhardy to suggest that the construction sector should simply follow established trends elsewhere. The notion of a shift from ‘product delivery’ to ‘service provision’ would imply that construction is primarily a goods‐producing industry. On the contrary, construction has always shared at least one important characteristic with service industries, namely that production takes place at the point of purchase. This is in contrast to the traditional practice within manufacturing where goods typically are fabricated before being moved to a sales location and then sold to the customer. The fact that construction takes place at the point of delivery is one explanation why the sector is frequently referred to as a provider of ‘construction services’ (Bosch and Philips, 2003), and there is also an important element of client–contractor co‐production. Therefore, in the case of construction, the distinction between product delivery and service provision is less fruitful than it is in manufacturing. Models and prescriptions derived from manufacturing are useful in forming theoretical propositions, but can hardly be directly applied to explain or predict organizational behaviour in construction.

In summary, it is worth considering the changes that a move towards procuring on the basis of whole‐life value and the increasing importance given to service in construction bring with them. Downstream service delivery increases the number of stakeholders and adds to project complexity. Fundamentally, the long‐term nature of the service delivery requirements combined with the added risks associated with the extended timeframes and future business environments place new demands on clients and suppliers alike. All this represents an intriguing research area that is far from being fully understood. This special issue highlights some of the many challenges faced by organizations when trying to compete on the basis of added value and service delivery.

Unravelling service‐led construction

There is more than one service‐oriented development in construction during recent decades. We have, for example, seen a restructuring of the construction sector in most OECD countries with a strong increase in labour‐only subcontracting supplemented by agency labour (cf. Harvey, 2001). In this way, many of the large contractors have evolved into specimens of the ‘hollowed‐out’ firm, handling the physical work of construction at arm’s length, while preferring to concentrate on management and coordination functions. Indeed, many contractors conceptualized themselves as ‘service companies’ long before notions of servitization became popular in the mainstream literature. Since the 1990s, major construction contractors have also entered the market for facilities management, attracted by the potential gains from vertical integration in the direction of end‐users of buildings (Cacciatori and Jacobides, 2005; Bröchner, 2008). In this context, it is also relevant to note how the construction interest in service process qualities has grown (Maloney, 2002).

There might be several reasons why it should be attractive for construction firms to integrate forward towards end‐customers and retain a long‐term commercial relationship with them or their representatives. For any firm in the construction sector, there is an organizational choice when wishing to benefit from a better understanding of end‐user service demand. Should the firm consider integrating forward (downstream) through developing activities internally, acquiring another business, or is it wiser to strengthen collaboration with service providers across market boundaries? This is closely linked to the question of what activities to undertake internally and what activities to contract out, which is at the heart of the study of economic organization. At the microeconomic level the question relates to what the firm does on its own and what it should purchase from the market. Thus, it relates to the scope of the firm and whether the firm should be vertically integrated or rely on other firms to supply it with inputs and purchase its outputs. Furthermore, should the firm be active in several markets, or focus on one or a few closely related ones? At the macro level the question is what the government should produce within the public sector and what it should purchase from the private sector.

Relying on microeconomic theory, in particular on transaction cost economics, it is probable that the case for forward integration lies with gaining and exploiting new knowledge. This begs the question how the firm gains technology knowledge in the construction phase that is valuable in operations and management, and vice versa. Also, how strong is the advantage to firms that choose to integrate? The second question cannot be answered without considering the effects of integration on competition in the industry (see Lind and Borg, this issue). Even if the internal forces driving towards end‐customer integration are found to be weak ultimately, other and stronger external economic forces derived from international financial markets might present themselves. One such force stems from the relative cost of servicing sovereign debt and private sector debt, a ratio that changes over time and differs between nations. Further, with few exceptions, public client organizations around the world have been asked to do more for less, i.e. produce more public value with fewer resources. Policies for slimming public sector debt and employment have led to new markets for construction‐related firms, not least through the emergence of procurement arrangements that seek to combine responsibility for the initial provision of buildings and infrastructure with their management over an extensive period of years. The early 1990s saw the reintroduction of infrastructure concession programmes in Europe, Latin America and elsewhere. The UK Private Finance Initiative was first out, triggered by the exchange rate mechanism crisis in 1992, and was followed by similar governmental initiatives in a host of other countries. Although posterity might view the PFI and PPP concessions as remains from a 16‐year period between two major British financial crises, there is much to be learned from what the private sector has been able to do, and chosen not to do, when joining the construction stage with a long‐term responsibility for operations and service delivery.

