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Contracting For Capital Projects

December 9, 2010

Last week, I interviewed members of the senior management team from contract management solution provider 8over8. I was interested in their perspectives because they focus on software that supports major capital projects in the oil, gas and utilities sector.

This industry sector has always dealt in relatively complex, high risk activities that require massive investments (average around $11 billion per project, according to 8over8 CEO Clare Colhoun) and are frequently in the public eye. For a range of reasons, the glare of publicity is unlikely to diminish; indeed, energy policy is set to become an even more visible issue in today’s highly interdependent global economy.

8over8 has produced a set of interesting white papers recording their recent experiences in dealing with the industry (available from their website). In our conversation, they confirmed that ‘contracting is being elevated to a higher level’ and seen as a critical ‘strategic discipline’ in managing both the risk and the economics of these major projects. ‘There is a new perception of contract management value’, commented 37-year industry veteran Bob Spence. ‘It is no more a backroom function.’

In support of these comments, there are a number of discussion points I would like to highlight (the complete one hour recording is available in the IACCM Member Library).

First, the role and importance of contracting varies depending on the nature of the service or product being acquired. While many organizations are recognizing this, some (especially on the buy-side) still tend to see contracts and associated contracting skills as a relatively minor element in a wider procurement or sales process. They may apply similar approaches to project relationships as they do to general procurement.  As a result, they fail to capture and share key data across the organization. This means that contracting principles and performance indicators are frequently not used in supplier selection (resulting in either the wrong suppliers being appointed, or failure to learn from past experience).

Second, in the experience of the 8over8 team, many companies lack a team that is dedicated to supplier performance management, equipped with the tools that enable it to oversee the best measures and KPIs, undertaking analysis and feeding back into the system to assist in future selection and performance management.

Third, the trend to Global Supply Agreements can be extremely helpful – for example, such standards assist in more consistent and mutual assessment of metrics and lessons learned across a portfolio of contracts. This capability, when used well, can operate to the advantage of international suppliers – but of course it depends on the readiness of both parties to adopt collaborative behaviors and demonstrate a mutual commitment to sustained improvement.

Finally, we talked about the characteristics of ‘good relationships’. Many organizations encounter local resistance to ‘central’ policy and the imposition of global or regional ‘preferred suppliers’. The local teams argue that the tight relationships with familiar suppliers lead to more closely-knit teams, committed to high performance. The 8over8 executives confirmed that ‘local clusters (of suppliers) lead to tight relationships’, but they observe mixed impacts on risk. ‘Local relationships may override procedural relationships, resulting in a more informal approach where there is a lack of documentation and decision making can become rather opaque’.

Automation is of course only one piece in the overall development of contracting competence, but its benefits are daily more evident. However, automation for capital projects is not the same as that for general contracting. Most companies have established good transaction management systems. The key for capital projects is to find systems that assist in managing interfaces (internal and external), facilitating high quality communication and supporting management judgment and decision-making. And when things go wrong – as inevitably will sometimes be the case –  it is increasingly critical to have the record of who made what decision, when, on what basis and with what expectations?

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