Description
Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year.
Large capital expenditures in emerging markets:
Smart project management practices for high performance
As the multi-polar world continues to take shape, with economic power becoming increasingly dispersed around the globe, strategies for achieving high performance will undoubtedly be marked by increased investment in emerging economies. Multinationals face peculiar challenges in making these investments, particularly when undertaking large and complex capital expenditure projects, such as designing and building new manufacturing plants. Complex capital expenditure projects historically have had problematic results in terms of budget, deadline or performance deviations. Avoiding these issues presents an eminently thorny challenge in emergingmarket geographies: Here, a fundamental lack of “self-healing” mechanisms compounds the natural complexities of large capital expenditure projects. Even seemingly minor issues related to the uneven infrastructure, unique bureaucratic challenges and intercultural communication, so common in emerging markets, can quickly escalate and start impacting the project across multiple areas.
Capital expenditure project failures impact the bottom line and shake stakeholder confidence. Executives understand this fact, yet embarrassing headlines related to project failures happen again and again. When problems such as these arise, it is instructive to look for a pattern. Understanding the common points of failure and addressing them before they escalate are the first steps to achieving high performance through large capital expenditure projects.
2
Balancing the inherent conflicts of interest
While many of the individual problems capital expenditure projects face can be traced to a failure to adhere to best practices, at a more fundamental level there are conflicting forces at play. Any large capital project has financial, schedule and quality objectives that are at odds. Companies undertaking a large capital expenditure project typically find themselves dealing with contractors and suppliers in a situation of “You can have it fast; you can have it cheap; you can have it good—pick two.” The cost component is determined by the initial business case and is currently influenced by the fact that the project owner operates in a seller’s market due to a scarcity of raw resources and labor. Contractors and vendors control the power today and those overseeing the financials related to a capital expenditure
project struggle to contain costs as sellers can demand higher prices. From a timely execution perspective, schedules often fasttrack. Too often it is assumed that everything will go smoothly, and a cushion for the unforeseen is not budgeted realistically enough. For example, parts may come from all different regions, but schedules fail to take into account that customs regulations or other issues may become a construction bottleneck. Finally, project teams demand the very best materials, even if they will take more time and money to obtain. Different parties in the process have different priorities, leading to an inherent conflict of interest between speed, cost and quality. Managing the interfaces among these three priorities means being able to get different parties together to determine the right balances in light of the plant owner’s long-term interests (see Figure 1).
Figure 1. . Success in large capital expenditure projects begins with bringing the responsible stakeholders together to balance priorities related to financial objectives, timely execution and resulting quality.
• Business case imperatives • Sellers market power shift from owner to contractors and vendors • Low-cost country sourcing
Co st
• Lack of resources / knowledge across all organizations • Physical bottleneck in equipment / material production capacity
• Focus and alignment on business case objectives during complete project life cycle • Manage the interfaces
• Cross-geographical expediting • Schedules often last track • Contractor relations • Governmental regulations & relations
le edu Sch
Quality
• Asset reliability and safety • Consistent product quality • Knowledge transfer and retention of qualified staff Source: Accenture
3
Rigorous project management maintains the focus, even in an uncertain environment
One challenge to maintaining a balance of priorities is keeping all people focused on the initial business case objectives during the entire project life cycle. As mentioned earlier, a variety of factors pose considerable challenges to maintaining this focus when operating in an emerging-market environment. For example, infrastructure inefficiencies can lead to schedule deviations—one part arriving one day late may result in deviation for the entire project. Lessdeveloped regulatory frameworks may leave too much room for inaccurate interpretation that turns out to be problematic later. Different cultural norms may mean that while the top priority of the corporation is getting a return on a capital expenditure, the top priorities of the vendors are accomplishing government orders. Factors such as these add stress to stakeholders already held to the fire for cost, quality and schedule. The sidebar, The turbulent emerging-market environment, provides more detail about the unique challenges to capital expenditure projects in emerging-market economies.
The recurrent theme across all of these issues is the lack of “selfhealing” structures in emerging economies: Emerging economy infrastructures generally lack the capacity to absorb any deviations, which allows problems in one area to snowball and causes problems to surface in other areas. For example, one company sought to import a high grade of cement not available in the local economy. The project spent more than a month writing the business case for the government and then shipping the cement in small increments by plane to overcome shipment issues. This example illustrates how even a banal problem can delay a project for weeks. It is here where rigid project management proves absolutely essential to keeping a large, complicated project on track. A project management office (PMO) with real, defined authority will help to identify and manage issues such as these before they blossom. Accenture experience in supporting a number of large capital expenditure projects in different emerging economies, such as China, Malaysia and Brazil, has shown that effective project management will entail assigning a full-time team, as soon as possible, to the project management role. This fulltime team will be empowered both to adapt and apply existing project management best practices to the project’s specific needs and to monitor and enforce adherence to the practices it chooses to institute.
