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Developing an evolutionary control system for Project Management


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STX, a Brazilian ship manufacturing company just completed the successful delivery of three AHTS (Anchor/Handling/ Tug/Supply) vessels, valued at $80 million each, to NorSkan, another subsidiary of DOF, which prompted them to make the new order for Technip. The COO was faced with the situation of how he can use the results of the recently delivered vessels to turn this new project into a successful venture for STX Brazil. Through this paper we look at various ways of improving the management control systems that enhance project visibility and allow better control of the project.

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Developing an evolutionary control system for Project Management

  1. 1. IE Business School Designing Evolutionary Control Systems for PMSTX Brazil: Developing an Evolutionary Control System Group 1Raphael Ani | Kundan Bhaduri | Daniel Bobu | Jason Conner | Rodrigo FerrazKimberly Gilsdorf | Kyle Grant–Anderson | Maggie Georgieva | Pedro Oliveira
  2. 2. IE Business School Evaluating AHTS Project Performance STX Brazil’s CEO, CFO, and COO, sat together preparing the approach on how to tacklethe most complex project their shipyard had ever taken on. At the beginning of 2006, thedecision was already made to accept an offer from Technip, a DOF subsidiary, to build threedifferent ships with price tag of approximately $220 million each. The management of STXBrazil realized the importance of taking on a project of this magnitude given the opportunityto grow the business and secure client retention, taking into consideration the newpartnership between DOF and Technip, a new client to the shipyard. It was now theresponsibility of the COO to analyze the details of the project and develop a plan tosuccessfully deliver the three ships on time and within the resources of STX Brazil. Hecontemplated the challenges given the project’s sheer complexity and STX Brazil’s limitedexperience with such an endeavor. He also wanted to involve both the CEO and CFO in anysolution as this project represented a major opportunity of growth and development for theshipyard, but also, a major going concern risk should something go wrong with a project ofthis size and complexity. STX Brazil just successfully completed the delivery of three AHTS (Anchor/Handling/Tug/Supply) sister vessels, valued at $80 million each, to NorSkan, another subsidiary of DOF,which prompted them to make the new order for Technip. The COO was faced with thesituation of how he can use the results of the recently delivered vessels to turn this newproject into a successful venture for STX Brazil. The success of the new project hinges on twoelements: their ability to continuously satisfy the client’s expectations to ensure a long-termrelationship, and to build on their internal control systems to have the right tools in place tomeet future challenges.THE ECONOMY AND WORKING CONDITIONS OF BRAZIL In 2006, the economic conditions in Brazil were positive with stable inflation, steadyunemployment at 10%, and rising average worker income.1 It was considered one of thestrongest economies of South America and was showing signs of a strong emerging market.The four main pillars of Brazil’s economy rested in agricultural, mining, manufacturing(including shipbuilding) and service sectors. Foreign direct investments were trickling increating an opportunity for many industries to flourish throughout the country. In fact, Brazilwas second only to China for receiving such investments totaling close to $15.6 billion.2 Productivity in Brazil was relatively low compared to developed countries, but highcompared to other emerging markets. This lower productivity was partly due to the below-average quality of manpower within Brazil because of a lack of specialized training programswithin the education system.3 Nevertheless, Brazilian workers were considered flexible,creative, hard workers who valued informal meetings and tended to work well in groups.Unions The current union structure in Brazil was first introduced by the Getùlio Vargas regimein 1930.4 Working conditions for many industries that flourished within Brazil were notfavorable for employees resulting in the rise of unionized labor. One of the key leaders of the1 Bonelli, Regis. “Productivity in Developing Countries: Case Study Brazil”. Endorsed by UNIDO.4 2
  3. 3. IE Business School Evaluating AHTS Project Performancelabor movement who worked tirelessly to ensure that unions were allowed to protectemployee rights was Luiz Inacio Lula da Silva. Lula moved on to hold a number of politicalpositions; most notably he became President of Brazil by 2003, position he still held in 2006.Under his control he maintained the fight to allow unions to play a significant role. During hispresidency, various unions represented many important industries and one of the strongestat the time was the Rio de Janeiro Shipbuilding Union.SHIPPING INDUSTRY IN BRAZIL5 The shipbuilding industry of Brazil was the second largest in the world before the hugecrisis of the 1980s. Just before the crisis, during the 1970s, Brazilian shipyards employed40,000 direct and 100,000 indirect workers, and claimed the second largest backlog due tocontracts with Petrobras, Vale de Rio Doce, Lloyd Brasileiro and others. However, theeconomic crisis of the mid-1980s in Brazil forced the shipyards