Innovation and learning in complex offshore construction projects

Ž .Research Policy 29 2000 973–989www.elsevier.nlrlocatereconbase

Innovation and learning in complex offshore construction projects

James Barlow )

SPRU-Science and Technology Policy Research Unit, UniÕersity of Sussex, Brighton, BN1 9RF, UK

Abstract

Concern about the poor performance of the construction industry, in the UK and elsewhere, is coming at a time when itscustomers are demanding more and projects are becoming increasingly complex. Many of the industry’s performanceproblems stem from inadequate inter-organisational co-operation. The paper explores the problems and solutions in aligningthe construction industry more closely to its customers in CoPS-type projects. Using the example of a high value, highcomplexity offshore oilfield construction project, the paper examines the use of ‘partnering’ as a tool for stimulatingperformance gains at the project level and innovation and learning benefits at the organisational level. q 2000 ElsevierScience B.V. All rights reserved.

Keywords: Construction industry; Offshore sector; Partnering; Innovation; Learning

1. Introduction

Concern about the poor performance of the con-struction industry, and its lack of innovation, iscoming at a time when its customers are demandingmore and projects are becoming increasingly com-plex. The construction and maintenance of majortransport and urban infrastructure schemes, highlycomplex production facilities for the microprocessorand pharmaceutical industries, or offshore oil andgas production platforms have all placed new de-mands on construction companies and their associ-ated suppliers.

Many of the industry’s performance problemsstem from inadequate inter-organisational co-oper-ation. These problems — which are by no means

) Tel.: q44-1273-877166; fax: q44-1273-685865.Ž .E-mail address: [email protected] J. Barlow .

unique to the UK — include low productivity, anadversarial environment and the limited take-up oftechnological and business process innovations. Con-flicting interests arise because project participantshave differing goals and priorities, and risk is trans-ferred down the supply chain to those who aregenerally least able to bear it.

The paper explores the problems and solutions inaligning the construction industry more closely to itscustomers in CoPS-type projects. Using the exampleof a high value, high complexity offshore oilfieldconstruction project,1 the paper examines the use of‘partnering’ — an approach designed to enhancecollaboration between organisations — as a tool forstimulating performance gains at the project leveland innovation and learning benefits at the organisa-tional level.

1 See Appendix A for details of research method.

0048-7333r00r$ - see front matter q 2000 Elsevier Science B.V. All rights reserved.Ž .PII: S0048-7333 00 00115-3

( )J. BarlowrResearch Policy 29 2000 973–989974

2. CoPS and construction projects

The notion of ‘CoPS’ involves the production ofŽhigh value systems, networks or constructs Hobday,

.1998 . These usually embody large numbers of tai-lored, components, produced by temporary coalitionsof firms using one-off or very small batch processes.These firms generally possess different technical andorganisational specialisations, and varying knowl-edge and skill inputs.

A characteristic of CoPS is the elaborate nature oforganisational dynamics. This arises from the tempo-rary nature of the inter-firm coalitions involved inthe production of CoPS projects. Furthermore, pro-duction stages can often be lengthy, messy and illdefined. The integration of a wide variety of knowl-edge and skills, and mastery of complex subsystemsinterfaces, are all crucial to the design and develop-ment of CoPS projects. It is not usually possible totest full-scale prototypes in CoPS projects, so simula-tion and modelling is of great importance in front-end

Ždecision making, planning and execution Gann and.Salter, 1998 . However, the importance of tacit

knowledge and need for personal contact in problemsolving also places emphasis on continuous andcontiguous project participation in the successfuldelivery of CoPS projects — a geographical cluster-ing of firms is common in many project basedindustries.

The construction industry is often presented by itspractitioners as somehow ‘different’ and less in con-trol of its environment than other industries. This ispartly because of its project-based nature — it isgeneral construction industry lore that its outputs are‘unique’ projects — and the complexity of its supplychain relationships. There is arguably some truth inthis perspective, and complex construction and civilengineering projects bear most of the hallmarks ofCoPS described above. Major construction projectsinvolve the integration of different subsystems andcomponents by a range of participants — the end-customer, main and sub-contractors, specialist sup-pliers and other advisors — who form a temporarycoalition, which disbands after project completion. Inthis respect, the organisational structure of the con-struction industry can be seen as a form of ‘hybrid’

Žor ‘virtual’ enterprise Eccles, 1981; Miles and Snow,.1987 .

The inter-relationships between each participantwill vary, depending on the type of project. Con-struction project phases, however, generally followa common order, from feasibility studies, projectdefinition, design, negotiation and pre-contractstages, to construction and commissioning. Subse-quent stages involve facilities management, refur-bishment and eventually demolition or conversioninto another use. The construction process is tradi-tionally managed by dividing the work into discretepackages, which are sequentially purchased andcompleted according to a logical, planned set ofphases. These are given to different specialists forexecution. The result of this approach is that projectworkflow can face major interruptions, increasingthe possibility of conflicts, time and cost over-runsand quality problems.

What are the implications of these organisationalarrangements for industry performance? The con-struction process traditionally involves the purchaseof a product, governed by legal contracts. Any uncer-tainty in the project ends and the means by which itis to be implemented is passed down the supplychain risk. This is allied to another characteristic of

Ž .CoPS. Gann and Salter 1998 point out that firmstend to manage risk by retaining information crucialto systems integration within their own sphere ofcontrol, rather than transferring knowledge to otherfirms involved in the project coalition. Fundamen-tally, market inefficiency arises from imperfectknowledge of the financial risks at the time contractsare negotiated, the level of uncertainty over projectdefinition and standards, and the ‘locked’ nature of

Ž .the contract Alsagoff and McDermott, 1994 . Thedominant approach to construction procurement in-volves fixed specifications and fixed profit levels.Under these circumstances, there is a tendency forparties to behave opportunistically — once a con-tract has been signed, power relationships changeand contractors are able to exploit clients through

Žadditional claims McDermott and Green, 1996;.Buckley and Enderwick, 1989 .