4
The turbulent emerging-market environment
While all large capital expenditure projects pose their share of risks, unique circumstances in emerging-market economies magnify the challenge.
Excess bureaucracy and government influence
– Emerging-market economies often operate under heavy and complex legal requirements, even as the maturity and reliability of the regulatory framework is less certain than in more developed regions. – The speed to resolution slows in these environments. In Brazil, for example, we have seen tax documents needing approval from three or four tax authorities; by the time all documents are approved, those approved at the beginning may begin to expire. Synchronization is a tremendous challenge in certain situations. – The government owns many contractors in emerging markets, and in these cases government authorities will determine project priorities.
Intercultural communication
– Projects need to adapt negotiation and communication styles to local norms. – Without an established presence, suppliers may not view the company as an A-list client and may provide a lower level of service and material quality. – Business case assumptions may not reflect local realities and the assumed nature of the relationship among the project owner and the associated contractors and vendors. For example, a company should not assume that confidentiality exists in its interactions with contractors (who may provide direct reports back to the government about ongoing negotiations).
Cost issues
– Inland transport often is higher than the marine transport costs from emerging market ports to foreign destination ports; the government’s focus may be on building port capacity, while inland road and rail infrastructure gets less funding for infrastructure expansion. – Investment in inland infrastructure lags economic and chemical industry growth in many emerging-market economies, indicating that logistics problems may get worse before they get better. – Total delivery expenses will likely be higher in the emerging market than in the home country. In China, for example, total delivery expenses are 25 percent higher than in the United States, excluding damaged/lost freight and losses due to longer transit times. – Often reduced efforts in scope definition and equipment specification, potentially superimposed by fast-track schedules, provide numerous opportunities for cost creeping during the execution, driving cost significantly beyond original quotations.
Lack of appropriate skills
– Contractors may lag in their abilities and compliance and need training for basic administrative and technical skills and safety awareness. One client building a plant in Brazil, for example, found it needed to conduct mass training for 3,000 local employees in very basic job-skill areas. – Project management skills and tools usually do not reach the level of Western multinational corporations. Control systems to support day-to-day supervision typically are very inefficient in comparison.
5
A range of responsibilities: One PMO
While every large-scale capital expenditure project is different, they typically share some common vulnerability that should fall within the purview of the PMO. In all of these areas the PMO needs to be proactive—ready to intervene to ensure all aspects of planning and execution work at their best. Scope management When scope changes, an empowered and proactive PMO should be able to judge what impact the change will have on the project economics and thus decide whether scope change should be claimed or not—particularly since changes mostly concern several parties and transcend across multiple interfaces, often facing conflicting interests of individual parties. Sound change management is a prerequisite for claims avoidance. Risk management A strong PMO will understand secondary/tertiary supply sources to manage supply risk. It will manage risk mitigation checklists: looking for high-dollar items and considering which of these items might cause problems or delays. Procurement The PMO will navigate tedious customs procedures and make decisions on whether to import resources or source them domestically, based on an understanding of the project’s cost, schedule and quality priorities.
Staffing Likewise, the PMO will make informed decisions about whether to staff the project with local people or with existing company employees from overseas. Knowledge management The PMO will determine how to transfer knowledge—from expatriates to local workers and from the execution to the operating phases. It will institute frequent team-building and training exercises. Communications The PMO will establish daily communications with those who build the plant and those who will operate it to monitor progress, capture and resolve issues, assess the impact of issues on the business case, and adjust tasks for different teams accordingly. Quality assurance The PMO will manage the quality of local engineering, procurement and construction (EPC) contractors. It will also monitor supplier compliance with quality standards. Documentation Sometimes mistakes on engineering plans will only become evident when already in the execution phase. The PMO will therefore work with the client to check the documentation quality of deliverables from local engineering firms and government authorities, as applicable.