to seek financial support fromforeign banks and investors. A senior Brazilian shipbuilding official recalled: “The government needed dollars and forced the shipbuilders to take foreign loans and, in order to build, obtain parallel loans to reinforce the treasury. Then, during these hard times, it did not put the tax money into the Merchant Marine Fund as it was supposed to. All this contributed to the ultimate collapse.”6 The number of people employed in the Brazilian shipbuilding sector increased byapproximately 300% during the 1990s, a positive sign towards the revival of the industry. By2006, Brazil had become self-sufficient on oil and gas production for the first time, which alsocontributed to such growth. Two additional reasons that contributed to this growth were (i)the government subsidy programs through BNDES (Brazilian Development Bank7) thatsecured promises from Petrobras and Transpetro to use local industry, decreased interestrates on loans to finance shipbuilding activities, and extended their maturity, and (ii)permitting foreign direct investment in Brazilian shipyards (See Exhibit 1 for growth of theshipbuilding industry graph). By 2006, shipbuilding was becoming one of Brazil’s most important industries increating jobs and increasing the country’s competitiveness on a global scale. Total salesduring 2006 were expected to reach $2.5 billion with over 36,000 employed in the industry.8 Brazil at the time had over 100 shipyards, out of which 40% are located in Rio deJaneiro with the remaining 60% in the Amazonas, Santa Catarina, Caera, Para, and Sao Pauloareas. Petrobras had 13 new oil platforms in the pipeline, six of which were underconstruction and seven were under bidding (or would be called for bids). The estimated5 The information in this section is drawn from “Fast Pack, Brazilian Shipbuilding Industry”(, “ShipbuildingIndustry, Investment Opportunities in Uruguay”(, “Brazilian6 Shipbuilding in Rejuvenation?”( Sinaval, “Industria Naval No Brazil”. 2007. 3
  4. 4. IE Business School Evaluating AHTS Project Performanceinvestment for those seven platforms was about $5.2 billion. The growth potential for theBrazilian shipbuilding industry was enormous.STX BRAZILBackground In 1996, four Brazilian entrepreneurs created the Promar shipyard, located in Niteroi,Rio de Janeiro, Brazil, seizing the opportunity to supply the demand for ship repairs. Duringthe first two years, the shipyard was focused on maintenance of Anchor/Handling/Tug/Supply (AHTS) and Platform Supply Vessels (PSV), mainly for local shipping companies. By 1997, in order to boost the shipbuilding industry, the Brazilian government issued aregulation that restrained foreign ships to a maximum of one year of work along the Braziliancoast. By that time, the Brazilian Oil and Gas industry was increasing its proven oil reservesand production. In addition, Petrobras was investing on exploration of new oil fields, whichrequired new ships and platforms. The first order for Promar came in 1998, from Companhia Brasileira de Offshore(CBO), an 80 meter long PSV. After this order, two others PSVs were delivered through 2000.At this point, the shipyard was producing at full capacity with these new projects. In 2001 a Norwegian group, Aker Yards, the largest European shipbuilder, acquired50% of Promar’s shares. The partnership brought a new client, DOF, which would becomeAker Promar’s most loyal client along the years. In the beginning of 2005, Aker Yards securedthe remaining shares and assumed full control of the shipyard. However, by the end of 2005,STX Group acquired 39.2% of Aker Yards shares on Oslo Stock Exchange (Oslo Børs), and inJanuary 2006 secured the remaining shares and became the company’s sole shareholder. The STX Group at the time was a very complex conglomerate encompassing a diversegroup of industries with a true global reach. It was a South Korean holding company with fivedistinct subsidiaries: STX Offshore and Shipbuilding, STX Engine, STX Heavy Industries, STXPan Ocean, and STX Energy. The newly acquired shipyard in Brazil, STX Brazil, was ownedand operated by STX Europe, which was part of the STX Offshore and Shipbuilding subsidiary.STX Brazil specialized in building offshore vessels and developed state-of-the-art concepts,technology, processes and products for customers around the world.Organizational Structure The Executive Committee, responsible for leading the company was chaired by theCEO, and also includes the CFO and COO. The full organization was structured on a functionalbasis comprised of an Engineering, Procurement, Production, Finance, Marketing, and HumanResources departments (see Exhibit 2 for the company’s organization chart). The STX Brazilshipbuilding process involves the four main departments of Engineering, Procurement,Production and Financial. Marketing and Human Resources serve more as support functionsto projects, as they were not directly involved.The Departments Each of these departments had a Director, which controls the flow of information fromits department to the Executive Committee. The organizational design of STX Brazil, in termsof project management, resembled a matrix-style organization, where continuous interactions 4
