Innovation and Learning in Complex Offshore Construction Projects

Research Policy 29Ž. 2000 973±989 www.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 its customers are demanding more and projects are becoming increasingly complex. Many of the industry's performance problems stem from inadequate inter-organisational co-operation. The paper explores the problems and solutions in aligning the construction industry more closely to its customers in CoPS-type projects. Using the example of a high value, high complexity offshore oilfield construction project, the paper examines the use of `partnering' as a tool for stimulating performance gains at the project level and innovation and learning benefits at the organisational level. q 2000 Elsevier Science B.V. All rights reserved.

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

1. Introduction unique to the UK Ð include low productivity, an adversarial environment and the limited take-up of Concern about the poor performance of the con- technological and business process innovations. Con- struction industry, and its lack of innovation, is flicting interests arise because project participants coming at a time when its customers are demanding have differing goals and priorities, and risk is trans- more and projects are becoming increasingly com- ferred down the supply chain to those who are plex. The construction and maintenance of major generally least able to bear it. transport and urban infrastructure schemes, highly The paper explores the problems and solutions in complex production facilities for the microprocessor aligning the construction industry more closely to its and pharmaceutical industries, or offshore oil and customers in CoPS-type projects. Using the example gas production platforms have all placed new de- of a high value, high complexity offshore oilfield mands on construction companies and their associ- construction project,1 the paper examines the use of ated suppliers. `partnering' Ð an approach designed to enhance Many of the industry's performance problems collaboration between organisations Ð as a tool for stem from inadequate inter-organisational co-oper- stimulating performance gains at the project level ation. These problems Ð which are by no means and innovation and learning benefits at the organisational level.

) Tel.: q44-1273-877166; fax: q44-1273-685865. E-mail address: [email protected]Ž. J. Barlow . 1 See Appendix A for details of research method.

2. CoPS and construction projects The inter-relationships between each participant will vary, depending on the type of project. Con- The notion of `CoPS' involves the production of struction project phases, however, generally follow high value systems, networks or constructsŽ Hobday, a common order, from feasibility studies, project 1998. . These usually embody large numbers of tai- definition, design, negotiation and pre-contract lored, components, produced by temporary coalitions stages, to construction and commissioning. Subse- of firms using one-off or very small batch processes. quent stages involve facilities management, refur- These firms generally possess different technical and bishment and eventually demolition or conversion organisational specialisations, and varying knowl- into another use. The construction process is tradi- edge and skill inputs. tionally managed by dividing the work into discrete A characteristic of CoPS is the elaborate nature of packages, which are sequentially purchased and organisational dynamics. This arises from the tempo- completed according to a logical, planned set of rary nature of the inter-firm coalitions involved in phases. These are given to different specialists for the production of CoPS projects. Furthermore, pro- execution. The result of this approach is that project duction stages can often be lengthy, messy and ill workflow can face major interruptions, increasing defined. The integration of a wide variety of knowl- the possibility of conflicts, time and cost over-runs edge and skills, and mastery of complex subsystems and quality problems. interfaces, are all crucial to the design and develop- What are the implications of these organisational ment of CoPS projects. It is not usually possible to arrangements for industry performance? The con- test full-scale prototypes in CoPS projects, so simula- struction process traditionally involves the purchase tion and modelling is of great importance in front-end of a product, governed by legal contracts. Any uncer- decision making, planning and executionŽ Gann and tainty in the project ends and the means by which it Salter, 1998. . However, the importance of tacit is to be implemented is passed down the supply knowledge and need for personal contact in problem chain risk. This is allied to another characteristic of solving also places emphasis on continuous and CoPS. Gann and SalterŽ. 1998 point out that firms contiguous project participation in the successful tend to manage risk by retaining information crucial delivery of CoPS projects Ð a geographical cluster- to systems integration within their own sphere of ing of firms is common in many project based control, rather than transferring knowledge to other industries. firms involved in the project coalition. Fundamen- The construction industry is often presented by its tally, market inefficiency arises from imperfect practitioners as somehow `different' and less in con- knowledge of the financial risks at the time contracts trol of its environment than other industries. This is are negotiated, the level of uncertainty over project partly because of its project-based nature Ð it is definition and standards, and the `locked' nature of general construction industry lore that its outputs are the contractŽ. Alsagoff and McDermott, 1994 . The `unique' projects Ð and the complexity of its supply dominant approach to construction procurement in- chain relationships. There is arguably some truth in volves fixed specifications and fixed profit levels. this perspective, and complex construction and civil Under these circumstances, there is a tendency for engineering projects bear most of the hallmarks of parties to behave opportunistically Ð once a con- CoPS described above. Major construction projects tract has been signed, power relationships change involve the integration of different subsystems and and contractors are able to exploit clients through components by a range of participants Ð the end- additional claimsŽ McDermott and Green, 1996; customer, main and sub-contractors, specialist sup- Buckley and Enderwick, 1989. . pliers and other advisors Ð who form a temporary The industry's traditional approach to project coalition, which disbands after project completion. In management and its organisational structure and this respect, the organisational structure of the con- competitive strategies not only result in short-term struction industry can be seen as a form of `hybrid' performance problems and customer dissatisfaction, or `virtual' enterpriseŽ Eccles, 1981; Miles and Snow, but also limit its ability to innovateŽ Mohamed and 1987. . Tucker, 1996. , engage in business process improve- J. BarlowrResearch Policy 29() 2000 973±989 975 mentŽ. Kubal, 1994 , or strategic planning Ž Hancock cluding clients, and the nature of interactions be- et al., 1996. . One of the main reasons for customer tween contractual parties will be partly influenced by dissatisfaction is said to be the failure of the con- a client's previous experience of procuring construc- struction industry to understand the needs of its tion work. Clients range from the very experienced customers and effectively translate these into prod- to those who are infrequent purchasers of construc- uctsŽ. Dulami et al., 1996 . The project-based nature tion services, with little incentive to become expert of the industry means that different solutions to in the procurement processŽ see Table 1; cf. Game- similar customer requirements are put forward, hin- son, 1996, for similar classifications. . Inexperienced dering organisational learning or standardisation in or infrequent clients dominate in sheer numbers construction processes. Ž.Anumba et al., 1996 , but experienced clients ac- This state of affairs has not gone unnoticed in the count for the majority of construction workŽ HMSO, UK. Improving the project briefing process has long 1990. . These clients Ð who include many govern- been seen as critical Ð government and other re- ment bodies Ð have become increasingly concerned ports on this issue date from the 1960sŽ e.g., MPBW, with the need for change and have exerted consider- 1964; Higgin and Jessop, 1963; O'Reilly, 1973; able influence over the construction industry to try NEDO, 1974, 1991; Barratt et al., 1996. . Until re- and raise its standards. Table 2 indicates the largest cently, however, major customers and government clients in the UK, measured by the value of their have tended to see improvements to the briefing construction expenditure for the period 1998-99. As process as a quick fix for the construction industry's the table shows, many are major, `blue chip' manu- performance problems. This obviated the need to facturing and service companies. These are fre- take harder decisions about ways of fundamentally quently involved in procuring complex, high value, deepening the level of customer focus in the indus- high-risk construction projects such as sophisticated try. However, a series of government initiatives is manufacturing facilities, railway infrastructure, or now attempting to modernise the construction indus- complex urban regeneration schemes. tryŽ. Latham, 1994; Construction Taskforce, 1998 , Traditional approaches to organising the construc- and there is some evidence that client satisfaction tion process, described above, can work well for has improved since 1995Ž. CIBrBuilding 1999 . relatively simple, slow and certain projects. When Concern about the industry's poor performance is this is not the case Ð when projects are more coming at a time when its customers are demanding more from it. Indeed, many customers for construc- Table 1 tion products and services represent considerably Types of construction client more advanced industrial sectors than the construc- Frequency of Reason for procurement tion industry itself. Their requirements have been a procurement Investor Occupation major driving force for change in the construction Ø Ø industry. Frequent Property developers Large clients Ø Investors seeking Ø Experienced in the short-term returns construction process 3. The customer interface in complex construction Ø Influential on the projects construction industry Ø Long-term view In any given construction project, there is a chain of internal and external customers. The end-customer Infrequent Ø Many clients Ð generally known as the `client' or project `owner' Ø Inexperienced in in the construction industry Ð is usually defined as construction the person or firm responsible for commissioning Ø Dissatisfied, but and paying for the projectŽ. Anumba et al., 1996 . unable to influence the industry There is considerable diversity between and within organisations involved in construction activities, in- Source: DoE and British TelecomŽ. 1995 . 976 J. BarlowrResearch Policy 29() 2000 973±989