Sustainability management Large capital expenditure projects have been facing growing challenges in dealing with environmental issues and corresponding laws, employee safety, and community sustainability around the areas where they are implemented. Emergent countries’ legislations are often opaque about sustainability and, at the same time, there is increasing pressure to consider environmental and social impacts. Structured attention paid by a PMO can help a great deal. Claims management While claims management is something EPC contractors are very familiar with—some have a specific department just to handle it—it is a relatively new discipline for contracting companies, and one growing in importance. (See sidebar, Contract claims management: A discipline in its infancy.) The main goal of claims management is to avoid unnecessary budget deviations. In a long capital project life, it is common to face change orders, and their reasons are legion, e.g., scope changes, new technologies, materials shortage, etc. If not handled properly and timely, they may result in significant budget overruns. Poor communication procedures could add to this, as misunderstandings often drive additional budget requirement from the EPC company. Here documentation takes on real significance: The PMO should be able to record, file and maintain a history of all documents— establishing an invaluable inventory in the resolution of any future claim.
6
Contracts claims management: A discipline in its infancy
Contracts claims management is a vital skill for companies undertaking capital expenditure projects—particularly in emerging markets. In these regions, claims are even more common: The lack of proven project management disciplines and regulation that Western multinationals take for granted in their home countries cause many projects to falter. Consider the fact that many of these projects have overall contract values of hundreds of millions or even billions of dollars, and the potential amount of money at stake makes a compelling case for companies to obtain real competency in the claims management area. A couple of areas constitute claims management: Claims Avoidance and Claims Analysis and Resolution. The former concerns the prevention of claims by proactive actions such as well-structured change order procedures and stage-gate processes. The latter involves the study of the main contractual documents and the evaluation of claims supporting information, aiming for the development of a concise report with all data needed for decision making. It also includes the analysis of the current scenarios prioritizing variables in order to negotiate the claims, aiming to reach an agreement or even to be prepared for arbitration. Claims management is a complex discipline—involving and dependent on a number of other disciplines—and for now, few companies have established the robust procedures that will lead to the best outcome. Companies need to take a range of inputs into account to analyze and resolve claims. Intimate knowledge of contractual documents and impeccable organization so that all parties’ responsibilities are clearly defined and ready to be referenced in any negotiation or future arbitration process are key. Here, a claims management database for filing all relevant information, from first notice of an issue onward, is an invaluable tool. And at all times, the claims management process must focus on corporate objectives, with the goal of resolving issues in the best way for the companies and avoiding similar claims discussions and losses on future projects. Hence, “claims avoidance” often constitutes leading practice. Measures to enhance awareness of key project personnel in fundamental principles of claims, how to recognize a pre-claim situation, and how to contribute to preventing or resolving escalations turn out to be well invested.
7
Ensuring the smooth transition to operations
The preceding recommendations will go a long way in ensuring a large-scale capital expenditure project moves smoothly from the design through the build phase, keeping the original business case objectives as the driving force. However, for many projects, the build to the run phase becomes the major stumbling block. EPC contractors have to concentrate on executing their end of the project—delivering the project according to contract specifications. Whether ongoing operations go well after the EPC contractors leave is the owner’s responsibility (see Figure 2).
The PMO plays an important role here as well, ensuring that knowledge gained in execution is properly documented and stored, that local workers have been instructed by the right people and are helping other local workers, and that the manufacturing supply chain continues to run smoothly after the contractors leave the picture. For example, the project owners need to know where to turn should problems arise in operation—where to get good supplies, which companies may be good choices as subcontractors if needed—and the PMO can ensure that this knowledge does not disappear with the EPC contractors. By instituting a handful of simple and smart practices, outlined below, PMOs can help their projects avoid the majority of pitfalls that typically occur between execution and operation.
Figure 2. While the “execute” phase falls heavily on the EPC contractors, success in operations after the EPC contractors’ job is done remains the project owner’s exclusive responsibility.
Business Strategy calls for new plant Engineering Contractor Focus
Appraise
Select
Define
Execute
Operate
Select
Define
Execute • Headquarter-to-affiliate transition • Knowledge transfer: expatriates to locals • Intercultural transfer: developed to emerging • Data cut over from project to operation systems • Manufacturing and supply chain capabilities Operate
Operate
Appraise
Owner relative Appraise Engagement / Focus
Select Define Execute
Source: Accenture
8
People – Conduct frequent teambuilding events starting four to six weeks before the go-live date, and throughout the ramp-up of operations. – Install at least two experienced people to prepare for the startup of factory operations. “Been there, done that” experience counts here and provides valuable backup in case key personnel have to deal with illness, family matters, home-country issues, etc. – Plan for attrition early on, including for key professional positions. Not everyone is up to the challenge of start-up, which will make heavy demands on time; others will be uncomfortable with new procedures that still need to be ironed out. (We also note that in high demand areas of China, professionals “job-jump” regularly.) – Identify a key “sender” at the home country location, and identify a key full-time “receiver” per product line or key operation. The “sender”/ “receiver” is for a scenario where an entire product line is moving from an existing plant (shut down) to the new capital expenditure project (start-up). Training – Create an aggressive and comprehensive home-country and local training program for key skills. Our experience strongly suggests planning a start date, then actually beginning two months earlier. Training will always take longer than expected due to visas, coordinating of holidays and other human resources issues. – Test the network connectivity of rooms to be used for training the week prior, using firewallprotected laptops.