The industry’s traditional approach to projectmanagement and its organisational structure andcompetitive strategies not only result in short-termperformance problems and customer dissatisfaction,

Žbut also limit its ability to innovate Mohamed and.Tucker, 1996 , engage in business process improve-

( )J. BarlowrResearch Policy 29 2000 973–989 975

Ž . Žment Kubal, 1994 , or strategic planning Hancock.et al., 1996 . One of the main reasons for customer

dissatisfaction is said to be the failure of the con-struction industry to understand the needs of itscustomers and effectively translate these into prod-

Ž .ucts Dulami et al., 1996 . The project-based natureof the industry means that different solutions tosimilar customer requirements are put forward, hin-dering organisational learning or standardisation inconstruction processes.

This state of affairs has not gone unnoticed in theUK. Improving the project briefing process has longbeen seen as critical — government and other re-

Žports on this issue date from the 1960s e.g., MPBW,1964; Higgin and Jessop, 1963; O’Reilly, 1973;

.NEDO, 1974, 1991; Barratt et al., 1996 . Until re-cently, however, major customers and governmenthave tended to see improvements to the briefingprocess as a quick fix for the construction industry’sperformance problems. This obviated the need totake harder decisions about ways of fundamentallydeepening the level of customer focus in the indus-try. However, a series of government initiatives isnow attempting to modernise the construction indus-

Ž .try Latham, 1994; Construction Taskforce, 1998 ,and there is some evidence that client satisfaction

Ž .has improved since 1995 CIBrBuilding 1999 .Concern about the industry’s poor performance iscoming at a time when its customers are demandingmore from it. Indeed, many customers for construc-tion products and services represent considerablymore advanced industrial sectors than the construc-tion industry itself. Their requirements have been amajor driving force for change in the constructionindustry.

3. The customer interface in complex constructionprojects

In any given construction project, there is a chainof internal and external customers. The end-customer— generally known as the ‘client’ or project ‘owner’in the construction industry — is usually defined asthe person or firm responsible for commissioning

Ž .and paying for the project Anumba et al., 1996 .There is considerable diversity between and withinorganisations involved in construction activities, in-

cluding clients, and the nature of interactions be-tween contractual parties will be partly influenced bya client’s previous experience of procuring construc-tion work. Clients range from the very experiencedto those who are infrequent purchasers of construc-tion services, with little incentive to become expert

Žin the procurement process see Table 1; cf. Game-.son, 1996, for similar classifications . Inexperienced

or infrequent clients dominate in sheer numbersŽ .Anumba et al., 1996 , but experienced clients ac-

Žcount for the majority of construction work HMSO,.1990 . These clients — who include many govern-

ment bodies — have become increasingly concernedwith the need for change and have exerted consider-able influence over the construction industry to tryand raise its standards. Table 2 indicates the largestclients in the UK, measured by the value of theirconstruction expenditure for the period 1998-99. Asthe table shows, many are major, ‘blue chip’ manu-facturing and service companies. These are fre-quently involved in procuring complex, high value,high-risk construction projects such as sophisticatedmanufacturing facilities, railway infrastructure, orcomplex urban regeneration schemes.

Traditional approaches to organising the construc-tion process, described above, can work well forrelatively simple, slow and certain projects. Whenthis is not the case — when projects are more

Table 1Types of construction client

Frequency of Reason for procurementprocurement Investor Occupation

Frequent Ø Property developers Ø Large clientsØ Investors seeking Ø Experienced in the

short-term returns constructionprocess

Ø Influential on theconstructionindustry

Ø Long-term view

Infrequent Ø Many clientsØ Inexperienced in

constructionØ Dissatisfied, but

unable to influencethe industry

Ž .Source: DoE and British Telecom 1995 .


Table 2Largest UK construction clients

Ž .Client Ownership Construction activity £ millions

Railtrack Private Rail infrastructure 858.0London Borough of Southwark Local government Urban regeneration 619.7London and Continental Railways Private High-speed rail line 595.9Energy Power Development Private Power generation 595.0Dept of the Environment, Transport Central government Urban regeneration 590.2and the RegionsMinistry of Defence Central government Military facilities 555.1National Power Private Power generation 544.2English Partnerships Public Urban regeneration, land reclamation 490.6Powergen Private Power generation 373.3

Ž .BP Oil UK Private Petrol stations 362.7HBG Construction Private Property development 356.1Chelsfield Private Property development 328.7Sainsbury Private Supermarkets 320.2Basingstoke and Deane District Local government Housing renewal 304.8CouncilSevern Trent Private Water services 296.9North of Scotland Water Private Water services 278.6

Ž .LG Lucky Goldstar Private Microprocessor factory 267.0Land Securities Private Property development 252.0Cardiff County Council Local government Cardiff Bay barrage and land reclamation 251.2West of Scotland Water Private Water services 238.5Manchester City Council Local government Urban regeneration 225.6BNFL Public Nuclear fuels processing plant 216.0Transco Private Gas pipelines 215.0United Utilities Private Power generation, water services 211.9Southern Water Private Power generation 210.6Home Office Central government Prisons 205.5Scottish Power Private Power generation 202.0Yorkshire Water Private Water services 200.9

Measured by average monthly value of outstanding contracts for the 24 months to March 2000. Excludes pure engineering work.Source: derived from Glenigan construction contracts data.

complex or uncertain, or need to be completed rapidly— it becomes much harder to coordinate the largenumber of specialist participants that are often in-volved. Under these circumstances construction tendsto resemble a prototyping process, whereby projectends and means are continuously negotiated by the

Ž .various parties involved Howell et al., 1996 . Thistends to blur the traditional boundaries between con-struction phases and activities, requiring more com-plicated, non-hierarchical organisational structures.As in typical CoPS projects, in this situation itbecomes essential to establish tools and techniquesfor achieving rapid integration of the necessaryknowledge and skills possessed by participating or-ganisations, and mastery of the interfaces betweenvarious subsystems.

