26 April 2013 10:12 [Source: ICB]
With the chemical sector once again investing in major plant building, the pressure is on to do it right and derive the maximum benefit from new capital projects
Following almost two decades of aggressive cost reduction and the recent economic downturn, chemicals companies are expanding again.
Effective capital projects depend on talent, front-end planning and alignment to organisational strategy
Projections indicate that nearly $19tr (€14tr) will be spent through 2035  on capital projects around the globe. With such large investments, and the increasing complexity of projects, effective capital project delivery is critical, especially since projects are increasing in size and complexity. However the majority of companies are not delivering consistently against their targets.
OBSTACLES TO EFFECTIVE DELIVERY
Conversations with C-level chemicals executives and Accenture's work in the chemicals industry have helped Accenture pinpoint the three main obstacles to effective delivery of capital projects - something that all industry executives are prioritising over the next three years: to deliver these projects on time, on budget and to get the maximum business value from their assets.
First, attracting and retaining talent has become a major issue in the chemicals industry. In developed regions, the workforce is aging and the industry has had difficulty competing with high-tech companies, like Google, eBay and Amazon, for top college graduates.
On the other hand, in emerging markets, companies are faced with less experienced talent, talent retention and the need to transpose skills from more mature locations.
Second, improving project planning on the front end is critical. Inadequate up-front planning can result in budget overruns and slippage in other areas. Insufficient detail in the planning stage and subsequent design changes driven by new or unrecognised requirements are the most common causes of changes to the project schedule.
The implication is that thresholds for considering changes to the project, especially for elective or beneficial changes, need to increase as the project proceeds through each phase. While it is relatively inexpensive to incorporate changes in early planning phases, projects cannot endure numerous changes without suffering an increase in overall cost and a decrease in schedule performance.
Third, alignment to organisational strategy is becoming increasingly complex and at the same time increasingly important. Chemical companies are now more likely to engage in joint ventures that set up huge facilities to achieve ever-greater economies of scale. For example, in 2000, approximately 60% of world ethylene capacity was owned by more than one entity. By 2010, this figure had risen to 70%, and the percentage is projected to increase further by 2020. As a result, multiple stakeholders enter the mix and management of all the corresponding priorities becomes critical in all decision-making.
As companies work with new teaming partners, use new technologies and expand in countries with less mature construction environments, the complications increase. And so this leads to the question: how can capital project delivery be improved?
With each mega-project, hundreds of millions of dollars are at stake, so making the most of scarce talent through portfolio management, organisational flexibility and training is paramount. Equally critical is establishing strong, integrated project governance, risk management and project controls. Once in place, sustaining these capabilities requires capturing effective practices in project information systems, based on key performance indicators (KPIs), that integrate internal external and capital project players.
Ten to 15 years ago, companies had a good pool of experienced project managers. With the further decline of the economy in 2008, however, many companies trimmed capacity, leaving organisations short of experience for the current expansion. Retirements further diminished the ranks of experienced project directors and managers.
The industry strategy to address these shortages is through a variety of measures, including strategic sourcing partnerships with engineering, procurement and construction (EPC) companies, tactical sourcing and development of internal resources. While companies can mitigate some of the shortage by relying on contractors, that option does not wholly solve the problem, as EPC performance issues, for example, can erode substantial business value from what is expected to be delivered. Contracting decisions assign challenges to other parties but EPCs and subcontractors also are experiencing talent shortages so the risk remains.
Since talent in a wide range of areas will be in high demand for many years, optimal management of existing resources is vital. Companies must deploy their available resources in the most strategic way.
As the number of capital projects grows, companies are challenged to allocate resources across complex portfolios. With an abundance of high-return opportunities, companies should not risk overextending resources by having too many projects at the same time.
Portfolio planning and optimisation approaches help to evaluate and prioritise project selection and resourcing decisions given competing priorities. Similarly, at the project level, automated planning and scheduling solutions enable project managers to know where critical or specialised talent needs to be positioned during each phase.
Information technology can be used to help organisations better leverage scarce, experienced resources, by streamlining work process and eliminating manually intensive, non-value-added activities. Additionally, tedious, transactional work can be shifted to other resources. Flexible organisational design promotes the sourcing of back-office functions, such as procurement, document management, IT and project coordination support.
Additionally, experienced managers in the industry need to invest time in training those who are less experienced. In the US, for example, the proportion of engineers over age 50  in the workforce has significantly increased. This maturing of the engineering workforce and war for skilled talent has created a shrinking time window to capture and transfer knowledge to the next generation.
Training is also a critical enabler for project safety, productivity and initial operability. The future lies in training simulations that familiarise staff with how to perform tasks successfully prior to actually doing the work - for example, installing new equipment, operating new plant systems at turnover and removal of equipment during refurbishment or decommissioning.