– Have all training supplies (such as hubs, wires, power strips, USB cords and so on) needed delivered a week prior to training, instead of on the first day. Make a “shopping list” of needed supplies well in advance. – Hold a training meeting with IT ahead of time to know when the required systems will be set up, how and when security will be granted, and how to access the systems. IT – Create a virtual “as-built” test environment that will go live two months before the actual start date of plant operations. – While standard business simulations will be used, countryspecific operating methods must be created, tested and run in all scenarios to ensure that operations are smooth from day one. For example, product machine-tool process routings in SAP will most likely need to be pre-configured to conform to exact country operating methods. Parts and Equipment – Create and adhere to an initial monthly ramp-up plan. – Prepare to have approximately two months’ worth of coverage in terms of parts to mitigate demand fluctuations. – When working with a new supplier, begin buying production supplies from them three to four months in advance of when the need is anticipated to work out quality issues. – Involve Western import/export experts who can work very closely with the sending and receiving leads.
– Make sure the sending lead stays involved in packing and tracking the parts and knows what clears customs and when. (The sending lead should stay in the sending location until all parts are in transit.) – Use a kit whenever possible to ensure all required parts are in one package. – Intensely manage procurement lead times and expected due dates: Track all key dates (purchase requisition date, purchase order creation date, order lead time, order ship date) for both Western and Eastern procurement operations. – Most importantly, conduct rigorous, independent audits of key dates from vendors. We note that culturally in many emergingmarket economies—particularly in the Asia-Pacific region—it is undesirable to share bad news, such as missed or delayed deliveries. Many suppliers instead rely on things sorting themselves out on their own. – Create a detailed maintenance, repair and operations list: all the items needed to support production, from grease to screwdrivers. Then appoint an “owner” who will focus on these unglamorous—but absolutely essential—items. Often, these items will not be readily found in supply houses near emerging industrial centers. – Institute weekly inspections to ensure the plant has everything it needs for operations, and all pieces of equipment are working properly. – Measure success based more on the plant’s ability to make a quality product, rather than on hitting production goals.
9
10
Conclusion
While the stakes are high in undertaking a large-scale capital expenditure project in an emerging market, the process itself need not be such a gamble. With rigorous project management in place, project owners can go far to mitigate the particular challenges unique to regions with different infrastructures, governmental requirements and cultural norms than the company’s home base of operations. While on the surface some advice may appear common sense, research and Accenture experience show that companies undertaking such capital expenditure projects too often neglect leading practices— and clearly underestimate the magnitude of potential disruption from even mundane issues. The result is a striking number of costly and publicly embarrassing failures. High performance is possible, but only by understanding corporate priorities (as set out by the business case) and empowering the PMO to maintain the right balance of cost, schedule and quality objectives throughout the organization as a whole—from strategy planning to plant operations.
11
About the Authors Marcus Huebel, senior executive —Global Chemicals group Accenture Marcus Huebel is a senior executive in the Global Chemicals group and serves as the Chemicals Strategy Lead for Emerging Economies. He has extensive management consulting experience across multiple geographies in Europe, the Middle East and Asia, particularly China. Marcus is based out of Düsseldorf. Michael R. Mason, senior executive —Resources group Greater China, Accenture Michael Mason is a senior executive in Accenture’s Greater China group for the Resources Industries where he leads the Plants and Asset Solutions group. He has a wealth of consulting experience in the refining and petrochemicals industry in the United States and Asia. Michael is based out of Beijing.
About Accenture Plant & Asset Solutions Accenture Plants and Asset Solutions for Chemicals and Natural Resources is a suite of offerings designed to help companies achieve operational excellence and high performance. Accenture collaborates with companies to help them address their plant and asset challenges with our extensive experience in operational consulting, systems integration, process and organization design, Program Management Office (PMO) of large capital projects, and outsourcing—along with extensive skills in new plant automation, industrial IT, engineering and six sigma capabilities.
About Accenture Accenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With more than 180,000 people in 49 countries, the company generated net revenues of US$19.70 billion for the fiscal year ended Aug. 31, 2007. Its home page is www.accenture.com.
Copyright © 2008 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.
