The first step to capital effectiveness is better front-end definition
If you take one thing away from this spring edition of Velocity magazine, let it be this: capital effectiveness is not optional anymore.
Capital construction projects are getting bigger, and the vast majority still come in years late and millions over budget. That’s not just bad for your bottom line. Investors simply won’t tolerate it anymore: Ernst & Young’s 2018 outlook of oil and gas analyst themes has once again ranked “discipline on costs and spending” among the top three key investor concerns. Beyond that, oil and gas is no longer the only energy game in town, and restive investors have the option to take their interests to the increasingly lucrative renewable energy markets. Let’s not assume the funds will always be there.
In short: your capital effectiveness strategy is not just a best practice or a nice-to-have. It is foundational, critical, and non-negotiable. As Stephen Mulva warns in our piece about soaring transactional costs this month: We need to stop managing projects “like a caveman with a checkbook.”
The first step is to radically rethink the way we execute the front-end definition on projects, and we’ve dedicated this entire edition of Velocity to helping you do just that. For starters, it’s time we recognize that capital construction projects start long before the project manager is assigned. By failing to do so, aren’t we firing the starter pistol after the horses have left the gates?
I am calling on Owner and EPC companies to expand the front-end view to include every single activity that happens from the day your commercial joint venture discussions start to after the first shovel goes into the ground. Start on the day the business opportunity presents itself, and build an organized, standardized and integrated project record in which traditional business-engineering silos are a thing of the past.
Create a project economy characterized by unprecedented collaboration, a flat supply chain, data-driven knowledge management and deep, granular visibility on everything from how much time was spent on a work package element to easy records access.
The next step is to sort out the fuzzy boundaries between accounting and cost-control, once and for all. Why are these two critical departments kept separate? In some cases, cost-control and accounting are on different ends of the country, or on different continents. If we want to build cost-conscious organizations, then we need to resolve this disconnect. Start by budgeting and accounting for integration as a separate project line item.
Finally, we need to recognize that a challenge of this scale can only be solved with technology. It’s time for the industry to embrace collaborative, cloud-based technology that can provide unprecedented, cost effective project visibility and data-driven, AI-assisted knowledge management.
Let us be wise, and start today.
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