Table 2 Largest UK construction clients Client Ownership Construction activity £Ž. millions Railtrack Private Rail infrastructure 858.0 London Borough of Southwark Local government Urban regeneration 619.7 London and Continental Railways Private High-speed rail line 595.9 Energy Power Development Private Power generation 595.0 Dept of the Environment, Transport Central government Urban regeneration 590.2 and the Regions Ministry of Defence Central government Military facilities 555.1 National Power Private Power generation 544.2 English Partnerships Public Urban regeneration, land reclamation 490.6 Powergen Private Power generation 373.3 BP OilŽ. UK Private Petrol stations 362.7 HBG Construction Private Property development 356.1 Chelsfield Private Property development 328.7 Sainsbury Private Supermarkets 320.2 Basingstoke and Deane District Local government Housing renewal 304.8 Council Severn Trent Private Water services 296.9 North of Scotland Water Private Water services 278.6 LGŽ. Lucky Goldstar Private Microprocessor factory 267.0 Land Securities Private Property development 252.0 Cardiff County Council Local government Cardiff Bay barrage and land reclamation 251.2 West of Scotland Water Private Water services 238.5 Manchester City Council Local government Urban regeneration 225.6 BNFL Public Nuclear fuels processing plant 216.0 Transco Private Gas pipelines 215.0 United Utilities Private Power generation, water services 211.9 Southern Water Private Power generation 210.6 Home Office Central government Prisons 205.5 Scottish Power Private Power generation 202.0 Yorkshire 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 Many important clients involved in procuring Ð it becomes much harder to coordinate the large complex construction projects now hold the view number of specialist participants that are often in- that that the current framework for managing the volved. Under these circumstances construction tends construction process is inadequate. These clients have to resemble a prototyping process, whereby project increasingly turned to `partnering' as a strategy for ends and means are continuously negotiated by the project management. In doing so, they have found various parties involvedŽ. Howell et al., 1996 . This that short-term project performance has often im- tends to blur the traditional boundaries between con- proved considerably and, furthermore, the approach struction phases and activities, requiring more com- has resulted in technical and business process inno- plicated, non-hierarchical organisational structures. vation. As in typical CoPS projects, in this situation it The rising practical interest in construction indus- becomes essential to establish tools and techniques try partnering mirrors the attention paid in organisa- for achieving rapid integration of the necessary tional theory to forms of `hybrid' or `virtual' enter- knowledge and skills possessed by participating or- priseŽ Miles and Snow 1987; Powell 1990; ganisations, and mastery of the interfaces between Thompson et al., 1991; Williamson 1993. ; in institu- various subsystems. tional economics to uncertainty-reducing arrange- J. BarlowrResearch Policy 29() 2000 973±989 977 ments such as obligational contracting and supply underlying rationale is that influence on final project agreementsŽ Williamson 1975; Kregel 1980; Hodg- outcomes is greatest in the earliest phases of a son 1988; Imrie and Morris 1992. ; or in manufactur- project and problem resolution is easier where there ing logistics to lean and agile supply chainsŽ Naylor is closer and early involvement of all parties. Part- et al. 1999. . nering essentially represents an attempt to reconceive the construction process, moving towards the bottom of Fig. 1 but maintaining the best elements of tradi- 4. Structures and strategies for managing com- tional approaches. plex construction projects The critical feature defining partnering is the extent to which the arrangements attempt to facilitate There is nothing new about collaborative arrange- an improvement on both sides of the client±supplier ments between firms in the construction industry Ð interface. Although the transactions between parties this has long been the industry's pattern of day-to-day are still governed by commercial contracts, more trading relationships. Partnering, as a new approach important for success is the way in which the Õalues to collaboration, emerged in the UK construction and objectiÕes held by each party are accommodated industry during the late-1980s in the offshore oil and to ensure that no one set dominates the outcome of gas sector, although some major supermarket chains the project. Genuinely performance-enhancing rela- had also been involved in informal long-term con- tionships frequently involve clients, contractors and struction industry relationships. other suppliers engaging in some form of collabora- Broadly, partnering is a generic term embracing a tive arrangement, which involves sharing the benefits range of different business processes designed to of partneringŽ. Barlow et al., 1997 . We return to this enhance collaborationŽ. see Barlow et al., 1997 . The point below.