If we accept that there are several forces driving towards further servitization of construction, the next set of questions arises from the need to understand the dynamics of actually making the transition: how do construction firms and project organizations organize to accommodate an increased emphasis on service? To start, it is worth noting that several recent empirical studies suggest that manufacturing firms frequently struggle in their attempts to realign their internal structures to this effect (e.g. Hobday et al., 2005; Raja et al., 2010). It is probable that construction firms, almost regardless of size and specialization, will ask themselves whether they have to acquire new capabilities or at the very least develop their present skill sets (Brady et al., 2005). Such changes need to be contextualized and investigated by researchers in relation to the larger portfolio of activities pursued by the firm. For example, how do construction firms manage and protect the expertise and working relationships that support them in their specialized niches and secure their positions in more traditional markets, while expanding into more collaborative and service‐led environments? Most large construction companies operate in multiple markets and would need to display different capabilities in different business contexts, often simultaneously. In essence, most firms will have to find a balance between their traditional strengths, which have brought success in the past, and the necessity to develop new capabilities. The contribution of Alderman and Ivory and that of Straub in this issue both provide ample evidence of the complexity inherent in striking such a balance. In addition, firms frequently comprise multiple business units, each of which may have very different orientations towards products and clients. Different business units have vested interests in their routines and changes inevitably upset these. Thus, any shift must be understood not only from viewing a company as a single entity but also as seen from inside its constituent operating divisions (Leiringer and Schweber, 2010).

A prominent tenet in the servitization literature is that clients will develop the capabilities and mechanisms required to procure value‐adding, service‐enhanced products efficiently. This is based on the assumption that organizational and structural changes in the supply chain are met by equivalent changes within client organizations. Such ideas are not new to those who study construction procurement. Large public client organizations are frequently asked by policy makers to act as change agents (cf. Fernie et al., 2006) and invest in new approaches to construction procurement on the basis that they are capable of making the necessary in‐house transitions themselves. The question here is to what extent adapting to more service‐orientated business models puts existing governance and contractual arrangements to the test (see Roehrich and Lewis, this issue). Let us assume that service‐focused operations should be relational, not transactional, and that focus should be on the execution or delivery of a functional result in a manner that is convenient and reliable in the view of the client organization. As a consequence it is likely that new contractual and relational capabilities will have to be developed by the client and that the roles of individuals will need to change (see Hartmann et al., this issue).

As is aptly illustrated in the article by Roehrich and Lewis (this issue) contractual and relational mechanisms are distinct but inseparable parts of the governance spectrum. Clearly there are several elements to be considered. To start, which types of capability should be distinguished between? It appears that there are technological, contractual and relational aspects to be taken into account (Hartmann et al., this issue). Clients may choose to support end‐user orientation by their choice of contract award criteria, moving away from a focus on price, and by heavier reliance on performance‐style specifications, rather than retaining control of technical details. Conscious change of culture would be an element of building relational capabilities, putting in place arrangements that improve communication and move attitudes and behaviour away from the traditional context, i.e. with the public client exercising detailed command and the contractor just responding. Yet another aspect of relational capabilities implies emphasizing the (long) duration of the client–contractor service relationship and how important it is that they consider assumptions and expectations at an early stage of their original contract negotiations. However, a longer duration means that relational (as opposed to contractual) governance must be robust. The long life span implies that the probability of individuals being replaced during the contractual period is much higher than in an ordinary, short‐term construction project (see Roehrich and Lewis, this issue).

The need for symmetry in a relational culture means that the development of technological capabilities among contractors would depend on the existence and growth of public client contractual capabilities. Those who tender can be assumed to be concerned with protection of their intellectual property so that their proprietary technologies do not leak to competitors. Many researchers believe that progress towards collaborative working in achieving added value has been curtailed in the past by a lack of trust between public and private sectors (cf. Leiringer et al., 2009), and compulsory competitive tendering has remained a central plank of policy, not just to discourage direct labour by public authorities. It follows that public sector clients have to find a workable compromise between transparency in procurement and confidentiality from the viewpoint of participants from the private sector (Hoezen et al., this issue). Firms will probably trust the procuring organization more when they perceive that preparations and planning are adequate and that the procurement procedure is predictable and stable.

