Plenum - Prof. George Jergeas - The Myth of Predictability

part of the Aker group

Project 2011, Succeeding with Projects

Oslo October 20, 2011

Beyond the Myth of Predictability

Dr. George F. Jergeas PEng

Department of Civil Engineering

University of Calgary

2

Learning Objectives

■ Challenge some long-held ideas and best practices.

■ View unpredictability as a dilemma that must be continuously managed.

■ Change focus from project level to the executive level.

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George Jergeas

Introduction

■ Larger and more complex projects

■ Cost overruns & lack of predictability●Risks associated with the project’s size,

duration, technology, location, and prevailing economic conditions.

■ Projects over budget & schedule

■ Consistently 50% to 100% cost overruns

■ Client not happySlide 3

George Jergeas

Slide 4

Introduction

■ Let’s blame each other:● Engineering contractors● Vendors● Construction contractors● Workers● Clients

■ Greater challenges to executives

■ Economics suffer

■ Increase risks to investors

■ Investors (boss) lose confidence

Introduction

INVESTMENT SUMMARY

“We rate shares of [K3] a Hold. K3’s growth prospects are lacking relative to peers, and current performance continues to disappoint. K3’s next major Oil Sands project, [name], isn’t expected to produce oil until 201?, and production from the [name of development] isn’t expected until late 201?. As a result, we believe K3 will be challenged to grow its production in the near term. However, we believe these expectations are reflected in the current stock price, and we believe the industry-leading yield on the stock is attractive for investors to Hold. ….”

Slide 5

Introduction

■ Conventional approaches no longer sufficient

■ Traditional risk tools have exhausted their potential

■ Complete re-thinking of how we assess project risk, make decision and manage projects

■ Need a change in focus from the project level to the executive level ● Responsibility for strategic decision-making,

planning and organization effectiveness truly lies with the executives.

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Conventional Risk Aversion

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New Way of Thinking – Let Go of:

■ The old perception that uncertainty is “evil”

■ Decision-making based on deterministic values 

■ Planning based on the perceived need to transfer or avoid risks. 

■ Execution management based on fixed objectives.

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George Jergeas

New Way of Thinking – Focus on:

■ Becoming comfortable with uncertainty as a source of opportunity to improve business results.

■ Becoming comfortable with organization based on risk-driven competencies. 

■ Becoming comfortable with decisions based on uncertain estimates.

■ Becoming comfortable with plans that accept and manage the risks that are rightfully ours.  

■ Becoming comfortable with an adaptive, flexible management style.

■ Uncertainty and risk have to be expected and accepted

■ Slide 9

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Tunneling Concept

Neglect of Sources of Uncertainty Outside the Plan Itself

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Black Swans and Tunnel Vision

”Tunnel vision”

Feasibility Pre-FEED FEED Execution

FEED – Front end engineering design

Start of FEL

Start of production

FEL – Front end loading

Sanction/financial close

”Black Swan” strategic and contextual risks are considered outliers

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George Jergeas

Fresh Thinking

1. Extend project risk to include strategic and contextual risks

2. Define a “territory” of risks or “The Bermuda Project Risk Triangle”

3. Near-term thinking

4. Re-shaping the Governance System■Shift in mindset■PEO

5. Team alignment

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1. The Extended Project Risk Model

■ No project goes exactly as planned

■ Accept deviations during project execution

■ Not sufficient to just look at Operational risk●Strategic and Contextual risks also

important

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1. The Extended Project Risk Model

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Operational (Project) Risks

■ Availability of resources

■ Efficiency/productivity

■ Timeliness

■ Operability

■ HSSE

■ Site related risks

■ Normal logistics risks

Project management

Corporate management

Environment

Operational risks

Explore

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Strategic (Enterprise) Risks

■ The project lifecycle

■ Maturity at project sanction

■ The project execution strategy

■ Changes to project objectives

■ Acceptance of project business risk exposure

■ Organizational Alignment

■ JV issues

Project management

Corporate management

Environment

Deliver

Strategic risks

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Contextual (Global) Risks

■ Project location

■ Business practices

■ Market conditions

■ Culture

■ Geopolitics

■ Public opposition

Project management

Corporate management

Environment

Contextual risks

Adapt

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Visibility, Accountability, Ability to Manage

Strategic and Contextual Risks are addressed by executive / management decisions

Operational are addressed by the project team who have the authority to make the necessary decisions and have clear accountability for results

George Jergeas

Three Buckets for Project Risks

■Contingency: for the Operational Risks● 40% of the total

■Scope Allowance: for the Strategic Risks●47% of the total

■Management Reserve: for the Contextual Risks●13% of the total

■Numbers above MUST be tested and verifiedSlide 19

Reasons for Changes: Owners Response

Main Reasons for Late Change Requests

47%

13%

40% Changes in Understanding of BusinessNeeds

Market / Business Changes

Technical Aspects Not Fully Understood

20

2. Define a Territory of Risks

■ The Bermuda Project Risk Triangle● The overlapping of corporate, project and

environment creates an “ocean” containing operational, strategic and contextual risks.