Fig. 1. Models of the construction process. 978 J. BarlowrResearch Policy 29() 2000 973±989

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

The reasons for partnering have tended to vary Ž.Bennett and Jayes, 1998 . These `second genera- from sector to sector, depending on the extent to tion' partnering relationships, involving companies which there has been a perceived need to move from that have already been through the learning curve, traditional approaches to construction procurement also provided their participants with more stable Ž.Fig. 2 . For instance, supermarket chains have pro- workloads, improved flexibility, faster project start- gressed from informal long-term relationships in or- up, the elimination of defects, innovation and better der to outsource their non-core construction activi- design. Some `third generation' partnering relation- ties, through more formalised arrangementsŽ perhaps ships, where participants have undergone fundamen- with an agreed pool of suppliers. to improve con- tal changes to attitudes, organisation and technology, struction performance, to full partnering relation- demonstrate even greater benefits Ð 80% time sav- ships. Because the construction of supermarkets is ings and 50% cost savings. Underlying these perfor- now highly efficient, partnering for these clients mance gains are the beneficial effects of improved tends to be for `soft' reasons, such as ensuring their communications on problem resolution, the develop- suppliers represent the supermarket's brand and pub- ment of inter-organisational and inter-personal trust, lic image effectivelyŽ. Barlow et al., 1997 . Other and the promotion of an innovation culture. types of construction client have begun to partner at different times and for different reasons. Despite slow adoption of partnering in some con- 5. Partnering, innovation and organisational struction sectors, recent evaluations show that im- learning in construction CoPS proved construction performance Ð in some cases, greatly improved performance Ð is possible. Ac- The management of innovation in CoPS is com- cording to one study of 200 examples, the most plicated by the discontinuous nature of their project sophisticated partnering agreements produced time based production processes. These often involve bro- savings of more than 50% and cost savings of 40% ken learning and feedback loops, in an environment J. BarlowrResearch Policy 29() 2000 973±989 979 where the architecture of the production system may 1991.Ž. . Moreover, as Kogut and Zander 1992 have fluctuate with the changing shape of the project argued, the transferability of knowledge between Ž.Gann and Salter, 1998 . A further factor complicat- organisations is shaped by the degree to which it can ing the inter-organisational transfer of knowledge is be codified Ð structured according to a set of easily the number of suppliers, each of which may be communicated identifiable rules Ð and its complex- highly specialist, and complexity of networks they ity. Knowledge that is readily codifiable and simple are involved in. Moreover, project-based firms often is more easily transferred than knowledge that is have only patchy knowledge of their own portfolio embedded in the culture and work principles of an of projects, relying on informal channels of commu- organisation. Successfully transferring embedded nication between project groups as the principal forms of knowledge between or within firms is most source of information on their activities. The flow of effective in a longer term relationship, since these knowledge and innovation between organisations thus are more likely to promote the emergence of shared needs to be managed in a context of short-term, coding systems. discrete supply networks, necessitating capabilities in Simply transferring knowledge is insufficient for coordination and integration across organisations. innovation to occur in a partnering relationship Ð Partnering, with its emphasis on communications, organisations need to be able to recognise the value risk and reward sharing and the development of trust of knowledge and apply it strategically. Three further between organisations would appear to be ideally features need to be in place to take full advantage of suited to this requirement. knowledge transfer. First, as Cohen and Levinthal There is indeed considerable evidence from other Ž.1991 have noted, the `absorptive capacity' of an industries that collaborative relationships help to pro- organisation depends in part on the ways in which mote product and process innovationŽ see Shaw, knowledge is retained and distributed. This suggests 1994, and other papers in Dodgson and Rothwell, that as well as the turnover of staff, an organisation's 1994. , and interest has grown in the construction internal and external communications structure, and industry in the possibility that partnering can aid the its political and cultural environmentsŽ Kanter, 1990; transfer of knowledge between firms. According to Schein, 1985. , are important influences. Second, the Provost and LipscombŽ. 1989 , partnering provides presence of `champions' Ð central figures helping companies with an environment, which allows them to nurture and implement the partnering process Ð to refine and develop new competencies in a more may well be crucial in promoting and distributing an controlled and lower risk way. A continuity of per- organisational `memory' of the lessons learned from sonnel from project to project in long-term partner- partnering experiences. Finally, organisations try to ing relationships may therefore provide organisa- routinise their ongoing and repetitive business pro- tional learning benefitsŽ. Baker 1990; CII 1991 . cesses because routines can stimulate innovation and Clearly the regular use of external organisations provide opportunities for sustained process improve- with different knowledge bases is potentially benefi- mentsŽ. Gann and Salter, 1998 . Project processes, cial. However, the mere existence of a partnering which tend to be temporary and unique, do not lend relationship is not in itself sufficient to result in themselves to standardisation and economies of scale. cross-organisational knowledge transferŽ Barlow et Success for project-based firms thus requires the al. 1998. . The degree to which this will occur is integration of project experiences with continuous influenced by several factors, which partly relate to business processes. There is, however, often a gap the objectives of each partner and partly to the type between the rational project development practices of knowledge, which may be transferred. Both these Ž.i.e., an organisation's procedural routines and ac- factors are, in turn, affected by the nature of intra- tual development practices, as designers and engi- and inter-organisational communications and organi- neers respond to unexpected events. Attempts to sational culture. There may for example be inherent impose rigid formal procedures may force practition- tensions and conflicts between clients and suppliers ers to mask their real activities and drive them if each are driven in different directions due to the underground, reinforcing and further widening the nature of the competitive environmentsŽ Mintzberg, gapŽ. Hobday and Brady, 1998 . 980 J. BarlowrResearch Policy 29() 2000 973±989