  5. 5. IE Business School Evaluating AHTS Project Performancebetween all departments occurred. It was functionally divided into business groups, each ofwhich shared a particular set of responsibilities. The central piece in this chain of commandand liaison was the STX Brazil project manager who had contact with the finance specialists,procurement specialists, engineers and foremen. The shipyard had a team structure for everydifferent project that they were working on and each individual participated in a multi-directional dissemination of information throughout their teams and departments. Further,each team at STX Brazil was cross-functional in nature to give each employee better visibilityof stepping in someone else’s shoes.Engineering: This department of white-collar workers represented the company’s skill-labored employees that were the most educated and highest paid employees in theorganization. The central design team within the global STX GROUP was located at Alesund,Norway and they did the beginning phases of the ship design process.9 Once the design wasfinished it was sent to the engineering team in the STX Shipyard in Brazil. This team wasresponsible for translating the designs into intelligible and detailed ship specifications thatcould be understood and applied by the production department in delineating the productionplans. This translation meant not only preparing those documents in Portuguese, but alsosimplifying the complexity of the whole design into a number of smaller parts/blocks apartfrom devising the most efficient solutions to meet all specifications’ requirements. Therefore,it was the engineering department that manages the design and operational complexity risks. Considering that the engineering process was not one of pure standard delivery ofmass production solutions, this process entailed very complex activities. The complexity ofthe design needed to be reduced in order to allow for lean production plans. Additionally, inthe case of projects relating to wholly new ships produced in their shipyard, the challenge wasmuch higher. The ability of the engineering department to translate the innovative ship designinto a language the production department understands, was a key factor in reducing thepotential for delays throughout the whole process. Finally, it was extremely important to have fluid communication between theengineering and production departments. The unexpected was surely bound to happen, andthe faster they were at devising solutions together, the lower the risk of delays or qualityissues.Procurement: This department managed the purchasing of goods and services necessary tocomplete the project. Their focus was to minimize cost and at the same time try to meet theproject’s requirements in terms of quality and quantity of service/materials, time and locationof rendering/delivering. Any failure on each of these variables could imply stoppages on theproduction process and its re-planning, leading to unrecoverable delays or significant extra-hours from the labor force. The supply risk entails not only these four variables (quality, quantity, time, andlocation), but also the price. The main supply was steel plates, a commodity with a highlyvolatile price. The procurement department was responsible for hedging this commodity riskand guaranteeing the prices that were foreseen in the bidding process. Should it fail to do so,and taking into consideration the significant price changes occurred in recent years (the9 5
  6. 6. IE Business School Evaluating AHTS Project Performancenickel price – the main driver of the steel price – more than quadrupled during this century –See Exhibit 3), the project could easily result in a loss.Production: The production department was mainly composed of blue-collar workers andwas the biggest department in terms of work force. The foreman and his team workedtogether with the Planning Coordinator and the Engineering department to devise theproduction plans. Afterwards, they were responsible to put these plans into practicemanaging the whole production process, from the steel plates cutting, building andassembling of the blocks, to the actual launch and final ship outfitting. One of the major challenges was working with the unions, which were strong in thisindustry. The labor contracts were usually negotiated between the management of STX Braziland the unions, and they typically include very strict rules about compensation, promotion,over-time and dismissal of workers. STX Brazil realized the importance of retainingemployees; therefore, they strove to maintain a healthy relationship with the unions toprevent any difficulties that would cause delays in the process. Even though most of the workers were skilled at some tasks in the building process,when a completely new project was taken, it presented a major challenge in breaking therigidness of their working habits and previous know-how and adapt to new methods and newdesired outcomes. Because the production department was at the center of the whole shipbuildingprocess, it had the responsibility to interact directly with all departments. The fact was thatany problems that arose in any other department would surely come up in production assymptoms that something was wrong. The capacity to detect these problems or issues beforethey affect production seemed to be a major challenge.Finance: This department had a dual objective in terms of project management. On one hand,it managed all the project’s cash flows, including financing from Federal Government andFinancial Institutions, payments’ schedules to suppliers, receipts’ schedules from the client,according to the projects’ milestones included in those schedules, hedging interest rate andforeign exchange risks, and settling the payroll. On the other hand, it was also