Many important clients involved in procuringcomplex construction projects now hold the viewthat that the current framework for managing theconstruction process is inadequate. These clients haveincreasingly turned to ‘partnering’ as a strategy forproject management. In doing so, they have foundthat short-term project performance has often im-proved considerably and, furthermore, the approachhas resulted in technical and business process inno-vation.

The rising practical interest in construction indus-try partnering mirrors the attention paid in organisa-tional theory to forms of ‘hybrid’ or ‘virtual’ enter-

Žprise Miles and Snow 1987; Powell 1990;.Thompson et al., 1991; Williamson 1993 ; in institu-

tional economics to uncertainty-reducing arrange-


ments such as obligational contracting and supplyŽagreements Williamson 1975; Kregel 1980; Hodg-

.son 1988; Imrie and Morris 1992 ; or in manufactur-Žing logistics to lean and agile supply chains Naylor

.et al. 1999 .

4. Structures and strategies for managing com-plex construction projects

There is nothing new about collaborative arrange-ments between firms in the construction industry —this has long been the industry’s pattern of day-to-daytrading relationships. Partnering, as a new approachto collaboration, emerged in the UK constructionindustry during the late-1980s in the offshore oil andgas sector, although some major supermarket chainshad also been involved in informal long-term con-struction industry relationships.

Broadly, partnering is a generic term embracing arange of different business processes designed to

Ž .enhance collaboration see Barlow et al., 1997 . The

underlying rationale is that influence on final projectoutcomes is greatest in the earliest phases of aproject and problem resolution is easier where thereis closer and early involvement of all parties. Part-nering essentially represents an attempt to reconceivethe construction process, moving towards the bottomof Fig. 1 but maintaining the best elements of tradi-tional approaches.

The critical feature defining partnering is the ex-tent to which the arrangements attempt to facilitatean improvement on both sides of the client–supplierinterface. Although the transactions between partiesare still governed by commercial contracts, moreimportant for success is the way in which the Õaluesand objectiÕes held by each party are accommodatedto ensure that no one set dominates the outcome ofthe project. Genuinely performance-enhancing rela-tionships frequently involve clients, contractors andother suppliers engaging in some form of collabora-tive arrangement, which involves sharing the benefits

Ž .of partnering Barlow et al., 1997 . We return to thispoint below.

Fig. 1. Models of the construction process.


Fig. 2. The emergence of construction industry partnering in the UK.

The reasons for partnering have tended to varyfrom sector to sector, depending on the extent towhich there has been a perceived need to move fromtraditional approaches to construction procurementŽ .Fig. 2 . For instance, supermarket chains have pro-gressed from informal long-term relationships in or-der to outsource their non-core construction activi-

Žties, through more formalised arrangements perhaps.with an agreed pool of suppliers to improve con-

struction performance, to full partnering relation-ships. Because the construction of supermarkets isnow highly efficient, partnering for these clientstends to be for ‘soft’ reasons, such as ensuring theirsuppliers represent the supermarket’s brand and pub-

Ž .lic image effectively Barlow et al., 1997 . Othertypes of construction client have begun to partner atdifferent times and for different reasons.

Despite slow adoption of partnering in some con-struction sectors, recent evaluations show that im-proved construction performance — in some cases,greatly improved performance — is possible. Ac-cording to one study of 200 examples, the mostsophisticated partnering agreements produced timesavings of more than 50% and cost savings of 40%

Ž .Bennett and Jayes, 1998 . These ‘second genera-tion’ partnering relationships, involving companiesthat have already been through the learning curve,also provided their participants with more stableworkloads, improved flexibility, faster project start-up, the elimination of defects, innovation and betterdesign. Some ‘third generation’ partnering relation-ships, where participants have undergone fundamen-tal changes to attitudes, organisation and technology,demonstrate even greater benefits — 80% time sav-ings and 50% cost savings. Underlying these perfor-mance gains are the beneficial effects of improvedcommunications on problem resolution, the develop-ment of inter-organisational and inter-personal trust,and the promotion of an innovation culture.

5. Partnering, innovation and organisationallearning in construction CoPS

The management of innovation in CoPS is com-plicated by the discontinuous nature of their projectbased production processes. These often involve bro-ken learning and feedback loops, in an environment


where the architecture of the production system mayfluctuate with the changing shape of the projectŽ .Gann and Salter, 1998 . A further factor complicat-ing the inter-organisational transfer of knowledge isthe number of suppliers, each of which may behighly specialist, and complexity of networks theyare involved in. Moreover, project-based firms oftenhave only patchy knowledge of their own portfolioof projects, relying on informal channels of commu-nication between project groups as the principalsource of information on their activities. The flow ofknowledge and innovation between organisations thusneeds to be managed in a context of short-term,discrete supply networks, necessitating capabilities incoordination and integration across organisations.Partnering, with its emphasis on communications,risk and reward sharing and the development of trustbetween organisations would appear to be ideallysuited to this requirement.

There is indeed considerable evidence from otherindustries that collaborative relationships help to pro-

Žmote product and process innovation see Shaw,1994, and other papers in Dodgson and Rothwell,

.1994 , and interest has grown in the constructionindustry in the possibility that partnering can aid thetransfer of knowledge between firms. According to

Ž .Provost and Lipscomb 1989 , partnering providescompanies with an environment, which allows themto refine and develop new competencies in a morecontrolled and lower risk way. A continuity of per-sonnel from project to project in long-term partner-ing relationships may therefore provide organisa-

Ž .tional learning benefits Baker 1990; CII 1991 .Clearly the regular use of external organisations

with different knowledge bases is potentially benefi-cial. However, the mere existence of a partneringrelationship is not in itself sufficient to result in

Žcross-organisational knowledge transfer Barlow et.al. 1998 . The degree to which this will occur is

influenced by several factors, which partly relate tothe objectives of each partner and partly to the typeof knowledge, which may be transferred. Both thesefactors are, in turn, affected by the nature of intra-and inter-organisational communications and organi-sational culture. There may for example be inherenttensions and conflicts between clients and suppliersif each are driven in different directions due to the

Žnature of the competitive environments Mintzberg,

. Ž .1991 . Moreover, as Kogut and Zander 1992 haveargued, the transferability of knowledge betweenorganisations is shaped by the degree to which it canbe codified — structured according to a set of easilycommunicated identifiable rules — and its complex-ity. Knowledge that is readily codifiable and simpleis more easily transferred than knowledge that isembedded in the culture and work principles of anorganisation. Successfully transferring embeddedforms of knowledge between or within firms is mosteffective in a longer term relationship, since theseare more likely to promote the emergence of sharedcoding systems.

