graham winch
TRANSCRIPT
Understanding Major Project Escalation
Graham M Winch Centre for Infrastructure Development Manchester Business School Jubilee Professor Chalmers University
1
Understanding escalation on major projects
• What is a major project?
• Four perspectives on escalation on major projects – Future-perfect thinking
– Strategic misrepresentation
– Escalation of commitment
– Contractor scapegoating
• Towards a model of escalation
• Policies for de-escalation
• Concluding thoughts
2
What is a major project?
• Size matters – > $1bn US
• The heroic definition – “master builders”
• A proposed definition
3
What is a major project: a definition
• The synergistic elements of a major project or programme – They are organisational endeavours producing complex
product systems
– They combine bespoke elements with different technological trajectories
– They mobilise large human and financial resources
– They shape their environment, spatially and organisationally
– They are managed as a single or closely coupled entity
4
Future-perfect strategies
• Sydney waste water project case – Experiment in alliancing
• Designer culture – Representations of the completed project – CAD fly-thrus – Artists impressions – Virtual reality
• Endgaming – Orientating action around completion dates
• Tinker Bell effect (Tim Smit) – Projects only exist if you believe in them
(Clegg and colleagues)
5
Strategic misrepresentation (Flyvbjerg and colleagues) • 258 transportation projects (1927-1998)
– Mean budget escalation 28% – Systematic tendency to underperform estimates – Cannot be explained by chance alone – If based on incompetence would expect secular improvement
• Most plausibly explained by “lying” about costs and benefits – This is a client-side phenomenon by project promoters.
• Strategic misrepresentation – Socio-economic struggle for resources under uncertainty – Perverse incentives in investment policies e.g. 10 cent dollar
• Optimism bias – Psychological tendency to give the benefit of the doubt under uncertainty
6
Strategic misrepresentation: explanations
• Technical explanations – Forecasting errors – Exogenous events
• Economic explanations – Stakeholder self-interest – Strategic misrepresentation
• Psychological explanations – Optimism bias
• Political explanations – Local elites and national funds – Urban transit projects the classic case
7
Escalation of commitment (Staw and colleagues) • Social-psychological experiments
– Post-hoc justification of selected courses of action – Attribution of negative outcomes to exogenous events – A retrospective, not prospective rationality – The tendency to throw good money after bad – Cultural norms of consistency in leadership
• Hindsight case studies – Expo 86 and Shoreham nuclear power station – A dynamic interplay of determinants through time – Psychological determinants predominate earlier in life-cycle – Project determinants predominate later in life-cycle
8
Escalation of commitment: determinants
• Project determinants – Expected returns – Salvage value – Alternative courses of action
• Psychological determinants – Visibility – Self-justification
• Social determinants – Cultural norms of consistency in leadership
• Structural determinants – Political support – Symbolic aspects
9
Contractor scapegoating
• Contractors obliged to provide bids complying with promoters expectations or project cancelled
• Competitive bidding generates further “low-balling” by contractors – Reliance on claims then drives escalation
• Escalation inevitable during delivery as costs exceed estimates
• Contractors set up to fail by their clients
• They thereby provide a convenient scapegoat for project promoters.
10
Complementarities and differences
• The expected utility (EU) paradigm dominates investment appraisal and risk management – Net present value
– Cost-benefit analysis
– Probability/impact matrix
– A heroic model in terms of information requirements
• In practice the EU norms are not applied – Strategic misrepresentation and bad faith
– Escalation of commitment and good faith
11
Complementarities and differences
• What enables strategic misrepresentation? – Not personal gain
– Not masochism
– Rather future-perfect thinking
• What enables escalation of commitment? – Norms of leadership supported by future perfect thinking
– Availability of exogenous actor (scapegoat)
– “getting the concrete on the table”
• A proposed model
12
A model of escalation on major projects
ContractorScapegoating
ProjectOutcome
Escalation of
Commitment
StrategicMisrepresent-
ation
Future PerfectState
13
Policies for de-escalation
• Develop rigorous project assurance
• Ensure an external view
• Invest in front end definition
• Mitigate optimism bias
• Develop client capabilities
14
Project assurance
• Stage-gates provide clear points of reflection and decision in the project process – They provide formal opportunities for the “outside view” – They break the momentum of strategic misrepresentation – Gates review progress to date and plan next phase – Gates provide opportunities for peer review – Gates provide opportunities for senior management review
• For example – UK Office of Government Commerce Gateway Process – Norwegian Government Quality at Entry Process
15
A basic stage gate process
16
appraise select define execute operate opportunity
Gate 1
Is the business case
sound?
Gate 3
Are we ready to execute the
project?
Gate 2
Is scope complete?
(full funds authorisation)
1%-2% 3%-4% 95%
Developed from Merrow (2011)
An external view
• Industry cost indices – e.g. Building Cost Information Service
– But very context-specific
• Inter-client process benchmarking – e.g. Independent Project Analysis (IPA)
– High quality processes should achieve good outcomes
• Peer review – The input of independent experts is invaluable
17
Front end definition
• excellent project definition work brings multiple returns – Treat it as an investment in the success of the project
• Economising on high impact/ low proportion of total cost services is a false economy – e.g. engineering services
• Projects go wrong from the head – Just like fish!!
18
t
low
high
Actual project outcome
Ability to
influence project
outcome
appraise select define execute operate opportunity
high
low
Front end definition
19
Develop client capabilities
• The outsourcing trend – Projects and engineering capability
• The emergence of the ignorant client
• Clients need to understand the implications of what their suppliers are telling them
• The key issue is oversight – Do too little and you get unpleasant surprises
– Do too much and you generate costs and restrict innovation
20
The client capability sine wave (Railtrack effect)
21
OUTTURNS
Engineeringis Core
SeniorManagement
Attitude
All engineering can be
outsourced
excellent
Project Success
disasterous
SMATTITUDE
Source: Prof Bernard Kelly, UoM
Concluding thoughts
• Major projects need leadership and vision – Future-perfect thinking is vital but needs tempering
• Quality of front-end work is crucial – Stakeholder management – Investment in dispassionate analysis
• Avoid perverse incentives in investment policies – e.g. UK Private Finance Initiative
• Be prepared to cancel projects at gates – A cancelled project is testimony to good project assurance
• Invest in client capabilities – High quality front end work requires client-side engineering and
project management competencies – It requires own-employees committed to the organisation’s goals
22