responsible forthe performance metrics of the project, preparing regular progress reports to management,and dealing with the accounting requirements.Project Management Structure The project management team was lead by the project manager, but it included arepresentative from each department, which not only brought the departments’ expertise toeach project, but also made the bridge between what the project needed and what thedepartment could provide. The project manager’s role was to closely supervise the ship’s construction, managethe customer’s supervision of the project, lead the project team and get them aligned with theproject’s KPI’s, and transform each coordinator in an efficient communication tool betweenthe project and their department, without compromising their day to day duties at the project.The project manager was the only one authorized to exchange information with the client. 6
  7. 7. IE Business School Evaluating AHTS Project Performance The usual project management organization could be depicted as follows: The department director selected each representative to the project managementteam. To give an example of the coordinators’ responsibility, the procurement coordinatorcould request reports and updates to his/her department to be used in its project activities.Because these requests had priority over the day-to-day activity of that department, thispractice many times creates conflicts. The exception to this flow of information came from theproject managers. In fact, the project managers were not part of any department. They formeda group of their own which also includes the planning coordinators. The quality control coordinator was included in the Production department, and wasmainly responsible for the interaction with the quality and risk control external agency (seebelow).PROJECT MANAGEMENT PROCESSThe Ship Building Process Offshore-Specialized vessels were built at STX Brazil through a very complexmanufacturing process. The process encompassed six phases involving a work force of up to1,500 individuals (see Exhibit 4 for a visual map of the different phases and its ownershipthroughout the shipbuilding process). The process can be better understood by analyzing thephases and its ownership per each relevant (semi) output along the process: Steel Ship Ship Ship Blocks Components Strucuture CompletionSteel Components: Once the Engineering Department finished the project details, including allspecifications on the ship, the procurement department then starts procuring all thenecessary material and equipment. They had a defined time line of materials and equipmentsupply so that the shipbuilding process didn’t stop due to lack of materials. The supply riskwas managed in two ways: first, validated at least two suppliers for the supply of any part inorder to have a backup plan; second, established clear supply deadlines with suppliers,including monetary penalties for delays in the contracts, and set the deadlines with a safety 7
  8. 8. IE Business School Evaluating AHTS Project Performancemargin regarding their actual inclusion in the production process. Parts and materialsreceived ahead of time are stored in the company’s storage facilities. The next phase was thecustomization of the steel parts, which was done at the Steel Process Unit according to thespecifications of each required part.Ship Blocks: In order to reduce the throughput time in building the ship, its productionprocess was designed in a way that several different blocks were being processed at the sametime. Therefore, the company was able to have several assembly lines working in parallel andsignificantly speed up the production process. The block assembly was also performed at theSteel Process Unit. During this phase, there was a new entity involved in the process. DNV10,an external agency dedicated to independent quality control, was responsible for controllingthe quality of the semi-finished products and also cooperating in risk management, both onsafety issues and in project management. This entity accompanied the production processfrom this phase until its conclusion. At this point, the blocks were moved to the pipe shopwhere the pipe assembly was finalized. The full ship blocks structure was concluded and thekeel laying takes place (putting together the hull of the ship).Ship Structure: This phase took place on a per ship block basis as well. It was here where theblocks were painted and the larger equipment was installed. This equipment had to beinstalled before the actual positioning at the dock and erection over the hull, because therewas impossible to accomplish this after the fact given its size. The next part of this phase waswhen the ship blocks were moved into the dock and each module was erected over the ship’shull (which the assembly began simultaneously at the dock), hence began to look like anactual ship. It was here all the pieces started to come together (see Exhibit 5 for an image ofthis process). Once this was completed, the ship made its first voyage into the water.11Ship Completion: The final phase comprised of the installation of the remaining equipment(mostly, the electrical components). Once the ship went through the final outfitting, the shipwent through an extensive series of tests to guarantee its performance according to projectspecifications. There were three main milestones in the ship building process: keel laying, launch, anddelivery. Depending on the ship, the time span between each of these milestones differed