Reference framework, top talent crucial to managing large projects

Roberto Nava Tiziano Rivolta
Bain & Co.
Milan

Large projects, increasingly complex and technologically demanding, confront oil and gas companies with an expanding barrage of challenges. Schedules and budgets are tight, safety is crucial, and every project faces a network of stakeholders concerned about its impact on the environment and communities. Even so, today's project managers still rely on concepts that the builders of the Colosseum, as well as other large projects of antiquity, would recognize: work breakdown plans, design-to-cost, and make-or-buy decisions.

For example, an army of workers took less than 10 years to complete the Colosseum in AD 80 using 100,000 cu m of travertine marble. To accomplish this, project leaders relied on tested engineering concepts and organizational innovations:

• The amphitheater was divided into sectors, assigned to different contractors, and supervised by teams of civil engineers, who shared best practices and guaranteed results.

• Contractors followed prescribed practices for simple designs to deliver against cost and time goals. Roman engineers set very high standards for innovation.

• Engineers managed organizational and logistical complexities in the design phase. For example, working space on site was maximized, and many activities were outsourced to yards where partly assembled blocks were prepared.

Reference framework

While best practices and experienced talent are essential to the successful execution of large oil and gas projects, they are not enough. Successful managers of large projects follow a coherent, consistent reference framework that guides their decisions and processes.

These frameworks include:

• Formalized project phases and checkpoints.

• Clear accountabilities within an integrated project team.

• Checks and balances between central functions and project teams.

• Continuous review to measure project value and monitor risk.

Successful companies also continuously improve their general project-management skills as well as skills specific to oil and gas. A shortage of technical talent in the industry—destined to become more acute over the next 7 years as a generation of experienced engineers retires—complicates the problem.

Even so, as they approach projects of greater complexity and scope, companies cannot afford to bring second-rate talent to the work.

The challenge

As activity ramps up and more oil and gas production moves to frontier and unconventional-resource areas, projects are becoming larger and more complex. Recent examples include an offshore facility in the Arctic budgeted at more than $3 billion and an $8.4-billion petrochemical complex spread across 45 km in South America.

Such projects involve many stakeholders, including company shareholders, local authorities and regulators, and environmental and community advocates. Schedules are compressing, too: For one oil company, more than 90% of its field discoveries from 2009 to 2011 are due online in less than 8 years.

Of course, no company manages only one project at a time. Portfolios may include hundreds of complex projects, to which companies assign priorities based not only on financial goals and risks (including execution, commercial, health-safety-environmental [HSE], and reservoir) but also on the availability of scarce resources like engineering talent. Some companies are building up their internal engineering staffs by as much as 80% to manage the many contractors and suppliers on each project.

Scoping projects accurately is an important skill. For small companies, delivery of a small, technically complex project may be as demanding as larger projects are for large companies. However, projects that look very big, such as producing oil and gas from shale, may in fact be collections of smaller projects. Companies that approach development of unconventional resources the same as they would approach large, complex projects run the risk of over-engineering.

Robust framework

Following a robust project reference framework can help avoid cost and schedule overruns. A company should gather technical input early, incorporating it into the project's framework to make sure it aligns with the organization's larger goals. Also important is the engagement of stakeholders throughout the life of the project, from architecture and design through execution.

Phases and checkpoints

Decision checkpoints, or stage gates, mark the ends of formal project phases (see figure). To move from one stage to the next, managers, coordinating with stakeholders, have to decide if they are ready to move on.

To keep these stage gates relevant, oil and gas companies and the contractors who work with them should continuously revise their stage-gate frameworks to align them with evolving market conditions. They then can anticipate the needs of key stakeholders as they plan the steps toward completion. For example, it may make sense to define local-content requirements well ahead of front-end engineering design.

Companies most successful in the management of large projects work to control costs in the early architectural and planning phases, when key decisions are made. Typically, 80-90% of costs are incurred in later phases.

Well-managed large projects balance simplicity and flexibility with respect for rigor at checkpoints. While it's important to keep project teams on task and schedule, processes that are not easily changeable can place unnecessary hurdles in a project's path.

Clear accountability

Successful projects require effective decision-making. Our analysis of projects that run late or over budget finds the top reason is "not making good decisions with the right people and not making them happen." This may include failing to invite technical input at the concept phase, disregarding stakeholders, or misaligning decision-makers' incentives and project goals.

