Reviving Entrepreneurial Thinking and Behavior in Capital Projects

BY SCOTT WHITBREAD and Nat Greene

As capital project development has become increasingly structured and formulaic--to enable scalability and consistency--many projects have become devoid of the entrepreneurial thinking and behavior required to minimize costs and maximize returns. Adherence to industry best practices has become a primary measure of success for a project team, and the sense of individual responsibility for the project’s ultimate financial outcome has largely dissipated; each individual can succeed by performing their scripted activities “well”.

To break out of this formulaic trance and unleash the creative potential of their organizations, capital project leaders must enable their employees to consider creative alternatives in design and execution, and critically examine opportunities to improve based on their merits. There are five key barriers that must be overcome to revive the entrepreneurial practices in any project.

1. Accepting false tradeoffs between cost, quality and schedule

“Good, fast, cheap: pick any two.”

This unattributed, but often quoted, slogan speaks to the Iron Triangle (or Project Triangle or Triple Constraint) conceptualization of the relationship between cost, quality, and schedule. The slogan asserts that to improve one of these aspects, another one (or two) must suffer.

The concept serves the formulaic approach by helping project managers to defend against unrealistic owner expectations or in giving the team strategic direction by defining a project as either cost-driven or schedule-driven. However, if only trade-offs are possible, then original designs must naturally gravitate to perfect optimization in every case. This is unrealistic in any original design.

 

2. Over-relying on benchmarks to other projects

Project leaders attempt to take full advantage of knowledge gained in past projects through various forms of benchmarking. Examples include reusing or licensing designs, following documented or de facto industry standards, and benchmarking costs and timelines to similar completed projects.

There are benefits to this: leaders can save on design costs, avoid known risks, and use an external sounding-board to validate some decisions. However, benchmarking encourages leaders to rely on the judgments of others, even though they were designing and building a different project in different circumstances. Focusing on replicating what has worked before discourages the team from using their creative capacities to maximize value for their unique project.

Each capital project will never be built twice at the same location, with the same economic and environmental conditions, and with the same team. If reliance on benchmarking is unchecked, these unique opportunities will remain hidden or be undermined.

 

3. Dismissing proposed ideas prematurely (not worth much)

The current complexity of financially modelling capital projects has made the projects’ economics largely inaccessible to the average team member. The models have become so intricate, and are iterated so infrequently, that team members no longer have a tacit understanding of how their design and execution decisions are influencing the project’s economics.

Without the ability to access and interact with real data to evaluate new ideas, these ideas are quickly dismissed because their impact is unknown. However, it is possible to quickly determine the value of possible improvements without dismantling the formal project economics structure. Supplementing the official calculations with approximate rules of thumb that equate the impact of changes in each value driver to a ‘common currency’ (e.g. impact on IRR), can give back to individual team members a tacit understanding of what their improvement ideas are worth to the project.

 

4. Dismissing proposed ideas prematurely (wrong time)

When improvement ideas are brought to the table, they often run into the perceived constraint that it is the wrong time to consider them. Early on in the project it is thought to be too soon for them, as not enough initial work has been done to properly evaluate their overall impact, and that there will be plenty of time later. Then, later on in the project, it is too late for them as the cost of making changes is thought to outweigh any potential benefits.

This thinking is rooted in the MacLeamy curve (named for the architect who defined it), which describes how the ability to influence the outcome of a project declines throughout its development.

When combined with the natural human tendency to see things in black and white terms, the perception of this relationship between time and influence creates a conundrum. Early on, improving project value is seen as purely academic. Then at some point, plans suddenly appear to have become set in stone.

A far better approach is to interpret the MacLeamy Curve literally, recognizing that there is a degree of influence that can be had on the project outcome throughout development and evaluating potential improvements based on their economic merits at that point in time.

 

5. Inadvertent incentives to “hide money” in the project case

The immense culmination of effort, attention, and expectation around the final investment decision of a capital project creates the pressure to distort perceptions and create unintended behaviors. Often discussed is the pressure to predict too optimistic a view of the economics to ensure project funding. Rarely discussed, however, is the pressure to sandbag the expectation, driven by a desire to raise the likelihood of success by testing the floor of stakeholder expectations.

To break out of the budget negotiation mindset, project teams need a safe space in which to creatively explore opportunities to increase project value without fear that their ideas will be prematurely incorporated into stakeholder expectations. During the cultural transition to becoming more entrepreneurial, a project team can create this safe space by developing an additional, internal stretch target, which they alone hold themselves to. Along with proper encouragement, the team will be motivated to improve while still being able to effectively manage external stakeholder expectations.

Uncovering upside value in projects should always be considered a win for the organization, even if there are sentiments that the value should have been uncovered sooner. By encouraging this behavior, organizations can ensure that individual do not hide project value in their back pocket for a proverbial rainy day.

 

The two paths forward

There are two paths forward that organizations can take in response to the reality of insufficient project returns: double down on the devotion to the formulaic approach, or revive entrepreneurial thinking and behavior. The latter does not mean abandoning the systems that drive safe and consistent execution: it means rigorously challenging the assumptions and constraints that have accumulated on the hull of the formulaic approach like barnacles. Those who give in to seeing a false trade-off will fall behind those that integrate the best of both.

 

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