inlength of time. (See Exhibit 6 for a visual representation of the different stages in theshipbuilding activity.)The Control System The control system for project management at STX Brazil was comprised of two layers,one visible and objectively defined, and another less visible and related with the way differentpeople were put together and to whom they reported to. Both control systems had theultimate purpose of keeping each project on-track, on time, and within budget.The Visible Side: STX Brazil had a set of control activities defined to establish a proper controlmentality around the project’s development and across every individual involved in theproject. They were meant to make everyone feel liable for their mistakes and to create10 DNV is a multinational company, headquartered in Oslo, Norway, and is a leading provider or services for managing risk. Their activitiesinvolve assessing, evaluating and managing the risks involved in high-profile projects. For more information visit Usually the launch of a ship is celebrated throughout the whole shipyard for its symbolism, by being regarded as the climax of the shipbuilding process. Check 8
  9. 9. IE Business School Evaluating AHTS Project Performancecommunication channels to foresee potential problems that could arise in the future, thuspromoting each individual’s involvement and commitment for the success of the project. In terms of the decision-making process, the project management team made decisionsas a group as they all had to be taken by full consensus. Moreover, even though the projectmanager was the only one on the team with direct communication to the ExecutiveCommittee, he did not carry more decisive power over the rest of the team. Additionally, theupward communication was also driven through each department, by reaching thedepartment directors, which also had direct access to the Executive Committee. Each department coordinator had to prepare summary reports of their activity in theproject, which were submitted to its department, to the project manager, and to the financialand planning coordinators. Additionally, the finance department prepared severalperformance metrics reports intended to provide a visualization tool, accessible to everyoneinvolved in the project management and to top management, for discussion and analysispurposes. This analysis and discussion took place in several instances including projectmanagement formal meetings and Executive Committee formal meetings, apart from manyother informal meetings taking place. Project management formal meetings took place on a weekly basis and include all theproject’s coordinators. The project management meeting agenda involved: i) tracking theproject’s performance in terms of schedule, quality and cost; ii) performing a status check onthe issues that had recently been solved or which solutions were currently underway; iii)discussing solutions to problems or issues occurred in the meantime; iv) conducting aforward-looking discussion on potential problems or issues that may arise in the future,where the individual contributions of each participant are valued. An Executive Committee meeting for project control took place on a monthly basis andbrought together all project managers and department directors. Each project managerdelivered a set of reports summarizing the projects status and progress, and the projectteam’s assessment of all the risks found so far that could, in any way, constrain its progressand results. When the project manager presented these reports, participants were allowed toquestion the assumptions of each report and make comments to spark discussions. A myriad of reports were created for various stages of a project (see Exhibit 7 forexamples of these reports). One of the most important reports was the “Risk register”. Theowner of this report was the project manager, and was a result of the project managementmeetings. It represented the team’s assessment of risk (probability and cost potential), theaction plans to mitigate them, and the continuous follow up on every meeting.The Invisible Side: The creation of the project team was a control in itself that topmanagement created to guarantee an intra-control mechanism, where the competingdepartments have a dual incentive to perform their best in addition to check that others dothe same. This team design also created a double flow of information to the ExecutiveCommittee: through the project manager as well as through the department coordinators andultimately their directors. The Executive Committee believes that this parallel flow ofinformation was extremely important to guarantee that their meetings for projects’ controlincluded a healthy level of discussion on details and perceptions about the process. Thepotential for conflict was viewed as a critical factor to foster the discussion over the formal 9