What is clear from this overview of the field is that neat‐and‐tidy generalizations are difficult to sustain; nevertheless, it seems that construction researchers could and should be inspired by many of the issues that have been identified by those who study the growth of service elements in the manufacturing industry. Those who remain sceptical can point to industry differences that have been recognized long ago.

In this issue

This special issue brings together six papers, each of which provides a novel and distinctive contribution to our knowledge of service‐led construction projects. Together they indicate how wide the range of themes is, as well as the corresponding need for a diversity of theoretical foundations and empirical methods.

In their opening article, Alderman and Ivory consider the problems of managing long‐term service‐led projects when the success of the project may depend on other projects outside the direct control of the project manager. The authors refer to this as the meta‐project context and argue for the need to identify how long‐term service requirements impinge on a wider range of stakeholders than is typical of a conventional capital delivery project. Drawing on three case studies they illustrate how managers of service‐led projects need to seek to influence people outside their normal purview. In particular they point to the importance of building constituencies of support, articulating and sharing a vision for the project. Such a vision ensures not only that those working directly on the project are aligned with the project objectives, but also that those managing related projects with a potential impact on the outcomes are proceeding in a direction compatible with the project requirements. Their article shows how conventional approaches to project management at the local level, e.g. within the supply chain, can lead to mismatches with the broader needs of a service‐led project, if an adequate understanding and appreciation of the project vision is not conveyed to all parties.

In the next article Lind and Borg use microeconomic theory with transaction cost analysis to examine some of the core tenets of product and service integration in general and service‐led construction in particular. They point out initially that there is a consensus in the mainstream economic literature that bundling is more of a way to reduce competition than a way to increase efficiency. In this perspective it is difficult to explain why public policies have promoted the bundling of construction and service delivery such as in PFI and PPP projects. Transaction cost analysis predicts that bundling is efficient if knowledge gained during production is useful during the maintenance period, or if maintenance knowledge has an impact on the design of the product. Both these criteria, it is argued, assume good internal communication between those who are responsible for construction and those who carry out maintenance. It is also assumed implicitly that firms have the incentives and ability to identify relations between construction technology choices and consequences for operation and maintenance. The authors argue that there is little empirical support for these two assumptions. Thus, the authors conclude, service‐led construction looks more like a short‐run measure for solving public sector problems, and writing such long‐term contracts creates new risks and new problems.

Roehrich and Lewis note that customers in a wide range of sectors are no longer buying subcontract production or construction capacity, but rather are procuring business solutions. This, they argue, necessitates a reconsideration of the mechanisms that coordinate inter‐organizational behaviour. The authors construct a model of governance in these complex inter‐organizational systems, targeting how contractual and relational governance mechanisms interact over time and across different levels of analysis. Reflecting on the implications of the model highlights how hard and soft mechanisms are distinct but inseparable parts of a governance continuum, where multi‐level interactions and transitions influence the behaviour of partners and impact on the effectiveness of the exchange. The authors conclude by arguing that capabilities for both contractual and proactive relational governance should be seen as crucial qualifiers for effective product–service exchange.

Hartmann, Davies and Frederiksen address the organizational challenges that client organizations face in contracting for integrated product/service packages. In particular, they explore the emergence of capabilities in public agencies and how capability building follows different learning trajectories. They argue that public agencies must master the dynamics of learning if they are to employ contractual and relational governance mechanisms successfully in their exchange relationships with the private sector. Drawing on two in‐depth case studies of public agencies in the UK and the Netherlands they present two learning trajectories: a pragmatic trajectory of learning, placing emphasis on the rapid exploitation of standardized contracts, and an experimental way of learning, emphasizing how alternative contracts are explored. The authors conclude that the managerial challenge for public agencies lies in finding, fitting and sustaining the appropriate level and focus of learning over time. Particularly the transitions between contractual and relational processes need to be facilitated by, for example, corporate organizational units that support project teams in building transactional relationships and capturing the experiences of these teams, translating them into new contractual elements.

