Research Spotlight: “Stuck In the Middle”

Félix Parodi, Ph.D.

Most IPA clients have a stage-gated Front-End Loading (FEL) process, but over 80 percent of IBC companies1 have unpredictable and/or poor performing projects. Not surprisingly, the best performers deliver their portfolio with a reasonable degree of predictability and strong project performance by consistently using Best Practices; underperforming companies are characterized by their weak use of Best Practices. The companies that are neither top nor bottom performers—that is, those that are usually “stuck in the middle”—display highly variability in their use of project management practices caused by variability in the use of their FEL process. This article discusses, in the context of organization effectiveness and project system dynamics, fundamental aspects that drive discipline in the use of the FEL process, including:

• Structure of the project organization and project teams
• Management and integration of owner core competencies and support staff
• Roles of key project system stakeholders such as the business sponsor, gatekeeper, portfolio manager, and project management organization
• Management of interfaces at the portfolio and project level
• Accountability to authorize only the “right and ready” projects

The success of a portfolio requires an effective organization that deploys project strategies and resources according to the business’ priorities defined by the strategic plan. Our research has revealed that the organizational structure, staffing, and use of the FEL process are critical to ensure organizational effectiveness, as illustrated in Figure 1.

A company’s project organization (PO) structure, which is also called the project management organization(PMO), is often influenced by the existing company business structure, particularly in the degree of centralization of the work process and competencies and the structure of the project teams. Although centralized work processes are fairly common and are often associated with FEL process improvement efforts, we observe a wide variety of arrangements in which the key project team members may report and/or reside in business units, technology divisions, and plants or, in some cases, are managed under a separate arm of the project organization. Centralized project organizations mature faster and deliver more competitive results because they promote a disciplined use of a common work process and have competencies that have a direct line reporting relationship to the central function. Centralized organizations tend to be better organized for rapid professional development and more effective deployment of resources to support their capital project portfolios. Importantly, some of the best performing companies have leveraged central functions through the use of regional office centers with a cadre of professionals that have the deep cultural understanding required to manage the interface with local companies and institutions as well as the work force.

We have seen several different approaches to staffing project teams. Some of the companies that are stuck in the middle use a matrix organization for large projects, which is problematic because team members usually dedicate more time to interface management than real work. The matrix organization structure often dilutes accountability of project performance and limits project management authority. IPA research indicates that to achieve success in large projects, the structure needs to be “projectized”; in other words, the structure should be standalone in which the project manager is the team leader with the right level of authority and a direct reporting relationship with the core team members. However, in small plant-based projects, team members usually participate in multiple projects supported by matrix organizations and the best companies use project portfolio management tools to strategically control these projects.

In addition, the use of the right core competencies is essential for project success. Research indicates that owner leadership in key activities such as construction safety, project controls, environmental permitting, and risk management are critical, but the optimal integration of the core competencies varies depending on the project characteristics (e.g., a contract specialist is a critical function for megaprojects).

Adhering to the FEL process enables the integration of the right project professionals and use of Best Practices at the right time; in other words, it is an enabler of project performance. Many of the organizational effectiveness studies that we have completed over the past 5 years indicate that the use of contractors without retaining key owner core competencies is increasing and that the training and mentoring for project professionals is inadequate, which contributes to the inconsistent use of the FEL process and Best Practices.

Delegation of responsibility to the contractors is illustrated by the low owner staffing during FEL in terms of full-time equivalents. A lean owner staffing strategy suggests that there are severe constraints at the portfolio level and/or a limited understanding of the effects of inadequate project resource requirements. Many underperforming companies do not have a balanced distribution of competencies and often experience conflicts of interests (e.g., FEL contractor will do EPCM, estimate is not validated, and incentives are part of the deal). Owner and contractors do what makes sense, but no one sees the larger system that individual actions create. This issue is exacerbated when those companies consolidate this approach using alliances with contractors. In Industry, we have observed that shifting the burden is an insidious pattern that demands quick solutions for difficult projects, often as a result of negotiations rather than using the “take charge” approach that is characteristic of the best performers.

The use of a portfolio management strategy that assigns key team roles to alliance or preferred contractors without adequate oversight is a disturbing trend we have observed in our research findings gathered from over 5,000 small plant-based projects. Contractor-led projects are less effective in using Best Practices, usually display less productive engineering, and are usually more expensive than owner-led projects. Fortunately, some of the best performers found a solution to this issue by providing clear business objectives, strictly following the FEL process, and ensuring that owner specialists validate the cost estimates.

The lack of adequate core competencies and staffing limits companies to using contracting approaches that have been shown to be very cost-effective (e.g., mixed strategy) and observed more often in the top performers. The companies stuck in the middle tend to compensate for this weakness with EPC lump-sums that have contract terms and conditions that transfer risk to contractors, often at a high price. The problem is that these companies transfer risks that the contractor cannot control or fail to implement project controls to ensure that the contractor is meeting its contractual obligations. Projects under these conditions tend to experience changes in execution plans, turnover of contractor team members, and claims that ultimately result in unpredictable and poor performance.