ACC08-0084
doc_753869605.pdf
Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year.
Large capital expenditures in emerging markets:
Smart project management practices for high performance
As the multi-polar world continues to take shape, with economic power becoming increasingly dispersed around the globe, strategies for achieving high performance will undoubtedly be marked by increased investment in emerging economies. Multinationals face peculiar challenges in making these investments, particularly when undertaking large and complex capital expenditure projects, such as designing and building new manufacturing plants. Complex capital expenditure projects historically have had problematic results in terms of budget, deadline or performance deviations. Avoiding these issues presents an eminently thorny challenge in emergingmarket geographies: Here, a fundamental lack of “self-healing” mechanisms compounds the natural complexities of large capital expenditure projects. Even seemingly minor issues related to the uneven infrastructure, unique bureaucratic challenges and intercultural communication, so common in emerging markets, can quickly escalate and start impacting the project across multiple areas.
Capital expenditure project failures impact the bottom line and shake stakeholder confidence. Executives understand this fact, yet embarrassing headlines related to project failures happen again and again. When problems such as these arise, it is instructive to look for a pattern. Understanding the common points of failure and addressing them before they escalate are the first steps to achieving high performance through large capital expenditure projects.
2
Balancing the inherent conflicts of interest
While many of the individual problems capital expenditure projects face can be traced to a failure to adhere to best practices, at a more fundamental level there are conflicting forces at play. Any large capital project has financial, schedule and quality objectives that are at odds. Companies undertaking a large capital expenditure project typically find themselves dealing with contractors and suppliers in a situation of “You can have it fast; you can have it cheap; you can have it good—pick two.” The cost component is determined by the initial business case and is currently influenced by the fact that the project owner operates in a seller’s market due to a scarcity of raw resources and labor. Contractors and vendors control the power today and those overseeing the financials related to a capital expenditure
project struggle to contain costs as sellers can demand higher prices. From a timely execution perspective, schedules often fasttrack. Too often it is assumed that everything will go smoothly, and a cushion for the unforeseen is not budgeted realistically enough. For example, parts may come from all different regions, but schedules fail to take into account that customs regulations or other issues may become a construction bottleneck. Finally, project teams demand the very best materials, even if they will take more time and money to obtain. Different parties in the process have different priorities, leading to an inherent conflict of interest between speed, cost and quality. Managing the interfaces among these three priorities means being able to get different parties together to determine the right balances in light of the plant owner’s long-term interests (see Figure 1).
Figure 1. . Success in large capital expenditure projects begins with bringing the responsible stakeholders together to balance priorities related to financial objectives, timely execution and resulting quality.
• Business case imperatives • Sellers market power shift from owner to contractors and vendors • Low-cost country sourcing
Co st
• Lack of resources / knowledge across all organizations • Physical bottleneck in equipment / material production capacity
• Focus and alignment on business case objectives during complete project life cycle • Manage the interfaces
• Cross-geographical expediting • Schedules often last track • Contractor relations • Governmental regulations & relations
le edu Sch
Quality
• Asset reliability and safety • Consistent product quality • Knowledge transfer and retention of qualified staff Source: Accenture
3
Rigorous project management maintains the focus, even in an uncertain environment
One challenge to maintaining a balance of priorities is keeping all people focused on the initial business case objectives during the entire project life cycle. As mentioned earlier, a variety of factors pose considerable challenges to maintaining this focus when operating in an emerging-market environment. For example, infrastructure inefficiencies can lead to schedule deviations—one part arriving one day late may result in deviation for the entire project. Lessdeveloped regulatory frameworks may leave too much room for inaccurate interpretation that turns out to be problematic later. Different cultural norms may mean that while the top priority of the corporation is getting a return on a capital expenditure, the top priorities of the vendors are accomplishing government orders. Factors such as these add stress to stakeholders already held to the fire for cost, quality and schedule. The sidebar, The turbulent emerging-market environment, provides more detail about the unique challenges to capital expenditure projects in emerging-market economies.
The recurrent theme across all of these issues is the lack of “selfhealing” structures in emerging economies: Emerging economy infrastructures generally lack the capacity to absorb any deviations, which allows problems in one area to snowball and causes problems to surface in other areas. For example, one company sought to import a high grade of cement not available in the local economy. The project spent more than a month writing the business case for the government and then shipping the cement in small increments by plane to overcome shipment issues. This example illustrates how even a banal problem can delay a project for weeks. It is here where rigid project management proves absolutely essential to keeping a large, complicated project on track. A project management office (PMO) with real, defined authority will help to identify and manage issues such as these before they blossom. Accenture experience in supporting a number of large capital expenditure projects in different emerging economies, such as China, Malaysia and Brazil, has shown that effective project management will entail assigning a full-time team, as soon as possible, to the project management role. This fulltime team will be empowered both to adapt and apply existing project management best practices to the project’s specific needs and to monitor and enforce adherence to the practices it chooses to institute.