■ To navigate in the triangle requires new knowledge to take a three legged journey●Explore●Adapt●Deliver

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The Bermuda Project Risk Triangle

Project management

Corporate management

Environment

Contextual risk

Operational risk

Explore

Deliver

Strategic risk

Adapt

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START

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4. Reshaping Governance System

■Shifts in Mindset

■The Project Executive Officer

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4. Re-shaping Governance System

■ Shift in mindset:● Moving from risk aversion to risk navigation● Looking for the opportunities created by

uncertainty in decisions● Postponing decisions for improved quality

(reduced risk)● Exploring and capitalizing strategic and

contextual risks● Training project managers in risk understanding ● Trusting and empowering PMs in their ability to

make good decisionsSlide 25

George Jergeas

4. Re-shaping Governance System

■ Shift in mindset:■ Project leaders will have to make a shift in their mind set:

● From projects as deliverables to a means to enhance project business value

● From uncertainties as “evil” to acknowledging the project as being unique and uncertain

● From projects as known tasks to be accomplished in known environments to embracing a continuum of known-unknown tasks to be executed in unfamiliar and often turbulent locations and business environments

● From deviations from project baselines as inaccurate planning or inappropriate control to acknowledgement of deviations as being the rule and not the exception

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4. Re-shaping Governance System

■ Shift in mindset may be achieved by: ● Disrupting the sense of comfort with the status quo

(explorative behaviour)● Providing the tools, techniques and frameworks to meet

emerging business needs (adaptive behaviour)● Heightening skills for self-reflection by creating

awareness of the participants’ leadership behaviours, and accountability for change and personal growth (delivery-oriented behaviour)

● Helping participants move along the leadership path and be in the appropriate place for the current context (integrative behaviour)

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4. Re-shaping Governance System

■ The Project Executive Officer (PEO)● Projects are temporary organization.

■ The size and complexity and financial exposure of a major capital project make such an endeavor similar to the operation of the corporation.

● Managing major capital project cannot solely be reduced to a manager leading a project team.

● In a project there are many leaders and at the top is the PEO● PEO is accountable for the results of what the organization produces● Reporting to the PEO are managers accountable for the physical

parts of the project (project managers) and managers for project functions (functional managers)

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Lea

der

ship

str

uct

ure

of

a te

mp

ora

ry o

rgan

izat

ion

PEO

Subproject leaders

Functional leaders

Team leaders

Self leadership

Principal (owner)

CEO

External stake-

holders

Project sponsor

Agent (project organization)

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4. Re-shaping Governance System

■ The Management Role of the PEO● PEO represents senior management● Possesses the skills and experience needed to manage the

owner’s role in the project.● Maintains direct access to the people making key decisions.● Is vested with authority to take day-to-day executive action.● Sees the project through to completion.● Selects the right people● Requires professional advice:

■ Strategy for project design and construction■ Strategy for project monitoring and proactive approach to avoid

claims and disputes■ Strategy for teamwork

● The PEO is a LeaderSlide 30

Six Areas for PEO Leadership, Organization and Strategy

■ Project leadership fundamentals

■ Project team composition and development

■ Setting project vision and follow through

■ Seeking corporate commitment

■ Influencing project external stakeholders

■ Project leadership navigation

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5. Team Alignment

■ Team Alignment Programs:●Project chartering and teambuilding●Monitoring team performance●Issue resolution and dispute

management●Tailored training●Management coaching

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5. Team Alignment

■ Project Chartering and Teambuilding● Sets achievable, yet challenging, goals and objectives● Defines criteria for measuring success ● Identifies critical success factors ● Identifies risks and response plans● Aligns stakeholders● Identifies lines of communication● Develops project team performance evaluation /health

check tools● Develops a dispute/issue resolution mechanism● Agrees on team ground rules

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Health Check Date: Name: Firm:

COMMUNICATION

1 Communications are… difficult, guarded 1 2 3 4 5 open, up-front

2 Information flow is… restricted 1 2 3 4 5 free, open

3 Timeliness of information is… late 1 2 3 4 5 on-time

WORKING RELATIONSHIPS

4 Cooperation between parties is… poor, detached 1 2 3 4 5 good, unreserved

5 Issues and concerns are… ignored 1 2 3 4 5 dealt with quickly

6 Responses to issues become… personal 1 2 3 4 5 project problems

7 Disputes are addressed… ineffectively 1 2 3 4 5 efficiently

8 Problems are resolved by… senior management 1 2 3 4 5 lowest level

TECHNICAL REQUIREMENTS

9 Safety performance is… not acceptable 1 2 3 4 5 acceptable

10 Overall quality is… not acceptable 1 2 3 4 5 acceptable

11 Value for money is not acceptable 1 2 3 4 5 acceptable

STAKEHOLDER & EXTERNAL ISSUES

12 Public complaints are… frequent 1 2 3 4 5 infrequent

Please list examples for point 1 – 12 above that you rated 1 or 2 ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

George Jergeas

Health Check

Average of All Responses

1

2

3

4

5

6

7

8

9

10

11

125,0

4,0

3,0

2,0

1,0

0,0

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Health Check

Average Response by Organization

1

2

3

4

5

6

7

8

9

10

11

125,0

4,0

3,0

2,0

1,0

0,0

Contractor

Owner

Engineer

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Issue Resolution and Dispute Management Mechanism

Solution to issue offered by those who are directly involved with the issue. If solution agreed, advise team members of issue and the agreed solution. If issue not resolved, go to Stage Two.

Solution to issue offered by Project Engineers.Advise team members of issue and agreed solution.If solution to issue cannot be agreed to, go to Stage Three.

Solution to issue offered by Project Managers.Advise team members of issue and agreed solution.If solution cannot be found, PMs escalate problem to be resolved by designated senior management.

Stage OneWithin 2 days-At Site Level

Stage TwoWithin 3 days-At Project Engineer

Stage ThreeWithin 5 days-At PM Level

Issue becomes apparent

Stage FourAt corporate level with PEO

Solution to issue offered by the PEO and executives.If issue is not resolved at this level, any party may then take specified dispute recourse through the contract.

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Reference

“Risk Navigation Strategies for Major Capital Projects: Beyond the Myth of Predictability”

by

Per Willy Hetland, George Jergeas, Asbjorn Rolstadas, Dick Westney

July 2011

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