Simply transferring knowledge is insufficient forinnovation to occur in a partnering relationship —organisations need to be able to recognise the valueof knowledge and apply it strategically. Three furtherfeatures need to be in place to take full advantage ofknowledge transfer. First, as Cohen and LevinthalŽ .1991 have noted, the ‘absorptive capacity’ of anorganisation depends in part on the ways in whichknowledge is retained and distributed. This suggeststhat as well as the turnover of staff, an organisation’sinternal and external communications structure, and

Žits political and cultural environments Kanter, 1990;.Schein, 1985 , are important influences. Second, the

presence of ‘champions’ — central figures helpingto nurture and implement the partnering process —may well be crucial in promoting and distributing anorganisational ‘memory’ of the lessons learned frompartnering experiences. Finally, organisations try toroutinise their ongoing and repetitive business pro-cesses because routines can stimulate innovation andprovide opportunities for sustained process improve-

Ž .ments Gann and Salter, 1998 . Project processes,which tend to be temporary and unique, do not lendthemselves to standardisation and economies of scale.Success for project-based firms thus requires theintegration of project experiences with continuousbusiness processes. There is, however, often a gapbetween the rational project development practicesŽ .i.e., an organisation’s procedural routines and ac-tual development practices, as designers and engi-neers respond to unexpected events. Attempts toimpose rigid formal procedures may force practition-ers to mask their real activities and drive themunderground, reinforcing and further widening the

Ž .gap Hobday and Brady, 1998 .


6. Partnering and the offshore sector — the( )British Petroleum BP Andrew Alliance

The offshore oil and gas industry has absorbedbetween a fifth and a quarter of the UK’s totalindustrial investment in most years since mid-1970sŽ .DTI, 1995 . The industry can be seen as an exampleof CoPS. Investment involves the development ofhighly technologically complex infrastructure for theexploitation of subsea oilfields. Because the operat-ing conditions on each field are unique and continueto change over its life, these products are highlycustomised and demand continuous technological andorganisational innovation over a lifecycle of 25 years

Žor more Bower and Young, 1995; Bower et al.,.1996 . There are, however, problems in managing

innovation and sustaining organisational learning inthe offshore sector because of the nature of itssupply chains.

Despite the high degree of vertical integration ofthe oil companies, aspects of exploration, design,construction and the operation of oilfields have longbeen contracted out. During the early 1990s the oilcompanies outsourced many activities and cut jobs.Many smaller specialist product and service suppli-ers were faced with the loss of previous communica-tion channels with the oil companies, becoming morereliant on their relationships with the prime contrac-

Ž .tors Bower et al., 1996 . These supply a wide rangeof services from in-house capability and subcontract-ing relationships, but most were relatively inexperi-enced in managing innovation, either internally or incollaboration. In contrast, although there are severalthousand specialist firms subcontracting and supply-ing to the offshore industry, perhaps 250 are ac-knowledged to be leaders in the provision of techno-logical innovation to the industry. There is a highdegree of geographical clustering in this sector, andinformal communication between them is extensiveŽ .Bower et al., 1996 .

The Andrew oil field was discovered by BP in1974, but until 1990, it was economically marginalbecause of the unfavourable balance between theprevailing oil price and development costs. Thesewere escalating under traditional procurement ap-proaches. The Andrew team realised that technologi-cal innovation alone would be insufficient to sub-stantially reduce construction costs and postulated

that focusing on the nature of their relationships withsuppliers and contractors could offer the possibilityof doing so.

Much of this early development work on Andrewwas subsequently reinforced by, and fed into, thegovernment- and industry-sponsored Cost Reduction

Ž .in the New Era CRINE initiative, which was pro-moting new approaches to offshore procurement anda radical change in contracting customs. This in-volved the promotion of contractual relationshipswith smaller numbers of integrated service providersor alliances of firms providing these services. Oneemerging approach was to replace traditional formsof contractual relationship with risk and reward shar-ing arrangements, whereby the benefits from innova-tion and performance improvement are shared be-tween project participants. CRINE made a number ofrecommendations, which the Andrew team felt shouldbe addressed:

Ø Improving the relationship between the operatorand contractors is a key element in reducingproject cost.

Ø Common objectives for all project parties aremore important than individual objectives.

Ø There is a need to remove the adversarial climateprevailing in the UK’s offshore industry.

BP’s aim in using partnering was to use smaller,more closely integrated project teams to substantiallyreduce the cost and time of delivering field facilities,without compromising quality, safety or environmen-tal performance. Table 3 lists the principal projecttargets and Table 4 indicates the individual elementsof the target cost saving. The Andrew Alliance was

Table 3Andrew targets at project sanctioning

Andrew Industry benchmark

Ž .Cost 1993 £ 373 450Platform rig 1800 2000

Ž .weight tonnesTopside 10 20installation timeŽ .man-hoursrtonneDevelopment 33 ca.50–60time to first oil


Table 4Target reduction in capital expenditure

Source of performance % Reductionchange in expenditure

Reduced interfaces, 8integration of design andfabrication teams,optimum equipmentdeliveryReduction in BP 8personnel bycombining resourcesImproved supplier 3relationships,less documentation,non-prescriptivespecificationsDesign innovation 3Total 21

Ž .Source: Bakshi 1995 .

especially concerned to engineer the design and pro-curement process to achieve full on-shore comple-tion of the structure, including fabrication, testingand commissioning. This was seen as critical inachieving significant cost and time savings. In otherwords, the fully completed drilling and accommoda-tion modules were to be transported to the deck

fabrication yard for installation in their final position,prior to transportation offshore. This breaks fromtraditional offshore projects, where the various ele-ments were installed offshore, at a high financial andsafety risk.