GOVERNANCE AND FRONT-END PLANS
Multiyear capital projects have many variables and long timespans. Coming up with the perfect plan from the start is, of course, unfeasible. Strong governance is needed, along with the ability to manage risks.
Front-end planning should occur through a well-established, stage-gate phasing process. Projects need to meet required exit criteria for each stage. Gaps should be identified and addressed in a peer-review process before moving to the next phase. A highly disciplined approach clarifies engineering needs, and leads to more accurate cost and schedule estimates.
Multiple methodologies for validation of the quality of the stage-gate process exist, including the Project Definition Rating Index (PDRI) for industrial projects. The choice of tool is not as important as solid commitment and discipline to follow a tested methodology.
The ability to significantly influence project cost occurs early on when greater uncertainty exists and contingencies are higher. Through improved front-end planning, both project delivery and operations and maintenance performance can be optimised in alignment with organisational strategy.
Assembling a cross-functional group helps to identify a wide range of risks, and the ways in which risks interact and magnify the adverse consequences. Furthermore, a diagnostic can help assess if an organisation's capabilities are adequate to meet the level of complexity of the project. Proactively managing risks helps reduce the number of realised problems, claims and scope changes.
One important topic for discussion is seeking representation and input from operations and maintenance early. In addition, systems need to be designed that capture information at the start, and enable sharing of data easily among teams across the project life cycle, including those who will operate the asset.
Agreeing on data needs and relevant performance indicators lay a solid foundation for capital projects analytics. Analytics provide dashboards for integrated project planning, progress measurement, schedule control, risk management and reporting. Agreeing on data needs also can avert a time-consuming data handover from project completion to operation.
INTEGRATING INFORMATION SYSTEMS
Inadequate information management undermines quality, increases costs and delays commissioning of new assets. Virtually everyone in the project life-cycle needs access to reliable and updated data.
Progress cannot be monitored effectively if proper standards are not established early in project planning. Rules of credit, for example, need to be established to measure EPC progress. This then leads to more accurate reporting. Improved accounting and management of equipment and materials occurs after chemicals companies consolidate functions that are fragmented among project owners, EPCs and construction contractors. Project owners need to lead the transition from document management to data management.
Electronic data standards and systems established early promote integration and improve productivity throughout the project life cycle. Monitoring systems and KPIs give project managers better information about the cost of projects from region to region, and among product groupings.
IT systems today also enable much better up-front design and 3D visualisation. Companies benefit from reduced rework and improved decision making through the use of the latest visualisation tools including 3D models, laser scans and videogrammetry (2).
Finding the right information on demand is frequently frustrating and time consuming. Automated tools can help employees find information, boosting productivity. Virtual tools, including next-generation portals, bring project teams closer together, promoting collaboration, learning and knowledge management.
Tools and information sources need to be structured and configured for specific roles. Many employees in the field, for example, could work with easy-to use tablet computers, but engineers need more powerful notebooks. Similar to hardware choices, software and data sources need to be configured to simplify information access. Also, as many are nearing retirement age, formal processes need to be implemented and documented to improve knowledge transfer, management and access.
With thorough information integration, organisations can benefit from improved decision support and stronger leadership.
ACCELERATE ASSET COMMISSIONING
Projects need to be executed with "on-time production" remaining top of mind throughout the project life cycle. As an example of the cost of delays, the above chart presents a view of how profits can potentially be reduced due to poor start-up timing of ethylene plants.
According to Accenture Research, ill-timed start-up would have equated to approximately $700,000 of lost cash flow per day for a new North American ethylene cracker in 2011.
Therefore, streamlining the effectiveness of the transition from project to working assets makes good business sense. The earlier that a chemical company's operations department is involved, the better chance there is of building assets that can be operated as planned and completed close to schedule.
Manual transitions between project stages can also significantly slow the process as personnel must manually populate and validate operational systems. Project directors need to remain keenly aware of better ways to conduct handovers.
A strong project management organisation is invaluable for mega-projects. Due to the high stakes involved, capital projects call for targeted objectives, clear delivery strategies and diligent monitoring to track progress. Capital projects should not be run as isolated and independent projects, but instead with a broader perspective, driving synergy across the portfolio for high performance.
TABLE SOURCE: FOOTNOTES
Industrial Info Resources base data extrapolated to 2035 using Oxford Economics' regional sector output forecasts; includes pharmaceuticals. www.industrialinfo.com.
Videogrammetry is a measurement technology in which the 3D coordinates of points on an object are determined by measurements made in two or more video images taken from different angles. http://en.wikipedia.org/wiki/Videogrammetry
National Science Board, Science and Engineering Indicators 2012. www.nsf.gov/statistics/seind12/c3/c3h.
Andy Webster is a managing director for Accenture Capital Projects Services supporting the chemicals, energy and utilities industry sectors. Paul Bjacek is a senior manager in Accenture Research and global lead for chemicals and natural resources research.
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