Project System Dynamics

One of the key factors to ensure project system effectiveness is the management of interfaces at both the project and portfolio level. Business value is accrued by the success of one project at a time, and one major project disaster can destroy the value of many successful projects (thus, project system success requires consistent project performance, which, in turn, requires sustainable discipline).

Figure 2 illustrates several aspects of a project system that can be used as a framework to understand the dynamics that affect the disciplined use of the FEL process. An essential FEL process element is the decision review board (DRB). The DRB is usually led by a gatekeeper and comprised of experienced functional managers and is often supported by technical experts. This group assesses the project’s readiness to proceed to the next phase based on the completeness of the phase deliverables, assessment of risks, and available resources. The gate review is often preceded by technical audits and/or peer reviews. In essence, gatekeeping is a management process to authorize projects.

The project organization improves and facilitates the use of the process and tools and fosters the development of core competencies. The PO manager works with the business sponsor to ensure the appropriate allocation of resources according to the project’s importance, technical complexity, and project development and execution strategy. Essentially, the PO focuses on strengthening and using the company’s project management capabilities.

The business sponsor represents the asset owner. This role ensures that the project is accepted and supported, establishes the business contribution for the project, and facilitates the resolution of issues that are outside the project team’s control. The sponsor and project team communicate frequently (i.e., at least monthly) regarding project progress and confirm alignment with a set of priorities. In practice, companies assign business representatives to participate in specific team activities, such as Technology Selection and Classes of Facility Quality (and other Value Improving Practices [VIPs]), scope reviews, and risk management efforts. Team activities are under the team leader’s domain (i.e., project manager or project director), who has access to the sponsor at any time. Not surprisingly, underperformers have weak to non-existent interfaces between the sponsor and project team.

At the individual project level, the business domain is situated in the FEL 1 and FEL 2 phases. The final align- ment of the business and project objectives and scope closure is achieved at the end of FEL 2 as a result of the dialog between business, operations, and engineering. Gate 2 is also referred to as the “business gate” be- cause it is the point at which the economic sensitivity analysis reveals whether the business case is strong enough for the project to start FEL 3 work. Gate 2 is the critical point at which the conflict between sponsor leadership and DRB management of the project system needs to be resolved. Although a detailed understand- ing of the strategy, risks, and economics is very important for the business case, IPA research provides over- whelming evidence that readiness (e.g., the FEL Index) correlates very strongly with improved project perform- ance.

Underperforming companies and those stuck in the middle experience different degrees of the following gatekeeping issues that explain deficiencies and variability in the use of Best Practices:

Gatekeeping that is considered only to be a necessary administrative process step and does not effectively scrutinize project readiness. Gatekeeping breaks down because of a lack of discipline; that is, “the gate is open.” Our research indicates that large, strategic, revenue-generating projects experience this issue more than standard, routine projects. Many of these underperforming projects start FEL 3 with open scope.

The increased focus on completing FEL phase deliverables to meet an established date (e.g., DRB meeting) results in a gross underestimation of the risks of taking FEL process shortcuts. It is not uncommon to undergo concurrent design and late FEL 3 changes and quick re-estimations to meet the estimate targets. Project teams “respond to the need to look good at authorization and pass the point of no return”; in other words, project practices are not as good as they should be at authorization. In some cases, the DRB meeting dates were established several months ahead of time. We have directly observed the shortcutting of the process during our FEL workshops when we noticed that project teams were working concurrently on activities that related to early FEL 2 and late FEL 3 (i.e., process fast tracking).

The lack of alignment between the DRB and investment committee decisions (e.g., portfolio management) because the Business Case dominates Readiness. The effects of the lack of Readiness are often underestimated (e.g., benefits outweigh the risks), and the project contribution is diminished because poorly defined projects cost more and slip schedule. Not surprisingly, many of these projects fail to achieve their business objectives.

An effective capital project system requires organizational elements (e.g., structure, process, and people) and a functioning stage-gated process structure with adequate roles and responsibilities and interface management processes. The balance between the desire to be flexible regarding decisions to be made given the business case and the strength of the control mechanisms (gatekeeping, project organization guidance, commitment to one scope, priorities, etc.) is what drives project system consistency. Unfortunately, decisions in many cases are influenced by the value of the business opportunity, incentives, and lack of business accountability for capital project performance (e.g., projects are completed 2 years or more after authorization). Accountability to authorize only “the right and ready” projects is an essential driver of FEL process discipline.

As most experienced project professionals retire, project complexities increase, global markets expand, frontier projects increase, and talent becomes harder to find, companies that do not invest in strengthening their project systems to ensure a disciplined use of the FEL process will experience large cost overruns and schedule slips. Many of the current improvement approaches were implemented in response to the symptoms of these issues, but they may not address the real problems. This will cause the capacity to manage these projects to erode until the side effects of “patching up the system” build to overwhelming proportions and eventually lead to unavoidable system breakdowns. This risk may be exacerbated as globalization and sustainable project delivery practices are intensified.