Government/Industry Forum on Capital Facilities and Core Competencies: Summary Report (1998)

Mr. Ronald M. Howard

Director-Construction

The Business Roundtable

Two years ago, The Business Roundtable Construction Committee, which supports the Construction Cost Effectiveness Task Force of Roundtable Chief Executive Officers, was very concerned with the declining state of project execution capabilities. The committee launched a strategic initiative to define the business value of maintaining effective project systems and professional competency. In addition, the initiative acted as an alert that effective project systems are very important to business assets, and once they are dismantled, they are very difficult to restore.

The data presented were developed as part of a cooperative study with Independent Project Analysis (IPA) Corporation of Reston, Virginia. IPA's database contains 2,000 projects from a variety of industries, representing about $300 billion of investment. IPA has established benchmarks for over 60 companies, of which 30 companies' benchmarks are reevaluated on a continuous basis. The resulting report was entitled The Business Stake in Effective Project Systems.²

Over the past 15 years, most American manufacturers have transformed their approach to engineering management of their capital projects. Virtually every owner has reengineered, reorganized, restructured, downsized, and ''right-sized.'' Sometimes this has been done many times, often without achieving satisfactory results.

When examining the relative importance of owner project systems, some trends appear. The best-performing company in the study can take an industry average of 15 percent return on an investment project and turn it into a 22.5 percent return. The poorest performer in the study started with a 15 percent average return on investment and drove it down to 9 percent. The difference between the best-and the poorest-performing companies, then, was a 13.5

percent return on investment. More important, the gap between the best and the poorest performing companies has been growing over the last 10 years.

The best-performing company in the study is spending 72 cents of the industry-average dollar for the same functional scope. The company with the shortest delivery time has taken only 70 percent as long as the industry average to bring a project from a business idea to an operating facility. The company with the best track record in start-up and operation achieves 6 percent more production from their assets. If these three companies could be taken together at their best, the return on investment for a capital project would increase from 15 to 25 percent.

There is both good news and bad news about the changing role of owner engineering. The good news is that cost overruns on owner projects are significantly lower relative to the 1970s and early 1980s. Although cycle times are 20 percent faster, projects are considerably safer than 20 years ago.

On the other hand, costs remain very unpredictable. Start-up and operability of new assets have not improved in the past 20 years. Most distressing is the fact that more than two-thirds of all the major projects built by process industries over the past 10 years have failed to meet one or more of the key business objectives of the project.

Today, only a few companies in the process and allied industries maintain the ability to perform detailed engineering in-house, as was common in the 1970s. The outsourcing of detailed engineering began a process of downsizing in-house engineering staff, a continuing trend. The cyclical nature of capital programs in owner companies has meant that large, in-house forces carry substantial cost penalties when there are periods of minimal work. Engineering contractors can adjust to such periods because they have a large client base and are more flexible in adapting to the changing workload.

If businesses expected outsourcing to lead to a decline in engineering costs, they have been disappointed. Engineering costs for major projects continue to grow as the amount of work performed in-house has declined. The reasons are not all attributable to engineering cost alone, but include the costs of complying with more environmental regulations and the costs of increased automation.

Many owners have turned to alliances as a solution to the loss of in-house engineering facilities. Alliances are long-term contractual relationships between owners and contractors intended to promote efficiency in capital projects. There appears, however, to be no correlation between the use of alliances and project results. It is not alliances but the substance of the process that drives the results. Alliances are good, but the owner must have an effective project system for them to work. Alliances are not a single answer for downsizing and cost cutting.

The rapid change in engineering functions during the last decade has resulted in a substantial loss of basic competencies in some organizations. Of particular concern is the loss of technical competency to assist businesses in defining the most appropriate projects to meet the businesses' needs and the competence to execute those projects. Unfortunately, the long-term damage to the company's earnings by doing the wrong projects in the wrong way can be devastating.

The key difference between a successful or unsuccessful company is not downsizing. Successful companies all have downsized; the winners have changed the substance and process of their engineering and not just the number of people they employ. Those who have lost competence in capital projects did not do so overnight. Instead, as their deeply experienced, critically skilled personnel retire, they slowly lose the ability to define alternatives effectively. More immediate, they find themselves overly dependent on contractors, and in an increasingly poor bargaining position. New technology projects go awry very quickly; global projects become very risky when the owner does not have a good process, even doing small projects.

Finally, communication now takes place between business people and contractors, because the former middlemen—the engineering staff—are no longer there to bridge the gap.

Companies that have succeeded in this new environment have fundamentally changed the way they view the business world and the capital project system. They now see capital projects as a principal way that the company's capital-assets base is created. They also see technology and engineering as key elements in the supply chain resulting in competitive projects, not merely as nonintegrated functions.

The supply chain begins when the customer need is identified and translated into a business opportunity. Following this is the critical planning phase of the project. Business opportunity is explored in the first stage of the planning phase and alternate methods of meeting the defined needs are investigated, including some noncapital assets. The most successful companies are using their technical resources in this business development process.

As the business plan focuses on a capital project as a solution, the project management professionals are added to the team to work with the business leaders in the facility planning stage. This is the stage at which the broad project objectives are honed into a particular project at a particular site with a particular technology configuration and schedule. Different formulations of the project are usually explored and exceptions made. At the project planning stage, the details needed to bring the project to a point where detailed engineering can be mobilized to execute the project are filled in with hopefully little or no change.

The importance of the advance-planning process cannot be overstated. Analysis of the IPA database showed that 49 out of 50 projects that achieved best practices in advance planning met all of their objectives. The project supply chain requires an integration of the business, technical, and manufacturing functions into teams that can create a project that uniquely fills the business need.

There are four roles that an owner can take in project definition: the all-owner role, the all-contractor role, the contractor-lead role, and the integrated team role. The integrated-team approach generally dominated the best performance category of the study in terms of cost and schedule, and was almost equal to the all-owner projects in operability.

What are the characteristics of the best capital project systems? In addition to using fully integrated cross-functional teams, they actively foster a business understanding of the capital project process. Business leaders are placed in an active role in their projects, helping the team make tradeoff decisions between competing objectives, always with the business objectives in mind. The engineering and project managers are accountable to the business, not the plant management. There are continuous improvement efforts that are subject to real and effective metrics.

The best capital projects have managers who can distinguish between cost-effectiveness and predictability, a difference that requires sophisticated project controls and measurement systems. All maintain in-house resources necessary to develop and shape projects on the front end and to bind the owner functions together to find the right project and prepare for efficient execution.

Finally, the best capital project systems all maintained some form of central organization that is responsible for preparing the work process for advance planning. This provides the skills and resources to pull in critical core competencies and the interpersonal organizational glue that binds the operations, business, engineering, maintenance, outside organizations, and affected project systems.