In the engineering project and construction (EPC) industry, a different market environment exists from many other industries. EPC’s are responsible for designing, constructing, and managing all issues associated with major projects, including chemical plants, power plants, and other large facilities. Very often, this occurs in developing countries where logistics is difficult and government agencies in some cases corrupt or extremely bureaucratic. Other characteristics that make this industry difficult to manage include.

This traditional industry thinking is reflected in some of the comments that Doug Harper learned about when he interviewed multiple owners, suppliers, and EPC companies in a project for Bechtel. These comments reflect a risk averse nature, and a resulting lack of commitment to any long-term relationship between parties – with the belief that the market drives a traditional bidding process that cannot be overcome. Clearly, this industry is ripe for a new business model. In this type of market environment, companies are now beginning to look at Strategic Alliances as a new way of doing business.

One company that has begun to examine this is the British Aviation Authority. They have adopted a fundamentally new approach to driving integration across not only the EPC industry, but all of the suppliers involved in this process. As they begin to revamp their airport construction projects, this new approach considers many more factors beyond price, and goes into detailed long-term contracts. The initial results from this strategy have been promising.

In only one case was Doug able to find a model of a long-term alliance relationship that worked in the industry. The alliance was established within Shell when it was determined that there was an on-going need for a certain type of equipment. It was also established that one supplier was normally successful in obtaining contracts. A series of discussions was started to establish whether there was an opportunity to create an alliance that would be good for both parties. Initially it was necessary to determine how trust would be established so that both parties would be able to operate without fear of risk (there had to be a management commitment). It was necessary to establish a system whereby pricing and some marketing information would have to be available, at the same time the vendor would have access to long range planning and engineering at Shell. Next there was established a system that would reward/share savings for pre-established decisions by the owner. The biggest thing that had to be created and established was a trust between parties. It was also determined that the alliance would be on-going, in other words, it was constantly being worked by a set group of people to involve/ make changes as work progressed. As a higher comfort factor evolved, the working of the process became easier and more advantageous for both parties. For the most part, when used, the degree of success was high and very helpful for project purposes.

WHAT MAKES THIS WORK? There clearly must be evidence that there is some system of cost savings sharing which will benefit all. There must be established some means of showing the client that changes and costs resulting are fair and not a means of gaining wealth. In all the client must be able to see why this is the best route and how he will be protected from pitfalls during the process. At the same time, the supplier must feel assured that his data/information will not be exposed to competition.

Doug Harper will continue to work on this project over the semester, and we will be posting some of the results from the project later. Stay tuned!

Sincerely,

Rob Handfield