The Andrew project involved the construction ofa single fixed platform comprising a piled steel

Ž .jacket substructure supporting an integrated deckwith production, drilling and accommodation facili-ties, standing in 116 m of water. The selection

Ž .process for the project participants Table 5 is de-Ž .scribed in Barlow et al. 1997 . Essentially, this

involved the key firms being brought into the Al-liance at the front-end of the project prior to sanc-tioning, rather than sequentially as in a traditionalcontract. Together, the Alliance partners developed aclear target that had to be achieved if the project wasto be sanctioned.

Each project partner signed an individual workscontract with BP and an ‘Alliance Agreement’. Thiswas a separate agreement, which sat alongside theworks contracts. The Alliance Agreement set out theprinciples by which the parties would work togetherand aligned them financially to the overall success ofthe project. All eight partners were brought together

Ž .in an integrated management team IMT . The workscontracts, which defined the individual scope of

Table 5Andrew Alliance partners

Function Firm RiskrprofitabilityŽ .share %

Project management, BP 46operational management,commercial management andexternal coordinationDesign, procurement, Brown Root 22and project managementsupportIntegrated deck Trafalgar House Offshore Fabricators Ltd. 12fabricationJacket fabrication Highland Fabricators Ltd. 6Export pipelines Allseas Engineering 4Transportation and Saipem UK Ltd. 6installationDrilling design and Santa Fe Ltd. 3fabricationAccommodation Emtunga AB 1design and fabrication


work and incorporated the actual contractual con-trols, gave the client the option of continuing theproject in a conventional way if the Alliance Agree-ment failed.

The Alliance Agreement included a gain sharingmechanism. Under this the partners agreed a target

Ž .cost £373 million at 1993 prices . If the project costŽmore than the target, Alliance members including

.BP were liable for a share of the overrun up to anoverall limit of £50 million. Conversely, if the pro-ject was completed within the original estimate, theAlliance members would received a share of thesaving. The risk and reward exposure for each mem-ber was determined by the financial amount theywere willing to put at risk and approximately re-flected their ability to influence the final project

Ž .outcome Table 5 . The gain sharing mechanismessentially prevented contractors from making moneyout of alterations, as all Alliance members stood tomake or lose money collectively. A major breakfrom tradition was that completion for the purposesof triggering gain sharing was defined such that theclient was delivered with a working facility.

The objectives of the IMT were to manage theproject under the leadership of the BP project manger,monitor project progress, address key issues impact-ing on the schedule and cost, provide a structuredforum for communication and interface management,and encourage innovation and cost saving opportuni-ties. The IMT adopted a policy of no ‘policing’ ofthe fabricators — accountability was given to thosewho were contractually accountable and there wasno BP team based at each site directly checking thequality of work. A ‘project controls group’ was alsoestablished to provide a central resource capable ofsupporting all Alliance members without duplicationof effort. Each member used its own in-house systemto control its activity, but electronic transfer of dataand a comprehensive project database, accessible byall members, were introduced.

7. The Andrew Alliance outcomes

The Andrew project has been heralded within theoffshore and construction industries as a major

breakthrough in construction and engineering pro-curement. The headline benefits for BP and its Al-liance partners were certainly striking, as follows.

ØThe cost of the Andrew development, usingtraditional procurement practices, had been estimatedat £450 million and the agreed target delivery cost

Ž .was £373 million in 1993 prices . The final out-turncost of the platform was £290 million. This resultedin a £45 million bonus to be split between the seven

Ž .partners Morby 1996 .ØThe initial target was for the first oil to be

extracted in January 1997. Partly because the amountof work completed on-shore allowed the time for

Ž‘hook-up’ connecting the topside structure to the.subsea jacket to be dramatically reduced, this was

achieved 6 months ahead of plan. The best in classperformance for hook-up was twenty man-hours pertonne, although the range was up to 140 man-hoursper tonne. The Andrew hook-up target at projectsanctioning was 10 man-hours per tonne, but theteam actually achieved one man-hour per tonne.This reduced hook-up and commissioning costs by75%.

ØThere were no disputes in the Andrew project.The strength of the Alliance and its gain sharingmechanism allowed members to deal collectively

Žwith potential serious unexpected problems e.g.,exposure to an additional cost of $7 m within a fewmonths of the project starting because of the failure

.of a subcontractor .ØAccident rates were halved compared to con-

ventional offshore commissioning programmes be-cause virtually 100% of the topside was completedon land, allowing the operation teams to practice thehook-up and carry out fully integrated emergencyexercises.

Underlying these headline outcomes, however,were numerous technical and business process inno-vations. These partly stemmed from more efficientworking during the design and construction phasesof the project and completion of as much work aspossible on-shore. All the contractors were able togenerate novel approaches to the design and installa-tion of the platform.

ØEarly involvement by Highland Fabricators,building the jacket, resulted in 200 fewer designdrawings and allowed design concepts to be re-viewed to optimise those which were less expensive


and best-suited to its fabrication facilities. A redesignof the jacket allowed a reduction in the number ofpiles from 16 to 12, saving £1.8 million. HighlandFabricators were also able to delay its original startdate for jacket fabrication by 7 months, creating adeferred expenditure of £10 million to save on fi-nancing costs.

Ž .ØThe fact that the drilling company Santa Fewas part of the Alliance from the start meant thatequipment could be selected and design requirementsreviewed to ensure that the rig’s functional specifica-tion was tailored to meet the drilling needs of theproject.

Ž .ØEmtunga which built the accommodation unitreported that early participation allowed it to have agreater choice in materials and more influence overthe design and location of the unit.

ØAllseas was able to reduce the pipeline size by20% and influence the pipeline connections to savesteel and welding costs. The installation date of thepipeline was also rescheduled when the price of oilfell, to bring forward the date for first oil.