4
The turbulent emerging-market environment
While all large capital expenditure projects pose their share of risks, unique circumstances in emerging-market economies magnify the challenge.
Excess bureaucracy and government influence
– Emerging-market economies often operate under heavy and complex legal requirements, even as the maturity and reliability of the regulatory framework is less certain than in more developed regions. – The speed to resolution slows in these environments. In Brazil, for example, we have seen tax documents needing approval from three or four tax authorities; by the time all documents are approved, those approved at the beginning may begin to expire. Synchronization is a tremendous challenge in certain situations. – The government owns many contractors in emerging markets, and in these cases government authorities will determine project priorities.
Intercultural communication
– Projects need to adapt negotiation and communication styles to local norms. – Without an established presence, suppliers may not view the company as an A-list client and may provide a lower level of service and material quality. – Business case assumptions may not reflect local realities and the assumed nature of the relationship among the project owner and the associated contractors and vendors. For example, a company should not assume that confidentiality exists in its interactions with contractors (who may provide direct reports back to the government about ongoing negotiations).
Cost issues
– Inland transport often is higher than the marine transport costs from emerging market ports to foreign destination ports; the government’s focus may be on building port capacity, while inland road and rail infrastructure gets less funding for infrastructure expansion. – Investment in inland infrastructure lags economic and chemical industry growth in many emerging-market economies, indicating that logistics problems may get worse before they get better. – Total delivery expenses will likely be higher in the emerging market than in the home country. In China, for example, total delivery expenses are 25 percent higher than in the United States, excluding damaged/lost freight and losses due to longer transit times. – Often reduced efforts in scope definition and equipment specification, potentially superimposed by fast-track schedules, provide numerous opportunities for cost creeping during the execution, driving cost significantly beyond original quotations.
Lack of appropriate skills
– Contractors may lag in their abilities and compliance and need training for basic administrative and technical skills and safety awareness. One client building a plant in Brazil, for example, found it needed to conduct mass training for 3,000 local employees in very basic job-skill areas. – Project management skills and tools usually do not reach the level of Western multinational corporations. Control systems to support day-to-day supervision typically are very inefficient in comparison.
5
A range of responsibilities: One PMO
While every large-scale capital expenditure project is different, they typically share some common vulnerability that should fall within the purview of the PMO. In all of these areas the PMO needs to be proactive—ready to intervene to ensure all aspects of planning and execution work at their best. Scope management When scope changes, an empowered and proactive PMO should be able to judge what impact the change will have on the project economics and thus decide whether scope change should be claimed or not—particularly since changes mostly concern several parties and transcend across multiple interfaces, often facing conflicting interests of individual parties. Sound change management is a prerequisite for claims avoidance. Risk management A strong PMO will understand secondary/tertiary supply sources to manage supply risk. It will manage risk mitigation checklists: looking for high-dollar items and considering which of these items might cause problems or delays. Procurement The PMO will navigate tedious customs procedures and make decisions on whether to import resources or source them domestically, based on an understanding of the project’s cost, schedule and quality priorities.
Staffing Likewise, the PMO will make informed decisions about whether to staff the project with local people or with existing company employees from overseas. Knowledge management The PMO will determine how to transfer knowledge—from expatriates to local workers and from the execution to the operating phases. It will institute frequent team-building and training exercises. Communications The PMO will establish daily communications with those who build the plant and those who will operate it to monitor progress, capture and resolve issues, assess the impact of issues on the business case, and adjust tasks for different teams accordingly. Quality assurance The PMO will manage the quality of local engineering, procurement and construction (EPC) contractors. It will also monitor supplier compliance with quality standards. Documentation Sometimes mistakes on engineering plans will only become evident when already in the execution phase. The PMO will therefore work with the client to check the documentation quality of deliverables from local engineering firms and government authorities, as applicable.