  10. 10. IE Business School Evaluating AHTS Project Performancetransparency. This was also designed to reach a stage of simulation of reviewing what wasactually happening in the shipyard and the authentic interactions and conflicts that wereoccurring. Finally, the project management team offices overlooked the shipyard and therefore,were visually connected to the physical building of the ships.The Stakeholders From the point of view of the project management team, there were manystakeholders that interact with the team and had interests in its decisions and formed a partof its overall success. These included the following:Shareholders: The interest of the shareholders was that each project maximizes their return.This was viewed from an individual project perspective, but also in terms of achieving long-term valuable relationships with the external stakeholders and internal buy-in to thecompany’s mission.Executive Committee: The Executive Committee was ultimately responsible for every successand failure in the company. Their interests were mainly aligned with those of theshareholders, however, as remuneration was usually set on certain specific KPI’s, themisalignment between those KPI’s and the shareholders interests, may cause some agencyissues. In fact, this misalignment was the norm and reducing it, was the goal of anyremuneration committee. The most common KPI was enterprise value, which corresponds tothe potential value to be created by its activities, which was very subjective and prone tomisconceptions and misperceptions.Departments: Each department was interested in being a factor of success and not beingassociated with failures. This might lead to some level of conflict between them.Unions/workers: Even though the interests of the Unions might not represent the interests ofthe majority of the workers of the Company (it was usually the case), they have an agenda thatusually includes salary compensation, career progression, working hours, training, andworking conditions. The shipyards in Brazil are strongly supported by the FederalGovernment, and this gives the workers and their Unions a strong negotiation power withinthe Company.12Customer: Most of the customer interests are set in the conditions and requirements of theproject. In the case of shipbuilding, the price was fixed so the risk was totally on the shipyardsside. However, during the project, due to changing circumstances, and because the projectsusually last for periods of over a year, it was quite normal for the client to request changes todesign, either for including extras or reducing them, aiming to have extra capacity or reducingprice, respectively. The customer always has an office on the shipyard from where he canaccompany all the works. However, he was only supposed to interact directly with the ProjectManager.12Shipbuilding in Brazil has become a symbol of progress and employment. It has strong political ties. Check for a speech of President Lula da Silva on a shipyard (in Portuguese!). 10
  11. 11. IE Business School Evaluating AHTS Project PerformanceSuppliers: Suppliers are interested in satisfying the shipyards requests in the most profitableway, and building long-term relationships.Regulatory Agencies/Government Authorities: Regulatory agencies should be independentfrom the Government, but it’s not the case in Brazil (and anywhere else for what it matters).Their purpose was to provide a public sense of control on the activity of the shipyards.However, their activities in the past have been more towards defending the interests of thenational shipyard industry. It was in this point that their interests are clearly aligned with theGovernments’, of which the most important interest was to create wealth for the generalpopulation by promoting employment. The shipyards lobby with these entities to get specialfavors (such as public funding/finance for projects) in exchange for the creation of jobs.What Could Go Wrong? Given the array of conflicting interests from all the stakeholders and considering thecomplexity and constant innovation in shipbuilding, the number of things that could go wrongin a shipbuilding project was simply overwhelming.The Basic Criteria For Success There was some commonality of interests between all the stakeholders involved thatwas key for the reasoning behind any conflict resolution in a way that can be understood aswhat the shipyard stands for. As a basic understanding, this seems plausible. However, if examined in depth in to what these concepts meant, the apparentcommonality of interests becomes much more chaotic. It seemed clear that each stakeholder’sinterests were conflicting between themselves, and additionally, the self-appraised rationalitybehind their actions, taking into consideration the considerable level of uncertainty in thiskind of projects, crumbled. The complexity of these interactions, together with generaluncertainty of assumptions and outcomes, were an overwhelming challenge. 11
  12. 12. IE Business School Evaluating AHTS Project PerformanceTHE AHTS $80 MILLION PROJECTThe Client NorSkan Offshore was a specialist firm specializing in the Brazilian oil and gasexploration business. It had many innovative service offerings for niche services that includecustom drilling and oil exploration project support for the main players in the Brazilianmarket. The company was a subsidiary of DOF ASA, a Norwegian offshore support groupfounded in 1981, and listed on the Oslo stock exchange. NorSkans’s operations in Brazil beganin the year 2000, due to the bright outlook forecasted for the Brazilian Offshore Oil & Gasindustry. Since then, NorSkan had rapidly expanded its operations to at the time, owning andoperating a fleet comprised of thirty-six supply, support and construction vessels, includingnew-builds. The NorSkan vessels were chartered on long-term contracts to the main oil & gasexploration and production companies in Brazil, as well as operating as subcontractor in thearea of subsea services. The vessels were able to complete a range of services for rigs,platforms and Floating Production Storage Offloading (FPSOs), or Floating ProductionSystems (FPSs), as