6. Partnering and the offshore sector Ð the that focusing on the nature of their relationships with British Petroleum() BP Andrew Alliance suppliers and contractors could offer the possibility of doing so. The offshore oil and gas industry has absorbed Much of this early development work on Andrew between a fifth and a quarter of the UK's total was subsequently reinforced by, and fed into, the industrial investment in most years since mid-1970s government- and industry-sponsored Cost Reduction Ž.DTI, 1995 . The industry can be seen as an example in the New EraŽ. CRINE initiative, which was pro- of CoPS. Investment involves the development of moting new approaches to offshore procurement and highly technologically complex infrastructure for the a radical change in contracting customs. This in- exploitation of subsea oilfields. Because the operat- volved the promotion of contractual relationships ing conditions on each field are unique and continue with smaller numbers of integrated service providers to change over its life, these products are highly or alliances of firms providing these services. One customised and demand continuous technological and emerging approach was to replace traditional forms organisational innovation over a lifecycle of 25 years of contractual relationship with risk and reward shar- or moreŽ Bower and Young, 1995; Bower et al., ing arrangements, whereby the benefits from innova- 1996. . There are, however, problems in managing tion and performance improvement are shared be- innovation and sustaining organisational learning in tween project participants. CRINE made a number of the offshore sector because of the nature of its recommendations, which the Andrew team felt should supply chains. be addressed: Despite the high degree of vertical integration of the oil companies, aspects of exploration, design, Ø Improving the relationship between the operator construction and the operation of oilfields have long and contractors is a key element in reducing been contracted out. During the early 1990s the oil project cost. companies outsourced many activities and cut jobs. Ø Common objectives for all project parties are Many smaller specialist product and service suppli- more important than individual objectives. ers were faced with the loss of previous communica- Ø There is a need to remove the adversarial climate tion channels with the oil companies, becoming more prevailing in the UK's offshore industry. reliant on their relationships with the prime contrac- torsŽ. Bower et al., 1996 . These supply a wide range BP's aim in using partnering was to use smaller, of services from in-house capability and subcontract- more closely integrated project teams to substantially ing relationships, but most were relatively inexperi- reduce the cost and time of delivering field facilities, enced in managing innovation, either internally or in without compromising quality, safety or environmen- collaboration. In contrast, although there are several tal performance. Table 3 lists the principal project thousand specialist firms subcontracting and supply- targets and Table 4 indicates the individual elements ing to the offshore industry, perhaps 250 are ac- of the target cost saving. The Andrew Alliance was knowledged to be leaders in the provision of technological innovation to the industry. There is a high degree of geographical clustering in this sector, and Table 3 informal communication between them is extensive Andrew targets at project sanctioning Ž.Bower et al., 1996 . Andrew Industry benchmark The Andrew oil field was discovered by BP in CostŽ. 1993 £ 373 450 1974, but until 1990, it was economically marginal Platform rig 1800 2000 because of the unfavourable balance between the weightŽ. tonnes prevailing oil price and development costs. These Topside 10 20 were escalating under traditional procurement ap- installation time Ž.r proaches. The Andrew team realised that technologi- man-hours tonne Development 33 ca.50±60 cal innovation alone would be insufficient to sub- time to first oil stantially reduce construction costs and postulated J. BarlowrResearch Policy 29() 2000 973±989 981