ØSaipem saved the Alliance £700,000 by elimi-nating the need for water-tight diaphragms inside thejacket legs and also developed an approach for plat-form hook-up, which saved 36 hours welding time.

Considerable emphasis was also placed on lifecy-cle cost planning. This was possible because Brown& Root was able to collaborate with other Alliancemembers and their suppliers to develop a simplifiedfacilities design system. For example, a single inte-grated system for process control, monitoring andemergency response was developed, rather than us-ing three separate systems.

As well as these immediate benefits arising frominnovative ideas, many involved in the Andrew Al-liance felt that the partnering approach had helped topromote creativity by encouraging staff to come-upwith new ideas. Even though attempts to harness theideas of Andrew’s project staff involved nothingmore than a paper-based suggestion scheme, subse-quently BP began to develop IT-based systems toidentify the relevant knowledge held by individualsand track the information required by project person-

Ž .nel Houlder, 1997 .While it was recognised that there had been or-

ganisational learning under previous approaches toconstruction procurement, the mechanisms for retain-

ing and distributing that knowledge were felt to havebeen limited. Organisational learning in the Andrew

ŽAlliance took a number of forms Barlow et al.,. Ž1998 . ‘Vicarious learning’ Dutton and Freedman,.1985 — where organisations acquire second-hand

knowledge and experience — was evident, particu-larly at the interfaces between contractors, subcon-tractors and suppliers. ‘Team learning’ was alsoevident, once a critical mass of individuals alreadycommitted to the project had been achieved. Thiswas underpinned by the emergence of trust in indi-viduals and the strong commitment to partnering.Finally, ‘individual learning’ was promoted withinBP and the other Alliance members. The ‘fear offailure’ was removed and project members weremore inclined to propose ideas and processes thatonce would have been looked on as being too risky.As one manager put it, ‘ . . . it’s OK to make amistake, ‘fail’, because that’s the best learning’.

8. Explaining the benefits — partnering vs. con-textual changes

What was the role of partnering in achieving theperformance benefits in the Andrew project? As wellas the familiar difficulties in interpreting opinionspresented in interviews, there can be problems indisentangling the specific outcomes of partnering.This is because a typical partnering relationship in-volves a large number of simultaneous business pro-cesses and the organisations engaged in partneringoften have a wide variety of objectives, which some-times change over time. It is necessary to separatethe role played by the processes involved in partner-ing, rather than wider contextual factors.

We argued above that the mere existence of apartnering relationship is not in itself sufficient forinnovation or the transfer of knowledge betweenorganisations — these need an element of ‘absorp-tive capacity’. This, in turn, depends on the internaland external communications structures of an organi-sation, the presence of ‘champions’ who are able toharness knowledge and promote change, and theintegration of project experiences with routine busi-ness processes.


Within the Andrew Alliance considerable empha-sis was placed on creating a single team withoutduplication of functions or accountabilities. Thismeant that more formalised, hierarchical systems ofcommunications were broken down, resulting a flat-ter structure. There was a high level of face-to-facecommunication because Alliance members sharedthe same office building, and the presence of inte-grated design and project management systems andvideo links with the various manufacturing and as-sembly sites. Direct communications between projectmembers was actively encouraged. As well as com-pressing the flow of information and provide speed-ier decision-making or problem solving, this helpedto promote a culture within which greater collabora-tion and trust could grow.

The second pillar of the partnering process in theAndrew Alliance was the considerable effort made atteambuilding. BP had management consultants work-ing on improving the company from the early 1990sand these were put to work on the Andrew Alliance.The objectives were to ensure people were commit-ted to delivering ‘exceptional results’ and providethem with appropriate tools for achieving this goal.Teambuilding was based around a nucleus of people,which was sufficiently large in mass to influence therest of the project. There was a variety of approachesto teambuilding and a great deal of time and moneywas spent in integrating project members. Inductionworkshops to explain the aims and objectives of theAlliance, and its modus operandi, were run for allnew members when they joined. Although the size ofthe project meant that no single individual was re-sponsible for ‘championing’ the partnering concept,key individuals emerged at critical project stages ofthe project. These were supported by BP’s ChiefExecutive, who identified partnering as a strategicgoal. Each of the main partners had an identifiableindividual providing support and selling the idea tosenior executives within their own organisation.

Arguably, the higher levels of trust emergingfrom these features of the partnering process led tomeasurable financial savings, as well as promotinginnovative thinking. Trafalgar House noted how, forexample, trust meant there was no need for a residentBP team at the construction yard, which would havebeen the case under a traditional relationship. Thissaved about £3 million in staff time. Innovative ideas

or ways of working were not penalised if they didnot succeed. The culture of collaboration, under-pinned by the gain sharing mechanism, allowed peo-ple to question ways of working without fear ofpenalty if they were unsuccessful. The perceptionthat participants were all striving to achieve a greaterunderstanding of each other’s goals meant they couldbreak from the confines of the contract and workspecification.

The importance of the Alliance Agreement andgain sharing mechanism in this process cannot beunder-emphasised. Essentially, this removed the re-strictions common to standard contractual proce-dures, whereby communication are obliged to gothrough a prescribed chain of command, and helpedto break down adversarial behaviour and language.Even though contractors were principally paid on areimbursable basis, total reward was tied to finalproject outcome and the gain sharing mechanismtherefore undermined the traditional cost-plus way ofpricing work. This approach was felt to restrict newapproaches since it could result in innovations, whichreduced contractors’ time input and therefore, theirremuneration.

Although they were not part of the formal Al-liance, efforts were also made to ensure that partner-ing principles flowed to suppliers further down sup-ply chain. Focusing on non-adversarial supply chainrelationships saved 17% on product manufacturingcosts. Furthermore, harnessing the knowledge resid-ing in suppliers was seen by many as a critical factorbehind the development of new ideas in the AndrewAlliance.

