Daily Archives: August 6, 2008

Asian Lessons in Managing Capital Projects

A recent article in the McKinsey Quarterly on Managing Capital Projects: Lessons from Asia (registration required) about how some Asian companies are better at managing capital projects than rivals elsewhere caught my attention because many companies are still buying traditional, on-premise, behind-the-firewall enterprise application software (despite the proliferation of good SaaS alternatives) — and these are always intensive capital projects. While not all of the lessons learned in a traditional capital project that revolves around physical assets will be directly applicable to such a project, the fact of the matter remains that, as a supply & spend management professional, you will have to manage these projects from time to time — and any free advice you can find is definitely worth a quick read. Furthermore, since resources required for new capital projects are becoming scarce around the world, now, more than ever, you cannot afford to screw up.

Lessons from Asia are particularly relevant now as more than 50% of the world’s capital investment is projected to take place in Asia over the next seven years. Furthermore, there have already been some major successes in China and India, including a recent oil refinery and petrochemical complex in Jamnagar built by India’s largest private-sector enterprise for 20% less capital than was required by similar plants elsewhere.

After weeding out local Asian conditions that were neither common nor transferable elsewhere (such as land costs, taxes, and regulations), as well as current global best practices, the study described in the article identified five innovative practices that break with the conventional wisdom of western companies and set the recent Asian successes apart. These five strategies are:

  • Set Aggressive Goals

    While safe and realistic targets for cost, quality, and execution time adds assurance that goals will be met on time, it increases costs and creates expectations of tolerance for delays. In contrast, best-in-class Asian CEOs typically set high, even unrealistic, targets and make explicit trade-offs between time and cost — which usually results in an over investment in the equipment and labor that generally form a relatively small part (< 5%) of a large capital project. This allows companies to work on a number of projects simultaneously, preventing downtime.
  • Invest Broadly

    Asia’s best companies regard project management as a core competence. While they may outsource various parts of a project, they retain an active role as overall integrator and manager. Generally, they will manage all critical aspects in-house and only outsource standard equipment / project work on a turnkey basis.
  • Reconsider Low Cost Suppliers

    Asia’s leading capital project managers obtain lower costs and faster service by aggressively sourcing even critical equipment from promising vendors that have developed strong capabilities and reputations in their home countries but that may lack extensive experience in global markets.
  • Avoid Gold Plating

    Leading Asian companies believe in challenging all assumptions and in understanding the reasons for designs and specifications by subjecting them to rigorous value-engineering tests. This often allows them to drive out 10% more cost than a Western organization would believe possible.
  • Flatten the Organization

    Leading Asian companies realize that the fast-paced nature of capital projects makes a flat organizational structure essential and typically only have two layers between line staff and project managers, who report directly to the CEO or another board member. Furthermore, while the CEO will be involved in all critical decisions, project managers are given full authority to supervise support functions and manage resources and can make decisions themselves if the budget is not threatened.

What really interested me is how these have their equivalents in capital-intensive software projects:

  • Set Aggressive Goals
    Especially if you bring in a third party to do the implementation. Furthermore, agree on reasonable SLAs and hold the third party to the SLAs when it is realistic to do so.
  • Invest Broadly
    Make sure your people and the third party integrators and consultants have the tools they need to work effectively. If middle-ware exists that already performs the ETL tasks that are required, don’t pay your team to reinvent the data wheel.
  • Reconsider Low Cost Suppliers
    You don’t always need IBM Global Data Services. With the right tools, the crack developer at the local IT shop might be able to do the job just as well.
  • Avoid Gold Plating
    Thoroughly investigate the requirements before assuming an implementation will take a certain amount of time or require a (large) number of third party consultants.
  • Flatten the Organization
    The implementation team should be flat. Leave the politics to the politicians.