Table 4 fabrication yard for installation in their final position, Target reduction in capital expenditure prior to transportation offshore. This breaks from Source of performance % Reduction traditional offshore projects, where the various ele- change in expenditure ments were installed offshore, at a high financial and Reduced interfaces, 8 safety risk. integration of design and The Andrew project involved the construction of fabrication teams, optimum equipment a single fixed platform comprising a piled steel delivery jacketŽ. substructure supporting an integrated deck Reduction in BP 8 with production, drilling and accommodation facili- personnel by ties, standing in 116 m of water. The selection combining resources process for the project participantsŽ. Table 5 is de- Improved supplier 3 Ž. relationships, scribed in Barlow et al. 1997 . Essentially, this less documentation, involved the key firms being brought into the Al- non-prescriptive liance at the front-end of the project prior to sanc- specifications tioning, rather than sequentially as in a traditional Design innovation 3 contract. Together, the Alliance partners developed a Total 21 clear target that had to be achieved if the project was Source: BakshiŽ. 1995 . to be sanctioned. Each project partner signed an individual works contract with BP and an `Alliance Agreement'. This especially concerned to engineer the design and pro- was a separate agreement, which sat alongside the curement process to achieve full on-shore comple- works contracts. The Alliance Agreement set out the tion of the structure, including fabrication, testing principles by which the parties would work together and commissioning. This was seen as critical in and aligned them financially to the overall success of achieving significant cost and time savings. In other the project. All eight partners were brought together words, the fully completed drilling and accommoda- in an integrated management teamŽ. IMT . The works tion modules were to be transported to the deck contracts, which defined the individual scope of

Table 5 Andrew Alliance partners Function Firm Riskrprofitability shareŽ. % Project management, BP 46 operational management, commercial management and external coordination Design, procurement, Brown Root 22 and project management support Integrated deck Trafalgar House Offshore Fabricators Ltd. 12 fabrication Jacket fabrication Highland Fabricators Ltd. 6 Export pipelines Allseas Engineering 4 Transportation and Saipem UK Ltd. 6 installation Drilling design and Santa Fe Ltd. 3 fabrication Accommodation Emtunga AB 1 design and fabrication 982 J. BarlowrResearch Policy 29() 2000 973±989 work and incorporated the actual contractual con- breakthrough in construction and engineering pro- trols, gave the client the option of continuing the curement. The headline benefits for BP and its Al- project in a conventional way if the Alliance Agree- liance partners were certainly striking, as follows. ment failed. ØThe cost of the Andrew development, using The Alliance Agreement included a gain sharing traditional procurement practices, had been estimated mechanism. Under this the partners agreed a target at £450 million and the agreed target delivery cost costŽ. £373 million at 1993 prices . If the project cost was £373 millionŽ. in 1993 prices . The final out-turn more than the target, Alliance membersŽ including cost of the platform was £290 million. This resulted BP. were liable for a share of the overrun up to an in a £45 million bonus to be split between the seven overall limit of £50 million. Conversely, if the pro- partnersŽ. Morby 1996 . ject was completed within the original estimate, the ØThe initial target was for the first oil to be Alliance members would received a share of the extracted in January 1997. Partly because the amount saving. The risk and reward exposure for each mem- of work completed on-shore allowed the time for ber was determined by the financial amount they `hook-up'Ž connecting the topside structure to the were willing to put at risk and approximately re- subsea jacket. to be dramatically reduced, this was flected their ability to influence the final project achieved 6 months ahead of plan. The best in class outcomeŽ. Table 5 . The gain sharing mechanism performance for hook-up was twenty man-hours per essentially prevented contractors from making money tonne, although the range was up to 140 man-hours out of alterations, as all Alliance members stood to per tonne. The Andrew hook-up target at project make or lose money collectively. A major break sanctioning was 10 man-hours per tonne, but the from tradition was that completion for the purposes team actually achieved one man-hour per tonne. of triggering gain sharing was defined such that the This reduced hook-up and commissioning costs by client was delivered with a working facility. 75%. The objectives of the IMT were to manage the ØThere were no disputes in the Andrew project. project under the leadership of the BP project manger, The strength of the Alliance and its gain sharing monitor project progress, address key issues impact- mechanism allowed members to deal collectively ing on the schedule and cost, provide a structured with potential serious unexpected problemsŽ e.g., forum for communication and interface management, exposure to an additional cost of $7 m within a few and encourage innovation and cost saving opportuni- months of the project starting because of the failure ties. The IMT adopted a policy of no `policing' of of a subcontractor. . the fabricators Ð accountability was given to those ØAccident rates were halved compared to con- who were contractually accountable and there was ventional offshore commissioning programmes be- no BP team based at each site directly checking the cause virtually 100% of the topside was completed quality of work. A `project controls group' was also on land, allowing the operation teams to practice the established to provide a central resource capable of hook-up and carry out fully integrated emergency supporting all Alliance members without duplication exercises. of effort. Each member used its own in-house system Underlying these headline outcomes, however, to control its activity, but electronic transfer of data were numerous technical and business process inno- and a comprehensive project database, accessible by vations. These partly stemmed from more efficient all members, were introduced. working during the design and construction phases of the project and completion of as much work as possible on-shore. All the contractors were able to generate novel approaches to the design and installation of the platform. 7. The Andrew Alliance outcomes ØEarly involvement by Highland Fabricators, building the jacket, resulted in 200 fewer design The Andrew project has been heralded within the drawings and allowed design concepts to be re- offshore and construction industries as a major viewed to optimise those which were less expensive J. BarlowrResearch Policy 29() 2000 973±989 983 and best-suited to its fabrication facilities. A redesign ing and distributing that knowledge were felt to have of the jacket allowed a reduction in the number of been limited. Organisational learning in the Andrew piles from 16 to 12, saving £1.8 million. Highland Alliance took a number of formsŽ Barlow et al., Fabricators were also able to delay its original start 1998.Ž . `Vicarious learning' Dutton and Freedman, date for jacket fabrication by 7 months, creating a 1985. Ð where organisations acquire second-hand deferred expenditure of £10 million to save on fi- knowledge and experience Ð was evident, particu- nancing costs. larly at the interfaces between contractors, subcon- ØThe fact that the drilling companyŽ. Santa Fe tractors and suppliers. `Team learning' was also was part of the Alliance from the start meant that evident, once a critical mass of individuals already equipment could be selected and design requirements committed to the project had been achieved. This reviewed to ensure that the rig's functional specifica- was underpinned by the emergence of trust in indi- tion was tailored to meet the drilling needs of the viduals and the strong commitment to partnering. project. Finally, `individual learning' was promoted within ØEmtungaŽ. which built the accommodation unit BP and the other Alliance members. The `fear of reported that early participation allowed it to have a failure' was removed and project members were greater choice in materials and more influence over more inclined to propose ideas and processes that the design and location of the unit. once would have been looked on as being too risky. ØAllseas was able to reduce the pipeline size by As one manager put it, ` . . . it's OK to make a 20% and influence the pipeline connections to save mistake, `fail', because that's the best learning'. steel and welding costs. The installation date of the pipeline was also rescheduled when the price of oil fell, to bring forward the date for first oil. ØSaipem saved the Alliance £700,000 by elimi- 8. Explaining the benefits Ð partnering vs. con- nating the need for water-tight diaphragms inside the textual changes jacket legs and also developed an approach for platform hook-up, which saved 36 hours welding time. Considerable emphasis was also placed on lifecy- What was the role of partnering in achieving the cle cost planning. This was possible because Brown performance benefits in the Andrew project? As well & Root was able to collaborate with other Alliance as the familiar difficulties in interpreting opinions members and their suppliers to develop a simplified presented in interviews, there can be problems in facilities design system. For example, a single inte- disentangling the specific outcomes of partnering. grated system for process control, monitoring and This is because a typical partnering relationship in- emergency response was developed, rather than us- volves a large number of simultaneous business pro- ing three separate systems. cesses and the organisations engaged in partnering As well as these immediate benefits arising from often have a wide variety of objectives, which some- innovative ideas, many involved in the Andrew Al- times change over time. It is necessary to separate liance felt that the partnering approach had helped to the role played by the processes involved in partner- promote creativity by encouraging staff to come-up ing, rather than wider contextual factors. with new ideas. Even though attempts to harness the We argued above that the mere existence of a ideas of Andrew's project staff involved nothing partnering relationship is not in itself sufficient for more than a paper-based suggestion scheme, subse- innovation or the transfer of knowledge between quently BP began to develop IT-based systems to organisations Ð these need an element of `absorp- identify the relevant knowledge held by individuals tive capacity'. This, in turn, depends on the internal and track the information required by project person- and external communications structures of an organi- nelŽ. Houlder, 1997 . sation, the presence of `champions' who are able to While it was recognised that there had been or- harness knowledge and promote change, and the ganisational learning under previous approaches to integration of project experiences with routine busi- construction procurement, the mechanisms for retain- ness processes. 984 J. BarlowrResearch Policy 29() 2000 973±989