Not all the observable performance gains in theAndrew Alliance could be ascribed to the partneringprocess alone, though. Two other factors need to beconsidered. First, the contribution by other parts ofBP’s Andrew team — outside the Alliance teamitself — was critical in making the field an eco-nomic prospect for example by:

Ø developing an appropriate reservoir depletionplan, in which associated gas was exploited bothfrom a reservoir management and a commercialperspective;

Ø proposing the use of horizontal wells.


Second, the importance of the context withinwhich partnering occurs was identified in Barlow et

Ž . 2al. 1997 . Arguably, the market power of clients inthe early 1990s — a time of deep recession in theUK construction industry — played a part in theheadline gains noted in early partnering arrange-ments, since clients were able to impose tough per-formance improvement targets. The large number ofcompeting contractors and suppliers also providedclients with a strong negotiating position during theearly 1990s.

The market context for the Andrew Alliance wassomewhat different from the mainstream UK con-struction sector at that time. Key drivers for theintroduction of partnering in the offshore industrywere the decline in oil prices — 1990 prices wereless than half those of 1980 in real terms — andescalating development and production costs. Likeonshore construction, however, there was virtuallyno standardisation of components — most operatorshad their own company, or even oilfield, specifica-tions for large ranges of components. Also similarwere the fragmentation of the supply chain andlimited understanding of value flows. For BP, 53%

Žof its North Sea expenditure totalling $3 billion in.1993 was spent with third parties. This was spread

amongst 4200 suppliers and contractors, 70% ofwhich accounted for 0.5% of expenditure. Third-partycosts were escalating and BP had little idea of valueadded within the supply chain as its principal focuswas on price, construction and delivery time, andinspection and testing costs. Moreover, although BP— and other oil companies — were not unaware ofthe costs associated with re-design, delivery andstart-up delays, debugging, poor plant layout andongoing maintenance, what was not known was howto influence them.

Given this context, it is perhaps unsurprising thatpartnering should emerge as an approach for improv-

2 Ž .Bennett and Jayes 1998 also note how an Esso partnershipto create a standard, modular service station shop for outletsacross Europe led to uneven time and cost savings — between1994 and 1997, costs fell by 50–60% in Germany and Switzer-land, 15–25% in the UK, France and Benelux, while in Finlandand Italy, Esso has failed to achieve anything more than minorsavings.

ing performance. Unlike the early days of partneringin the onshore construction sector, there seems tohave been a better understanding of the need tointroduce approaches, which lead to mutual im-provement through the entire supply chain. The de-velopment and introduction of gain sharing mecha-nisms — long before other parts of the constructionindustry — is a demonstration of this.

Along with market structure and conditions, an-other contextual factor, which helps to explain thedramatic outcomes of the Andrew Alliance was theevolution of construction and engineering technologyduring the course of the project. While it was ac-knowledged by the Andrew team that technologicalimprovements on their own would be insufficient todeliver the desired project outcomes, the ability of allpartners to benefit through the Alliance gain sharingmechanism encouraged a willingness to adopt newtechnological developments. Some of these were notnecessarily new. For example, improved lifting ca-pacity of barges had been a feature of the offshoreindustry since the late 1980s, but in the case ofAndrew, this was coupled with an approach, whichled Alliance members to seek ways of maximisingthe onshore completion and commissioning of thetopside structure.

Other technology developments affected the qual-ity and performance of steel, and welding processes.This allowed a reduction in the number of jacketpiles, saving £2 million. Improvements in IT werealso important; in particular, a new interactive 3DCAD system for structural steel work, which alloweda stage in the design modelling and drafting processto be skipped, leading to further time and cost sav-ings. Additional IT developments included improvedsoftware for pipeline design and computer modelingto allow the project team to work from a single set ofdrawings.

To make best use of these technology changesand to adopt new ideas required, however, a highdegree of collaborative working and trust betweenpartners. In all these instances, the cultural and or-ganisational context interacted with changes in theavailable technologies to produce innovative tech-niques. In the Andrew Alliance, this completelychanged the economics of the scheme and allowed aproject that had marginal chances to succeed.


9. Conclusions

This paper has argued that parts of the construc-tion industry share many aspects of CoPS projects inother sectors. Common to both are the size andcomplexity of projects, and uncertainty arising fromincomplete information, difficulties in capturing userneeds and the emergence of new system require-ments during production. The construction industryis also characterised by a high level of competitiveturbulence and fragmented supply chains. Construc-tion and other CoPS projects often involve elaborateorganisational dynamics because projects are gener-ally delivered by temporary coalitions of firms. Thetypical construction problem thus involves a lack ofcoordination between project participants and othermembers of the supply chain, and a ‘fuzzy front end’during project planning phases. The number of dif-ferent specialists, and the level of imperfect knowl-edge and uncertainty all promote a culture in whichconstruction firms are tempted to behave opportunis-tically, passing risk down the supply chain and mak-ing claims on clients for additional work arisingfrom unforeseen project problems.

Innovation and knowledge management in CoPSand the construction industry are shaped by theproject-based nature of production. The presence ofshort-term, discrete supply networks complicates theflow of knowledge and innovation between organisa-tions. Similarly, standardisation, innovation and or-ganisational learning in the construction industry areall hindered by its discontinuous, project-based na-ture. Under these circumstances, coordination andintegration of knowledge across organisations is crit-ical for successful project delivery. Key factors in-clude the development of non-hierarchical internaland external communications structures, the presenceof ‘champions’ within organisations, and the integra-tion of repetitive business processes with projectexperiences.

A notable feature of the UK construction sector inthe 1990s has been the growing importance of clients,which procure high value, high risk projects but arehighly dissatisfied with industry performance. Al-though the paper deals solely with the UK context,this picture is by no means unique — attempts toimprove performance have been a feature of theUSA, Canada and Australia in the last decade, and

attention is now turning to mainland Europe. Wesuggested that ‘partnering’, a bundle of businessprocesses designed to enhance collaboration betweenorganisations, had delivered significant performancebenefits at both the project and organisational levels.Partnering places special emphasis on the front-enddecision-making, planning and execution phases ofprojects, as well as the rapid integration of organisa-tions with different knowledge bases. This makes itparticularly suited to CoPS-type projects, whether inthe construction sector or elsewhere.

