5 Lessons in Managing Capital Projects

The Find: Asian companies could teach western competitors a few things about managing big capital projects.
The Source: A study in the McKinsey Quarterly (free registration required).

The Takeaway: When giant Indian company, Reliance Industries, set out to build an oil refinery and petrochemical complex in Jamnagar, they managed to finish the project with 20 percent less capital than similar plants in 30 percent less time to commission. Superb results like this are growing increasingly common when Asian firms build large facilities. How do they do it? McKinsey examines the issue and concludes: "roughly half of the cost and time difference was due to local Asian conditions... and to practices that were neither common nor transferable elsewhere. Other strengths of the Asian companies are already global best practices... The rest are innovative practices that break with the conventional wisdom of many Western companies."

So what are these lessons that Asian firms can teach their Western competitors? McKinsey outlines five:

Set aggressive goals: Most companies recommend safe timelines with built-in room for error and delay. This approach may be reasonable but it "increases costs and creates expectations of and tolerance for delays." In contrast Asian execs "typically set high, even unrealistic, targets for project teams, making explicit trade-offs between time and cost."
Invest broadly: Many multinationals outsource nearly everything, which lowers their ability to control the project and assess how it's coming along. Leaders in Asia "regard project management as a core competence" and "retain an active role as its overall integrator and manager."
Reconsider low-cost suppliers: Western companies often limit purchases from low-cost suppliers to non-critical items, while Asian rivals source even critical components more cheaply by using vendors with excellent reputations in their home countries but a low international profile.
Avoid gold plating: The best of the pack in Asia use their technical know-how to question assumptions and understand the reasons behind design decisions.
Flatten the organization: The best companies McKinsey looked at believed "that the intense, fast-paced nature of capital projects makes a flat organizational structure essential."

For those interested in the deep dive, there's much more here.

The Question: Could Western companies do better by applying these lessons?

(Image of oil refinery by night by benachou, CC 2.0)

Jessica Stillman

Jessica lives in London where she works as a freelance writer with interests in green business and tech, management, and marketing.

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