Within the Andrew Alliance considerable empha- or ways of working were not penalised if they did sis was placed on creating a single team without not succeed. The culture of collaboration, under- duplication of functions or accountabilities. This pinned by the gain sharing mechanism, allowed peo- meant that more formalised, hierarchical systems of ple to question ways of working without fear of communications were broken down, resulting a flat- penalty if they were unsuccessful. The perception ter structure. There was a high level of face-to-face that participants were all striving to achieve a greater communication because Alliance members shared understanding of each other's goals meant they could the same office building, and the presence of inte- break from the confines of the contract and work grated design and project management systems and specification. video links with the various manufacturing and as- The importance of the Alliance Agreement and sembly sites. Direct communications between project gain sharing mechanism in this process cannot be members was actively encouraged. As well as com- under-emphasised. Essentially, this removed the re- pressing the flow of information and provide speed- strictions common to standard contractual proce- ier decision-making or problem solving, this helped dures, whereby communication are obliged to go to promote a culture within which greater collabora- through a prescribed chain of command, and helped tion and trust could grow. to break down adversarial behaviour and language. The second pillar of the partnering process in the Even though contractors were principally paid on a Andrew Alliance was the considerable effort made at reimbursable basis, total reward was tied to final teambuilding. BP had management consultants work- project outcome and the gain sharing mechanism ing on improving the company from the early 1990s therefore undermined the traditional cost-plus way of and these were put to work on the Andrew Alliance. pricing work. This approach was felt to restrict new The objectives were to ensure people were commit- approaches since it could result in innovations, which ted to delivering `exceptional results' and provide reduced contractors' time input and therefore, their them with appropriate tools for achieving this goal. remuneration. Teambuilding was based around a nucleus of people, Although they were not part of the formal Al- which was sufficiently large in mass to influence the liance, efforts were also made to ensure that partner- rest of the project. There was a variety of approaches ing principles flowed to suppliers further down sup- to teambuilding and a great deal of time and money ply chain. Focusing on non-adversarial supply chain was spent in integrating project members. Induction relationships saved 17% on product manufacturing workshops to explain the aims and objectives of the costs. Furthermore, harnessing the knowledge resid- Alliance, and its modus operandi, were run for all ing in suppliers was seen by many as a critical factor new members when they joined. Although the size of behind the development of new ideas in the Andrew the project meant that no single individual was re- Alliance. sponsible for `championing' the partnering concept, Not all the observable performance gains in the key individuals emerged at critical project stages of Andrew Alliance could be ascribed to the partnering the project. These were supported by BP's Chief process alone, though. Two other factors need to be Executive, who identified partnering as a strategic considered. First, the contribution by other parts of goal. Each of the main partners had an identifiable BP's Andrew team Ð outside the Alliance team individual providing support and selling the idea to itself Ð was critical in making the field an eco- senior executives within their own organisation. nomic prospect for example by: Arguably, the higher levels of trust emerging from these features of the partnering process led to measurable financial savings, as well as promoting innovative thinking. Trafalgar House noted how, for Ø developing an appropriate reservoir depletion example, trust meant there was no need for a resident plan, in which associated gas was exploited both BP team at the construction yard, which would have from a reservoir management and a commercial been the case under a traditional relationship. This perspective; saved about £3 million in staff time. Innovative ideas Ø proposing the use of horizontal wells. J. BarlowrResearch Policy 29() 2000 973±989 985