Hoezen, Van Rutten, Voordijk and Dewulf take as their point of departure that the European Commission has recently developed the competitive dialogue (CD) procedure for procurement of complex projects. They focus on the applicability and appropriateness of the CD procedure for the procurement of service‐led construction projects. They draw on a case study of a large infrastructure project, the Second Coen Tunnel, to illustrate how the complex demands of the principal could be aligned with possible solutions from contractors. Specific attention is given to how stipulated principles of transparency and non‐discrimination seem to conflict with the principle of confidentiality, and how such conflicts could be reconciled. The authors suggest that the procedure could be improved by the provision of standardized documents and through more comprehensive information about the project context.

In the concluding article, Straub argues that offering new services demands additional resources, skills and competences of contractors. In particular, he explores the dual roles of firms working with performance‐based maintenance; a context in which the contractor acts as maintenance‐engineering consultant to clients and as service provider to end‐customers. Using questionnaires and in‐depth interviews with clients, contractors and end‐customers, he examines the skills and competences required of contractors offering performance‐based maintenance services to clients, in this case social housing providers and their end‐customers (tenants). The results show that to fill the role as maintenance‐engineering consultants, contractors have to interact intensively with clients, discussing maintenance scenarios and activity plans. The contractors need knowledge about concepts such as whole‐life costing, key performance indicators and service levels, and they also need communication and empathy skills, especially in dealing with the end‐customers. The author found that for end‐customers, the important determinants of service quality are those related to reliability and responsiveness: providing the service at the time promised and performing the service right the first time. In performance‐based maintenance partnerships, contractors are responsible for the agreed performance of building components and clients’ satisfaction during the entire contract period by handling planned and reactive maintenance; end‐customers are particularly concerned with reactive or daily maintenance, the author notes.

What next?

Most of the articles in this issue show that relationships between the public and the private sector are crucial for understanding how the construction industry approaches service‐led projects. This is in stark contrast to the typical context of servitized manufacturers, and has immediate consequences for research. We need to return to the fundamental reasons why the public sector engages in construction; it is the presence of natural or technical monopolies, sizable environmental externalities and the long‐term consequences of most infrastructure projects that should be recognized as starting points. As researchers, we should be aware of how political scientists analyse the big picture of public–private relations and of their conceptual apparatus for dealing with institutions. If we wish to do economic analysis of service‐led projects, we need to understand more of the macroeconomic reasoning that underlies decision making in public finance. Put slightly differently, industry practices do not develop independently of governing institutional structures. The broader institutional context in which the change is to take place and the structural characteristics of the sector in question combine to form unique localized challenges for all involved and also influence the process and content of academic work. Therefore, the current research agenda needs to be expanded. This would entail a partial merging of priorities across public and private sector research with increased emphasis on the consequences of policy implementation for the interplay between public and private interests. More empirical research is needed in order to further our understanding of how public and private organizations align their interests; how organizational behaviour is shaped by the interaction between clients and suppliers; and how client and supplier interests merge and diverge over time.

At the firm level, a key research challenge is to study the tensions which participation in service‐led projects cause among the involved parties and to establish ways in which these tensions can be managed at intra‐ and inter‐organizational levels. It is clear that simplistic models of centralized homogeneous firms, working in a single institutional environment, that are derived from stylized cases in manufacturing, are unsuitable for the complexity of service‐led construction projects. A strong case can, thus, be made for a shift in emphasis from viewing firms as unitary entities and instead capturing the dynamics of decentralized firms working in multiple markets on a variety of projects, some of which are service‐led. This kind of project will be of varying importance and occupy different proportions of the larger portfolio of activities of various internal stakeholders. The new line of inquiry, associated with such a change in emphasis, will lead to a more nuanced and useful understanding of intra‐organizational dynamics throughout project life cycles. It could also, in turn, lead to a clearer appreciation of the working relationships between different organizations at different phases of service‐led projects. Such an understanding is necessary if we are to unravel the myriad of practices referred to in terms such as ‘adding value’ and ‘service delivery’, as realized in projects situated in complex and unique environments.

Finally, most of the professional and academic discussion focuses on the demands put on the supply side and how suppliers are accommodating and adapting to an increased emphasis on service. Less attention has been directed to the organizational challenges that client organizations face. There is plenty to be gained from looking beyond contractual governance and furthering our understanding of issues such as employee commitment, the implementation of en‐abling structures and processes (including learning and capability building) and the modification of both routine practices and individual incentive structures among client organizations, not least in the public sector.