Sustainability management Large capital expenditure projects have been facing growing challenges in dealing with environmental issues and corresponding laws, employee safety, and community sustainability around the areas where they are implemented. Emergent countries’ legislations are often opaque about sustainability and, at the same time, there is increasing pressure to consider environmental and social impacts. Structured attention paid by a PMO can help a great deal. Claims management While claims management is something EPC contractors are very familiar with—some have a specific department just to handle it—it is a relatively new discipline for contracting companies, and one growing in importance. (See sidebar, Contract claims management: A discipline in its infancy.) The main goal of claims management is to avoid unnecessary budget deviations. In a long capital project life, it is common to face change orders, and their reasons are legion, e.g., scope changes, new technologies, materials shortage, etc. If not handled properly and timely, they may result in significant budget overruns. Poor communication procedures could add to this, as misunderstandings often drive additional budget requirement from the EPC company. Here documentation takes on real significance: The PMO should be able to record, file and maintain a history of all documents— establishing an invaluable inventory in the resolution of any future claim.
6
Contracts claims management: A discipline in its infancy
Contracts claims management is a vital skill for companies undertaking capital expenditure projects—particularly in emerging markets. In these regions, claims are even more common: The lack of proven project management disciplines and regulation that Western multinationals take for granted in their home countries cause many projects to falter. Consider the fact that many of these projects have overall contract values of hundreds of millions or even billions of dollars, and the potential amount of money at stake makes a compelling case for companies to obtain real competency in the claims management area. A couple of areas constitute claims management: Claims Avoidance and Claims Analysis and Resolution. The former concerns the prevention of claims by proactive actions such as well-structured change order procedures and stage-gate processes. The latter involves the study of the main contractual documents and the evaluation of claims supporting information, aiming for the development of a concise report with all data needed for decision making. It also includes the analysis of the current scenarios prioritizing variables in order to negotiate the claims, aiming to reach an agreement or even to be prepared for arbitration. Claims management is a complex discipline—involving and dependent on a number of other disciplines—and for now, few companies have established the robust procedures that will lead to the best outcome. Companies need to take a range of inputs into account to analyze and resolve claims. Intimate knowledge of contractual documents and impeccable organization so that all parties’ responsibilities are clearly defined and ready to be referenced in any negotiation or future arbitration process are key. Here, a claims management database for filing all relevant information, from first notice of an issue onward, is an invaluable tool. And at all times, the claims management process must focus on corporate objectives, with the goal of resolving issues in the best way for the companies and avoiding similar claims discussions and losses on future projects. Hence, “claims avoidance” often constitutes leading practice. Measures to enhance awareness of key project personnel in fundamental principles of claims, how to recognize a pre-claim situation, and how to contribute to preventing or resolving escalations turn out to be well invested.
7
Ensuring the smooth transition to operations
The preceding recommendations will go a long way in ensuring a large-scale capital expenditure project moves smoothly from the design through the build phase, keeping the original business case objectives as the driving force. However, for many projects, the build to the run phase becomes the major stumbling block. EPC contractors have to concentrate on executing their end of the project—delivering the project according to contract specifications. Whether ongoing operations go well after the EPC contractors leave is the owner’s responsibility (see Figure 2).
The PMO plays an important role here as well, ensuring that knowledge gained in execution is properly documented and stored, that local workers have been instructed by the right people and are helping other local workers, and that the manufacturing supply chain continues to run smoothly after the contractors leave the picture. For example, the project owners need to know where to turn should problems arise in operation—where to get good supplies, which companies may be good choices as subcontractors if needed—and the PMO can ensure that this knowledge does not disappear with the EPC contractors. By instituting a handful of simple and smart practices, outlined below, PMOs can help their projects avoid the majority of pitfalls that typically occur between execution and operation.
Figure 2. While the “execute” phase falls heavily on the EPC contractors, success in operations after the EPC contractors’ job is done remains the project owner’s exclusive responsibility.
Business Strategy calls for new plant Engineering Contractor Focus
Appraise
Select
Define
Execute
Operate
Select
Define
Execute • Headquarter-to-affiliate transition • Knowledge transfer: expatriates to locals • Intercultural transfer: developed to emerging • Data cut over from project to operation systems • Manufacturing and supply chain capabilities Operate
Operate
Appraise
Owner relative Appraise Engagement / Focus
Select Define Execute
Source: Accenture
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People – Conduct frequent teambuilding events starting four to six weeks before the go-live date, and throughout the ramp-up of operations. – Install at least two experienced people to prepare for the startup of factory operations. “Been there, done that” experience counts here and provides valuable backup in case key personnel have to deal with illness, family matters, home-country issues, etc. – Plan for attrition early on, including for key professional positions. Not everyone is up to the challenge of start-up, which will make heavy demands on time; others will be uncomfortable with new procedures that still need to be ironed out. (We also note that in high demand areas of China, professionals “job-jump” regularly.) – Identify a key “sender” at the home country location, and identify a key full-time “receiver” per product line or key operation. The “sender”/ “receiver” is for a scenario where an entire product line is moving from an existing plant (shut down) to the new capital expenditure project (start-up). Training – Create an aggressive and comprehensive home-country and local training program for key skills. Our experience strongly suggests planning a start date, then actually beginning two months earlier. Training will always take longer than expected due to visas, coordinating of holidays and other human resources issues. – Test the network connectivity of rooms to be used for training the week prior, using firewallprotected laptops.