Second, the importance of the context within ing performance. Unlike the early days of partnering which partnering occurs was identified in Barlow et in the onshore construction sector, there seems to al.Ž. 1997 .2 Arguably, the market power of clients in have been a better understanding of the need to the early 1990s Ð a time of deep recession in the introduce approaches, which lead to mutual im- UK construction industry Ð played a part in the provement through the entire supply chain. The de- headline gains noted in early partnering arrange- velopment and introduction of gain sharing mecha- ments, since clients were able to impose tough per- nisms Ð long before other parts of the construction formance improvement targets. The large number of industry Ð is a demonstration of this. competing contractors and suppliers also provided Along with market structure and conditions, an- clients with a strong negotiating position during the other contextual factor, which helps to explain the early 1990s. dramatic outcomes of the Andrew Alliance was the The market context for the Andrew Alliance was evolution of construction and engineering technology somewhat different from the mainstream UK con- during the course of the project. While it was ac- struction sector at that time. Key drivers for the knowledged by the Andrew team that technological introduction of partnering in the offshore industry improvements on their own would be insufficient to were the decline in oil prices Ð 1990 prices were deliver the desired project outcomes, the ability of all less than half those of 1980 in real terms Ð and partners to benefit through the Alliance gain sharing escalating development and production costs. Like mechanism encouraged a willingness to adopt new onshore construction, however, there was virtually technological developments. Some of these were not no standardisation of components Ð most operators necessarily new. For example, improved lifting ca- had their own company, or even oilfield, specifica- pacity of barges had been a feature of the offshore tions for large ranges of components. Also similar industry since the late 1980s, but in the case of were the fragmentation of the supply chain and Andrew, this was coupled with an approach, which limited understanding of value flows. For BP, 53% led Alliance members to seek ways of maximising of its North Sea expenditureŽ totalling $3 billion in the onshore completion and commissioning of the 1993. was spent with third parties. This was spread topside structure. amongst 4200 suppliers and contractors, 70% of Other technology developments affected the qual- which accounted for 0.5% of expenditure. Third-party ity and performance of steel, and welding processes. costs were escalating and BP had little idea of value This allowed a reduction in the number of jacket added within the supply chain as its principal focus piles, saving £2 million. Improvements in IT were was on price, construction and delivery time, and also important; in particular, a new interactive 3D inspection and testing costs. Moreover, although BP CAD system for structural steel work, which allowed Ð and other oil companies Ð were not unaware of a stage in the design modelling and drafting process the costs associated with re-design, delivery and to be skipped, leading to further time and cost sav- start-up delays, debugging, poor plant layout and ings. Additional IT developments included improved ongoing maintenance, what was not known was how software for pipeline design and computer modeling to influence them. to allow the project team to work from a single set of Given this context, it is perhaps unsurprising that drawings. partnering should emerge as an approach for improv- To make best use of these technology changes and to adopt new ideas required, however, a high degree of collaborative working and trust between 2 Bennett and JayesŽ. 1998 also note how an Esso partnership partners. In all these instances, the cultural and or- to create a standard, modular service station shop for outlets ganisational context interacted with changes in the across Europe led to uneven time and cost savings Ð between available technologies to produce innovative tech- 1994 and 1997, costs fell by 50±60% in Germany and Switzer- land, 15±25% in the UK, France and Benelux, while in Finland niques. In the Andrew Alliance, this completely and Italy, Esso has failed to achieve anything more than minor changed the economics of the scheme and allowed a savings. project that had marginal chances to succeed. 986 J. BarlowrResearch Policy 29() 2000 973±989