An integrated project team with clear roles and responsibilities and a shared interest in the project's objectives helps ensure accountability. In some organizations where decisions and accountability are not clearly allocated to project teams, functional experts may wind up making key decisions. That can create bottlenecks and delays, as decisions percolate up to functional managers with wide-ranging agendas. A diagnostic survey of decision quality, speed, yield, and effort can identify areas that need to be changed.

Checks and balances

Corporate functions empower project teams by assigning the best people, defining processes, and ensuring control of managerial and technical activities.

In turn, project teams must be able to make decisions for the projects' deliverables. Projects are more likely to succeed when the functional experts have an advisory rather than a decision-making role in assurance, control, and steering activities.

Continuous review

Successful organizations assess projects continually, not only at formal checkpoints and stage gates, to ensure they are on track to add value.

Ideally, senior managers who are not part of a project team give a "cold-eye" review of the project, costs, and progress. They report to decision-makers on the project's state of readiness and suggest ways to improve value or cut costs. Comparing the project with others in the portfolio helps assign priorities to resources in line with company goals.

Sometimes, the reviewer's analysis will lead the organization to modify a project or change its delivery date.

Competency development

A good framework is essential, but it's not enough to satisfy the demands of major projects in oil and gas. Companies also must improve their general project management skills continuously, balancing trade-offs among costs, schedules, technical demands, and stakeholder requirements while also coordinating between the functional center and project teams (see sidebar).

In oil and gas, some skill areas are particularly important:

Local content

Local content rules, which require large project owners to source some goods and services from the host country, are critical in oil and gas projects.

Project managers must understand the requirements and plan accordingly, taking into account the relevant risks. In some cases, services are not available from local sources, or local providers are not able to deliver against objectives. Failing to plan for these contingencies can delay a project and send it over budget.

Successful project managers seek to understand host-country goals. They engage policy-makers to create long-term strategies that go far beyond their immediate supplier needs, promoting best practices that help local industries meet global standards. A local network of robust suppliers benefits not only the project but also the local economy.

Engineering

Over-engineering can contribute to unnecessary complexity in major projects, while simplicity in design can ensure efficient and competitive solutions.

This is an ancient principle. Even engineers supervising construction of the Colosseum demanded simple, proven construction techniques, setting a high standard of proof for any deviation from their templates.

Today's oil and gas projects can benefit from the same principles. At one project, engineers reviewed 71 complex engineering actions, from rotating machinery to the layout of pipes, to find simplifications that lowered costs by 1-2.5%.

International oil companies (IOCs) and oil-field service companies are building up their internal engineering capabilities to ensure quality among their contractors.

This enables them to better manage projects for national oil companies (NOCs) and other resource holders.

Procurement

Many oil companies are rationalizing procurement by moving from many shallow relationships to fewer but deeper ones. For example, some IOCs are trying to spend half their procurement budgets with their top 40 vendors; a few years ago that share might have gone to more than 250 companies. Taken as a whole, these improvements could return 5% in cost efficiencies.

Procurement trends follow cycles, however, and the push for local-content requirements could fragment the procurement pool again. If local-content efforts are to succeed over the long term, NOCs and other oil and gas companies will have to work with local suppliers to build a strong foundation of support services.

Better tools also can improve procurement. One company redefined its contract work breakdown into related contracting modules, allowing it to reassign some contractor jobs and save 13% on goods and services. Global companies should also strive to manage suppliers at the global level and ensure they're working with the supplier's most qualified team, which adds value (and reduces frustration).

Risk and opportunity

Managing risk and opportunity is a continuous process that requires companies not only to consider the most common risks but also to have experience mitigating unexpected events. In the oil and gas industry, the importance has never been greater to manage health, safety, and environmental risks, given the rising complexity of operations and the close scrutiny by regulators and stakeholders. Risk identification and evaluation continue throughout a project's life and across the project portfolio and should take a systemic perspective that considers projects, their phases, and relevant risks.

Leading companies work with contractors to determine how risk and opportunity will be shared. The practice forges a relationship closer than what's possible by simply trying to transfer risk to contractors while reducing cost and risk for the managing organization.

New generation

Engineers and builders in the oil and gas industry face unprecedented challenges as they design and construct the infrastructure to extract, transport, and process the oil and gas needed by the global economy.

Few large projects in the planning stages will stand the test of time like the Colosseum. But that doesn't diminish their importance or suggest they should be undertaken with any less rigor.

As the oil and gas industry undertakes a new generation of major projects, project managers will need to rely on coherent, consistent reference frameworks that guide their decisions and engage the most competent talent they can find.

The authors