– Have all training supplies (such as hubs, wires, power strips, USB cords and so on) needed delivered a week prior to training, instead of on the first day. Make a “shopping list” of needed supplies well in advance. – Hold a training meeting with IT ahead of time to know when the required systems will be set up, how and when security will be granted, and how to access the systems. IT – Create a virtual “as-built” test environment that will go live two months before the actual start date of plant operations. – While standard business simulations will be used, countryspecific operating methods must be created, tested and run in all scenarios to ensure that operations are smooth from day one. For example, product machine-tool process routings in SAP will most likely need to be pre-configured to conform to exact country operating methods. Parts and Equipment – Create and adhere to an initial monthly ramp-up plan. – Prepare to have approximately two months’ worth of coverage in terms of parts to mitigate demand fluctuations. – When working with a new supplier, begin buying production supplies from them three to four months in advance of when the need is anticipated to work out quality issues. – Involve Western import/export experts who can work very closely with the sending and receiving leads.
– Make sure the sending lead stays involved in packing and tracking the parts and knows what clears customs and when. (The sending lead should stay in the sending location until all parts are in transit.) – Use a kit whenever possible to ensure all required parts are in one package. – Intensely manage procurement lead times and expected due dates: Track all key dates (purchase requisition date, purchase order creation date, order lead time, order ship date) for both Western and Eastern procurement operations. – Most importantly, conduct rigorous, independent audits of key dates from vendors. We note that culturally in many emergingmarket economies—particularly in the Asia-Pacific region—it is undesirable to share bad news, such as missed or delayed deliveries. Many suppliers instead rely on things sorting themselves out on their own. – Create a detailed maintenance, repair and operations list: all the items needed to support production, from grease to screwdrivers. Then appoint an “owner” who will focus on these unglamorous—but absolutely essential—items. Often, these items will not be readily found in supply houses near emerging industrial centers. – Institute weekly inspections to ensure the plant has everything it needs for operations, and all pieces of equipment are working properly. – Measure success based more on the plant’s ability to make a quality product, rather than on hitting production goals.
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Conclusion
While the stakes are high in undertaking a large-scale capital expenditure project in an emerging market, the process itself need not be such a gamble. With rigorous project management in place, project owners can go far to mitigate the particular challenges unique to regions with different infrastructures, governmental requirements and cultural norms than the company’s home base of operations. While on the surface some advice may appear common sense, research and Accenture experience show that companies undertaking such capital expenditure projects too often neglect leading practices— and clearly underestimate the magnitude of potential disruption from even mundane issues. The result is a striking number of costly and publicly embarrassing failures. High performance is possible, but only by understanding corporate priorities (as set out by the business case) and empowering the PMO to maintain the right balance of cost, schedule and quality objectives throughout the organization as a whole—from strategy planning to plant operations.
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About the Authors Marcus Huebel, senior executive —Global Chemicals group Accenture Marcus Huebel is a senior executive in the Global Chemicals group and serves as the Chemicals Strategy Lead for Emerging Economies. He has extensive management consulting experience across multiple geographies in Europe, the Middle East and Asia, particularly China. Marcus is based out of Düsseldorf. Michael R. Mason, senior executive —Resources group Greater China, Accenture Michael Mason is a senior executive in Accenture’s Greater China group for the Resources Industries where he leads the Plants and Asset Solutions group. He has a wealth of consulting experience in the refining and petrochemicals industry in the United States and Asia. Michael is based out of Beijing.
About Accenture Plant & Asset Solutions Accenture Plants and Asset Solutions for Chemicals and Natural Resources is a suite of offerings designed to help companies achieve operational excellence and high performance. Accenture collaborates with companies to help them address their plant and asset challenges with our extensive experience in operational consulting, systems integration, process and organization design, Program Management Office (PMO) of large capital projects, and outsourcing—along with extensive skills in new plant automation, industrial IT, engineering and six sigma capabilities.
About Accenture Accenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With more than 180,000 people in 49 countries, the company generated net revenues of US$19.70 billion for the fiscal year ended Aug. 31, 2007. Its home page is www.accenture.com.
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