9. Conclusions attention is now turning to mainland Europe. We suggested that `partnering', a bundle of business This paper has argued that parts of the construc- processes designed to enhance collaboration between tion industry share many aspects of CoPS projects in organisations, had delivered significant performance other sectors. Common to both are the size and benefits at both the project and organisational levels. complexity of projects, and uncertainty arising from Partnering places special emphasis on the front-end incomplete information, difficulties in capturing user decision-making, planning and execution phases of needs and the emergence of new system require- projects, as well as the rapid integration of organisa- ments during production. The construction industry tions with different knowledge bases. This makes it is also characterised by a high level of competitive particularly suited to CoPS-type projects, whether in turbulence and fragmented supply chains. Construc- the construction sector or elsewhere. tion and other CoPS projects often involve elaborate The offshore oil industry, which involves the organisational dynamics because projects are gener- production of CoPS, faced growing competitiveness ally delivered by temporary coalitions of firms. The problems because of escalating costs and a declining typical construction problem thus involves a lack of oil price during the 1980s and early 1990s. The coordination between project participants and other industry also suffered from highly fragmented supply members of the supply chain, and a `fuzzy front end' chains and adversarial contractual relationships, in during project planning phases. The number of dif- common with the mainstream construction industry. ferent specialists, and the level of imperfect knowl- Taking the example of a complex offshore oilfield edge and uncertainty all promote a culture in which construction project, the Andrew Alliance, we exam- construction firms are tempted to behave opportunis- ined how the client, BP, had sought to effect radical tically, passing risk down the supply chain and mak- improvements in its delivery performance. The part- ing claims on clients for additional work arising nering approach which was adopted had not only from unforeseen project problems. delivered very significant performance gains com- Innovation and knowledge management in CoPS pared to similar traditionally procured and managed and the construction industry are shaped by the offshore developments, but also resulted in technical project-based nature of production. The presence of and process innovation. In the case of the Andrew short-term, discrete supply networks complicates the project, BP had established an Alliance with eight flow of knowledge and innovation between organisa- key contractors. The partnering process included the tions. Similarly, standardisation, innovation and or- dissolution of traditional hierarchical communica- ganisational learning in the construction industry are tions structures and considerable emphasis on team- all hindered by its discontinuous, project-based na- building. Critical for the success of the project, ture. Under these circumstances, coordination and however, was the establishment of a financial mech- integration of knowledge across organisations is crit- anism for sharing project risks and benefits. This ical for successful project delivery. Key factors in- acted as a `fast-track' method for focusing on and clude the development of non-hierarchical internal encouraging performance improvement, thus encour- and external communications structures, the presence aging project members to put forward innovative of `champions' within organisations, and the integra- ideas without fear of penalty should they fail. As tion of repetitive business processes with project well as promoting a culture within which technical experiences. and process innovation could flourish, the use of A notable feature of the UK construction sector in partnering in the Andrew Alliance led to organisa- the 1990s has been the growing importance of clients, tional learning within its members. which procure high value, high risk projects but are How generalisable are the results of the Andrew highly dissatisfied with industry performance. Al- Alliance for our understanding of innovation man- though the paper deals solely with the UK context, agement in CoPS? We have noted how there are this picture is by no means unique Ð attempts to similarities between CoPS projects in the construc- improve performance have been a feature of the tion and other sectors. There is nothing unique about USA, Canada and Australia in the last decade, and the use of partnering as a tool for overcoming barri- J. BarlowrResearch Policy 29() 2000 973±989 987 ers to performance improvement in situations where ments on an earlier draft of the paper. The normal there is a need to integrate organisations with differ- disclaimers apply. ent objectives and knowledge bases. It is, however, important to understand the role played by context in influencing the way the largely generic processes Appendix A. Research method comprising partnering are introduced and implemented. Partnering has had a variable impact within The research on the Andrew Alliance was carried construction, with perhaps the greatest project per- out as part of an ESRC-funded study of the organisa- formance and longer term innovation and learning tional and managerial processes involved in con- benefits being seen in the CoPS sectors of the indus- struction industry partnering. The research involved try. While partnering has been used to great effect in a major review of current research on partnering and more routine and repetitive areas, notably the con- literature on relevant economic and organisation the- struction of hotels, supermarkets and drive-through ory; background interviews with key organisations restaurants, it has had only limited impact in house- and firms involved in partnering; and five case stud- building. This remains deeply traditional and dis- ies of existing and emerging partnering arrange- plays a serious lack of technical and process innova- ments. Over 40 companies were involved in these tion because of a variety of cultural, economic and case studies, which were chosen to represent differ- regulatory barriersŽ. Barlow, 1999 . ent types of partnering and different construction Parts of the construction industry have become sectorsŽ. see Barlow et al., 1997 for details . A series increasingly similar to other CoPS sectors and clients of semi-structured interviews with key staff in as are growing more demanding. Although the need to many of the companies involved in the partnerships improve the client±contractor briefing process has as possible was conducted. There were only 2 re- long been recognised as a factor behind performance fusals, out of 36 partners which were approached. In improvement, this is no longer sufficient. The ability total, 75 interviews were conducted. Twenty of the to manage value and knowledge flows across the interviews were taped and transcribed, and written boundaries of firms is necessary for the successful notes were taken in the remainder. delivery of construction CoPS, suggesting that ap- All the case study interviewees were involved in propriate tools and techniques for integrating supply setting-up andror managing the partnering arrange- chain members are critical. This is turn calls for new ments. In some instances staff were interviewed criteria for competency in the construction industry, more than once. Interviews tended to last between 1 notably an ability to offer a customer-focused service and 2 hours and broadly examined the direction of, rather than one which merely reflects the clients' and motives for, the particular strategies that had perceived needs. It remains to be seen whether the been adopted, and their experience of the specific UK construction industry Ð in its current guise Ð partnering relationship. The areas covered in each is capable of meeting these new criteria. interview depended on the particular role of the interviewee, but in general the following questions were explored: Acknowledgements Ø how partners were selected; Parts of this paper are based on research carried Ø the extent to which, and how, members `bought out for a project on construction industry partnering into' the partnering aims and objectives; funded within the Economic and Social Research Ø the degree of commitment at different levels of Council's Innovation Programme. The project was management; carried out by James Barlow, Michael Cohen, Ashok Ø how agreements on performance targets and risk Jashapara and Yvonne Simpson. We are grateful to sharing were arrived at; the Andrew Alliance companies and their members Ø the level and nature of teamwork, trust and open- for their help and time. We also thank Bob Scott, ness; Virginia Acha and two anonymous referees for com- Ø the way conflicting objectives were approached; 988 J. BarlowrResearch Policy 29() 2000 973±989

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