well as other oil and gas infrastructure. The vessels transport materialsand supplies; as well as crew to the rigs, platforms and FPSOs; positioning; towing; mooring;and support services related to the construction, installation, maintenance and repairs of rigs,platforms and FPSOs.The AHTS Project – details NorSkan outsourced the end-to-end construction of three vessels under a new projecttitled AHTS to STX Brazil in 2004. Each ship would be identical in shape, design, andengineering, and would be sold at a fixed price of approximately $80 million each. Each ofthese ships was 80 meters long, weighed 2,600 tons and had an 18-month development cycle.There was widespread consensus within NorSkan on the selection of STX Brazil for the designand development of the new project. In the words of the Norskan CEO: “As we are investing more and more in Brazil, we expect and trust that the shipyard will keep up with our expectations, so far they did.” The purchase order for these three ships was the largest and most complex that STXBrazil had ever received. Therefore, they drew special attention of the management andproject engineering teams. The complexity of the project led management to forecast economies of learningthroughout the construction of the three ships. In fact, the shipbuilding industry wascharacterized by increasing profit margins as the number of ships built per project increase. Itwas commonly accepted that a shipyard needed to build at least three ships of an identicalnature to break even, and at least six ships to reach normal shipbuilding margins. For thisproject, management was estimating 2%, 5%, and 7% margins for each of the three ships tobe built, which are lower than the normal margin realized by the shipyard in a commonlyproduced vessel. Nonetheless, and considering the interesting prospects for further vessels’orders down the road, management believed this project to be a necessary step towards thatgoal. 12
  13. 13. IE Business School Evaluating AHTS Project Performance After the early joy of victory subsided, STX Brazil soon figured that implementing theengineering plan for all three ships was easier said than done. Although the customer initiallyintended to order all three ships in identical design and measurements, it soon turned outthat owing to the difference in utility of the ships and adequacy to changing circumstances inthe economic environment and the customers’ stakeholders (e.g. Petrobras), their designsneeded some customization. In addition, since each ship now had a different project time line,and in reaction to different problems and issues that constantly surfaced, the actualproduction process differed considerably between them. All of this resulted in temporarydelays that had to be compensated with overtime, and additional production planningchallenges, since the project plan was no longer synchronous and tightly aligned as initiallyprojected. But these challenges ended up provoking more problems than estimated. These issuesat the AHTS project brought forward the friction that existed between the Engineering andProduction teams. The delays and production planning revisions exacerbated the potentialnegative impact of that friction, by creating delays on the engineering side (the revision ofdetailed part specifications was taking longer than expected), and idle time and inefficiencieson the production (the revised production plans were not received in due time that allowedfor an efficient planning of resources allocation). Some of the friction seemed to derive from aclash of social classes: the engineering staff was white-collar and highly educated, while theproduction department had unskilled/semi-skilled blue-collar workers that depended largelyon the engineering division to make sense of the maps and blueprints that arrived from theclient in Europe. The antagonism between both sides made everything worse. The Project Manager was also concerned about the sheer complexity of the project,and the engineering division was finding it tough to deal with a complete new ship conceptand to keep pace with the consistently changing requirements. As a result these delays alsopercolated down to production. In the words of the Project Manager: “We have underestimated the engineering department’s capacity! Now, production is suffering!” Finally, the political dynamics of the organization and the department conflict gave riseto an unhealthy lack of trust amongst the two teams. On conditions of anonymity, one of theengineers from the team commented: “There are regular misunderstanding between engineering department and the production one, mostly regarding planning and the real status of the project.”Tools Used STX Brazil developed in-house tools that aided periodic review and helped track theknown and unknown elements of the project. However, those tracking tools were of no use tothe limitations the whole project was facing with. The production and engineeringdepartments were clearly with their backs turned to each other, and it seemed that thecompany had no tools or means to reverse that situation. The actual control tools weretreated as a bureaucracy procedure, and did not serve its purpose in any way. (Refer toExhibit 7 for reports). 13