The offshore oil industry, which involves theproduction of CoPS, faced growing competitivenessproblems because of escalating costs and a decliningoil price during the 1980s and early 1990s. Theindustry also suffered from highly fragmented supplychains and adversarial contractual relationships, incommon with the mainstream construction industry.Taking the example of a complex offshore oilfieldconstruction project, the Andrew Alliance, we exam-ined how the client, BP, had sought to effect radicalimprovements in its delivery performance. The part-nering approach which was adopted had not onlydelivered very significant performance gains com-pared to similar traditionally procured and managedoffshore developments, but also resulted in technicaland process innovation. In the case of the Andrewproject, BP had established an Alliance with eightkey contractors. The partnering process included thedissolution of traditional hierarchical communica-tions structures and considerable emphasis on team-building. Critical for the success of the project,however, was the establishment of a financial mech-anism for sharing project risks and benefits. Thisacted as a ‘fast-track’ method for focusing on andencouraging performance improvement, thus encour-aging project members to put forward innovativeideas without fear of penalty should they fail. Aswell as promoting a culture within which technicaland process innovation could flourish, the use ofpartnering in the Andrew Alliance led to organisa-tional learning within its members.

How generalisable are the results of the AndrewAlliance for our understanding of innovation man-agement in CoPS? We have noted how there aresimilarities between CoPS projects in the construc-tion and other sectors. There is nothing unique aboutthe use of partnering as a tool for overcoming barri-


ers to performance improvement in situations wherethere is a need to integrate organisations with differ-ent objectives and knowledge bases. It is, however,important to understand the role played by context ininfluencing the way the largely generic processescomprising partnering are introduced and imple-mented. Partnering has had a variable impact withinconstruction, with perhaps the greatest project per-formance and longer term innovation and learningbenefits being seen in the CoPS sectors of the indus-try. While partnering has been used to great effect inmore routine and repetitive areas, notably the con-struction of hotels, supermarkets and drive-throughrestaurants, it has had only limited impact in house-building. This remains deeply traditional and dis-plays a serious lack of technical and process innova-tion because of a variety of cultural, economic and

Ž .regulatory barriers Barlow, 1999 .Parts of the construction industry have become

increasingly similar to other CoPS sectors and clientsare growing more demanding. Although the need toimprove the client–contractor briefing process haslong been recognised as a factor behind performanceimprovement, this is no longer sufficient. The abilityto manage value and knowledge flows across theboundaries of firms is necessary for the successfuldelivery of construction CoPS, suggesting that ap-propriate tools and techniques for integrating supplychain members are critical. This is turn calls for newcriteria for competency in the construction industry,notably an ability to offer a customer-focused servicerather than one which merely reflects the clients’perceived needs. It remains to be seen whether theUK construction industry — in its current guise —is capable of meeting these new criteria.

Acknowledgements

Parts of this paper are based on research carriedout for a project on construction industry partneringfunded within the Economic and Social ResearchCouncil’s Innovation Programme. The project wascarried out by James Barlow, Michael Cohen, AshokJashapara and Yvonne Simpson. We are grateful tothe Andrew Alliance companies and their membersfor their help and time. We also thank Bob Scott,Virginia Acha and two anonymous referees for com-

ments on an earlier draft of the paper. The normaldisclaimers apply.

Appendix A. Research method

The research on the Andrew Alliance was carriedout as part of an ESRC-funded study of the organisa-tional and managerial processes involved in con-struction industry partnering. The research involveda major review of current research on partnering andliterature on relevant economic and organisation the-ory; background interviews with key organisationsand firms involved in partnering; and five case stud-ies of existing and emerging partnering arrange-ments. Over 40 companies were involved in thesecase studies, which were chosen to represent differ-ent types of partnering and different construction

Ž .sectors see Barlow et al., 1997 for details . A seriesof semi-structured interviews with key staff in asmany of the companies involved in the partnershipsas possible was conducted. There were only 2 re-fusals, out of 36 partners which were approached. Intotal, 75 interviews were conducted. Twenty of theinterviews were taped and transcribed, and writtennotes were taken in the remainder.

All the case study interviewees were involved insetting-up andror managing the partnering arrange-ments. In some instances staff were interviewedmore than once. Interviews tended to last between 1and 2 hours and broadly examined the direction of,and motives for, the particular strategies that hadbeen adopted, and their experience of the specificpartnering relationship. The areas covered in eachinterview depended on the particular role of theinterviewee, but in general the following questionswere explored:

Ø how partners were selected;Ø the extent to which, and how, members ‘bought

into’ the partnering aims and objectives;Ø the degree of commitment at different levels of

management;Ø how agreements on performance targets and risk

sharing were arrived at;Ø the level and nature of teamwork, trust and open-

ness;Ø the way conflicting objectives were approached;


Ø the techniques for: financial controlrmonitoring,progress controlrreporting, quality control;

Ø the expectations of each partner in terms of pro-ductivity and quality improvements, human re-sources and training;

Ø key decisions and events, and ways personneladjusted to change by making trade-offs or re-structuring work relationships.

In each case study, interviewees’ responses toidentical questions were compared to highlight dif-fering perspectives on the outcomes of the partneringprocess. In addition, documentary material generatedby the partners was evaluated and compared with theinterview material. Finally, reports of each case studywere sent to interviewees for validation.

For the Andrew Alliance case study, 20 inter-views were carried out with representatives from allthe member companies, together with a representa-tive from the independent teambuilding facilitators.

ŽThe research was carried out in ‘real-time’ late.1995 to mid-1996 , during the second half of the

Andrew construction programme. A follow-up meet-ing was held with a senior BP representative in 1999to seek views on the Andrew project over 2 yearssince its completion. In addition, an initial draft ofthe paper was sent to a former member of theAndrew Alliance for comment.

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Innovation and learning in complex offshore construction projects

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