Business models and project governance

Karlos Artto

22.1.2015

Karlos Artto

A lecture on Jan 22, 2015,

PHYS-C1380 Multi-disciplinary energy perspectives course,Spring 2015

Aalto University, Otaniemi

Project Business research group at Aalto University, Finlandhttp://pbgroup.aalto.fi/en/

Business models and project governance

• An anatomy (elements) of a business model– Understanding business model as a driver of a

single firm’s aims and action

• Large energy projects are multi-firm projects– Success criteria of a project– The contract organization of a project (supply

chain, or value stream of ”a project”)

• Governance framework

• 1660 MW reactor• The first EPR type reactor to be

constructed in the world• Turnkey contract 3 billion Euro

• Scheduled to operate in 2016/2017?

• Diversity of actors: Over 4000 employees and over 50 different nationalites have been working on the site at the same time

Case Olkiluoto 3 project

Picture: TVO

Discuss in your group: success criteria of a project?

• [ Consider a project. ]

• What are the success criteria of a project?– -> Create a list of success criteria!

• Use 2 mins only.

Assessing Project Success

Traditional approach

Projects are successful if they meet their time, budget, and performance goals

Reality

Projects are successful if they meet multiple success criteria, including achieving business results and customer satisfaction

Adopted from: Shenhar & Dvir, 2007

Specific Success Measures

Impact on

Customer

Impact on

Team

Business & Direct Success

Project Success

• Meeting schedule

• Meeting budget

• Changes

• Yield

• Other efficiencies

• Meeting requirements

and specifications

• Benefit to customer

• Extent of use

• Customer satisfaction &

loyalty

• Brand name recognition

• Team satisfaction

• Team morale

• Skill development

• Team member growth

• Team members’ retention

• No burnout

• Sales

• Profits

• Market share

• ROI, ROE

• Cash flow

• Service quality

• Cycle-time

• Organizational measures

• Regulations approval

• New technology

• New market

• New product line

• New core competencies

• New organizational

capabilities

Preparing for Future

Efficiency

Adopted from: Shenhar & Dvir, 2007

Value stream for an ”integrated solution” ->A view over the life cycle of a complex system

Earlierstages

M SI OS SPFinal

Consumer

Addedvalue

Raw materials,intermediate

goods, primaryproducts

manufacture

Manufacture (M)

Design and produce

componentsand

subsystems

Systemsintegration (SI)

Design, build, integrateproducts

and systems

OperationalServices (OS)

Maintain andoperateproducts

and systems

Service Provision(SP)

Buy in maintenanceand operational

capacity to provideservices to final

consumers

Consumption ofservice by final consumer (e.g.

train passenger)

Manufacturing – Service interface

Upstream (products) Downstream (services)

Vertical moves (Forwards)(Backwards)

Davies, 2004

Business models

A business model characterization by Osterwalder

INFRASTRUCTURE OFFER CUSTOMER

FINANCE

CORECAPABILITIES

VALUECONFIGURATION

PARTNERNETWORK

VALUEPROPOSITION

CUSTOMERRELATIONSHIP

DISTRIBUTIONCHANNEL

TARGETCUSTOMER

COSTSTRUCTURE

REVENUESTREAMS

A simplified/adjusted business model characterization by Karlos Artto

Network of partners and/or

suppliers

Core capabilities

CustomerOffering

and/or value proposition

Relationship

Profit-making logic

Project governance

Governance of large projects

• The complexity of a large project and the diversity of actors and the differences in their ways of operating and communication require clear a governance structure with clear roles and responsibilities

• Governance structure guides:-> How to organize production activities?-> How to maintain control of production and

other important activities?-> How to safeguard against uncertainty and

opportunistic behavior?

SiemensAREVA

The ownerTVO

Other subcontractors

Civil works BOUYGUES

Safety authority

STUK

Turnkey contract between owner and Areva-Siemens consortium

Main actors in Olkiluoto 3 project

Consortium between

Safety authority communicates through the owner

Owner managed (with single and multiple contractors)

OTechCon

C

SC SC SC SC

OTechCon

C C C C

SC SC SC SC

SC SC

Single contractor Multiple contractors

Project Services Contractor

Project Services Contractor

TechCon

C C C C

SC SC SC

SC SC

OPSC

Project manager

Project control OPSC

Eng OPSC

Proc OPSC

Const OPSC

Project Governance vs. Project Management

Modified from Klakegg et al. 2009

• Project Governance less detailed but larger perspective

• Project management operates on more detailed level

Large and complex projects

cannot be managed effectively

and efficiently only by project

management techniques and

tools – instead the

development of a governance

structure is required

Project governance structure consists of mechanisms and policies for coordinating and safeguarding exchanges between firms participating to a project in a manner that fulfills the shared project objectives (e.g. the construction of a power plant)

Project governance structure

The tool:Designing effective governance structures for large projects

http://pbgroup.aalto.fi/en/publications/lpg_report_2013/

– Download either .docx or .pdf version of the tool.

Designing governance structures

OWNER

NETWORK

PROJECT

MARKET

Roles and res-ponsibilities

Contracts

Supply chain management

Collaboration

Control and monitoring

FIT

Contextual factors Governance structure elements

Contracts

Collaboration

Control and monitoring

Level of detail of contract items

Planning and monitoring

Contract type

Goal alignment

Co-development

Communication

Target setting

Owner’s line of visibility in the supply

chain

Several contract items specified in

detail

Emphasis primarily on safeguards (e.g.

penalty clauses)

Lump sum Cost plusUnit price

Visibility to all central actors also in

2nd, 3rd, etc. tiers

Balance betweensafeguards &

incentives

Emphasis primarily on incentives (shared gains)

Centralized to one or few actors

Information openly available to all

actors

Focus on resultsFocus on processes

Various actor-specific practices in

monitoring

Decentralized in the supply chain

Some shared development

activities

Each organization develops

individually

Limited (only need-to-know

information)

Semi-open (someinformation is shared openly)

Problem solving Cross-organizational teams

Emphasis on manager level

problem solving

Emphasis on engineer level

problem solving

Roles and Responsibilities

Main coordinator OwnerMain supplier Management contractor

Risk allocationShared risks

between owner and suppliers

Risks mostly carried by suppliers

Risks mostly carried by owner

Project type Turnkey Split into two or

three main packages

Supply chain management

Procurement approach

Supplier selection criteria

Emphasis on price Emphasis on product attributes

Future-oriented and performance-based

agreements

Competitive tendering

Emphasis onsupplier attributes

Level of detail based on industry standards

Supply chain length Low (central actors limited to 2 tiers)

Unlimited number of tiers

Moderate number of tiers (3-4 tiers

with central actors)

Focus on innovation across project participants

Key element areas Elements Alternatives (of element contents)

Split into several main packages

High priority for using experiences

from past collaboration

Focus on resources

Sharing of business critical knowledge

Visibility based on reporting from 1st

tier suppliers

Mutually agreed principles rather

than details

a) b) c)or: or:

Governance structure elements and their contents