  14. 14. IE Business School Evaluating AHTS Project PerformanceThe Outcome As result of the project, the project margins did not meet expectations: the three ships’margins stood at -2%, 0% and 5%, respectively. The project manager quickly realized he had severe issues on his hands andcommunicated them in an extraordinary Executive Committee meeting. He emphasized threemain symptoms which the roots had to be sorted out: i) motivational issues in the engineeringand production departments, ii) there were delays in the engineering department andabnormal low productivity in the production department, and iii) instead of working togetherto devise solutions, both of those departments were further falling apart from each other. However, the acknowledgement of these problems, and the personal sacrifice of theproject manager’s, supported by a strong stand from the Executive Committee backing himup, made it possible to make substantial improvements throughout the project that becameevident in the last ship’s production. Additionally, since they went through the developmentiteration of the ship three times, after each increment of the project cycle, the projectmanagers, the engineering and production teams knew beforehand some of the issues theywould have to deal with, and provided for solutions to anticipate them, which in the endreduced the impact of the problems that had arisen.THE $220 MILLION PROJECT The project consisted of three OSCV ships (Offshore Supply Construction Vessels)which are mostly used to supply offshore platforms during its construction phase and areinvolved in deep sea construction works. The new order of three ships was considered to bethe biggest challenge the shipyard ever faced in its history. The total value of each ship(approximately $220 million) almost surpassed the total value of the previous three ships’order, and its complexity seemed to be correlated with the increase in value. Not only was thisship much bigger in size (approximately 120 meters long and with a deadweight tonnage of5,100 tons – refer to Exhibit 8 for a picture of a similar ship), but also, and mostly, it was muchmore complex in all the additional equipment that it included. This new ship was designed tooffer a much bigger range of possibilities to supply and serve the offshore platforms, andbecause of that, the level and complexity of the equipment to be installed was much higher.The initial assessment of the project’s risks emphasized the following: i) because the shipyardwas not experienced in dealing with this level of equipment in a ship, the engineering andproduction departments will have to work closely together to constantly devise and adapt theproduction plans to difficulties found in installing the equipment (mainly related with thesequence of equipment installation and ship block building); ii) the complexity of theequipment was in itself a challenge to the equipment handling team, as most of the equipmentin this new ship was completely new to them.NEXT STEPS As the CEO, CFO and COO worked together, they thought about their meeting with theProject Manager of the AHTS project for Norskan. The building of the three ships was themost complex project to-date and presented some major challenges to the company. Inaddition, this project was not sufficient to achieve considerable gains of learning by itself,similarly to the previous project. However, they believed there should be a way to make the 14
  15. 15. IE Business School Evaluating AHTS Project Performancelearning curve for shipbuilding a continuous between projects, and that the teams involvedshould endow themselves with the learning opportunities from the previous project and beable to build the first ship at a much higher profit margin. Anyhow, even though the conflictsbetween the engineering and production departments seemed to be settled, it was clear tothem that it was just temporary. The emergence of new challenges, expected to be even biggerin this new project, would certainly make their mutual issues come up and disrupt the courseof production. The challenge that the COO faced was to understand the process and control for theprevious three $80 million ships and implement control system improvements to assure thatbetter results were achieved for the new project of three ships, while keeping all stakeholders’interests in mind. The COO had two questions in mind to ask the Project Manager that hehoped would help devise an action plan to sort out these issues: What are the key issues to address? What changes can they do to the control system in order to achieve higher shareholder return in this new project? But he also remembered what the CFO had told him about how to address all theseissues: “It’s all about asking the right questions!” 15
  16. 16. IE Business School Evaluating AHTS Project PerformanceExhibit 1 – Growth of the shipbuilding industry in BrazilExhibit 2 – STX Brazil Organizational ChartExhibit 3 – Historical steel prices (US$/ton)Source: London Metal Exchange ( 16
  17. 17. IE Business School Evaluating AHTS Project PerformanceExhibit 4 – Map of different phases of the shipbuilding processSource: STX BrazilExhibit 5 – Erection of modules over the ship’s hullSource: STX Brazil 17
  18. 18. IE Business School Evaluating AHTS Project PerformanceExhibit 6 – The main milestones in shipbuildingSource: STX BrazilExhibit 7 – Various important reports usedReport: Cost control – budget, year to date and forecast 18
  19. 19. IE Business School Evaluating AHTS Project PerformanceReport: Progress control – milestones statusReport: Labor control – man-hours budgeted, year to date and forecast 19
  20. 20. IE Business School Evaluating AHTS Project PerformanceReport: Risk controlExhibit 8 – Similar ship to the $220 million ships project 20