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Brief reports of how we have helped our clients improve their businesses.
 

CONTROLLING CONSTRUCTION COSTS IN AN UNCERTAIN ENVIRONMENT

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COMPANY: A Fortune 50 manufacturing company

PROBLEM: The company was planning a $100 MM+ construction project of a type it had never before attempted . The management structure of the project was similar to that of most construction projects: a general contractor that performed some work directly and subcontracted the rest to specialty subcontractors. Even though all of the usual budgets and controls were in place, senior management was concerned about controlling costs over the three year life of the project.

CHALLENGES: At the beginning of this kind of project, separate cost estimates are created by architects, engineers, professional cost estimators, and the general contractor. A sequence of estimating methods is used as the project progresses – increasing accuracy (we hope).

  1. Dollars per square foot of floor space, estimated by the architects and engineers based on their experiences with similar project.
  2. Dollars per square foot of floor space, estimated by professional estimators based on industry standards. These are typically based on volumetric estimates and unit costs of labor and material, e. g., dollars per cubic yard of concrete x cost per cubic yard.
  3. Bids by subcontractors
  4. Contracts with subcontractors
  5. Invoices for work performed (including changes)

WHAT WE DID: We developed a cost monitoring system that tracked not only estimates and actual costs as incurred but also the inherent uncertainty in these costs., on a contract-by-contract basis, then consolidated these uncertainties into an overall measure of project uncertainty and risk. We provided senior management with a monthly report that said

Expected cost of the project, knowing all we now know is $ZZZ.
There is a 90% chance that the cost will not exceed $ZZZ + 25%.
There is a 90 % chance that the cost will be at least $ZZZ - 10%.

RESULTS: Senior management was more comfortable knowing the level of risk it faced, and was able to make informed decisions about changes with a clear understanding of the consequences of those changes.

 

 

 

 

 

 

 

 

 

 

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OTHER USES: This methodology is applicable to any project that extends over a long period of time and involves multiple suppliers, including construction of residential and commercial buildings, refinery construction, and complex marketing programs.


DETERMINING THE EFFECTIVENESS OF IT EXPENDITURES

COMPANY: A $75 MM manufacturing company

PROBLEM: The CFO was concerned about the effectiveness of his IT activities and the level of IT expenditures. His questions to us were, “Why are we spending all this money on IT? Is it supporting the business as it should?”

CHALLENGES: The IT function was small and overcommitted. There was no paper trail describing IT purchases and evaluating them in terms of benefits received.

WHAT WE DID: We analyzed the IT expenditures and mapped each expenditure to the business activity it supported. This enabled the CFO to see the amount of IT expenditure supporting each business function and decide whether that amount was appropriate to support business operations and strategy.

RESULTS: After we finished the analysis, the CFO decided that the expenditure levels and allocations across business function were about correct.

OTHER USES: The technique we developed for this project, Strategic Portfolio Analysis, is directly applicable analyzing any organization’s IT expenditures, regardless of industry.

This is one example of a phenomenon we have observed in a number of our client companies: IT doing the right things but not effectively communicating this to the business community.


DEVELOPING AN IT STRATEGIC PLAN WHEN NOBODY WANTED ONE

COMPANY: An old-line multi-billion dollar manufacturing company

PROBLEM: The company had a well-established strategic planning process in operation, but IT planning was not a part of it. As the company became more and more dependent on IT, the IT department needed a roadmap to guide its own long range planning to assure that it could meet future company needs. But because IT was not an integral part of the business planning process, there was insufficient data about future IT needs. Meanwhile IT expenditures grew to become a significant fraction of company revenue.

CHALLENGES: The IT department had attempted for several years to institute a formal IT planning process but it was resisted by the business units. The business units perceived the IT planning effort as an attempt to wrest control of IT utilization from them and of course they refused to participate.

WHAT WE DID: To jump start the planning process, we developed an IT plan based on our own projections of IT needs. We based our projections on three data sources:

  • The corporate strategic business plan
  • Public information from the company such as presentations to the financial analysis community and press releases about future projects and initiatives
  • General industry information and trends

RESULTS: As we expected, the plan was not accepted by the business units. Rather than spend time gaining formal approval, we published the plan as a “Proposed IT Strategy” and requested comments. No comments were received, but the plan became the de facto IT strategy because there was no other source for strategic IT direction. The IT department had a road map that proved effective for about five years.

OTHER USES: In some large organizations, the real business strategy is often known only to a few very senior executives. Lower level executives and managers are left to plan in the dark. The techniques we used in this case can provide useful guidance for strategic planning at lower levels in the enterprise.


REVIEWING IT STRATEGY FOR A HEALTH INDURANCE COMPANY

COMPANY: A multinational health insurance company

PROBLEM: The major overseas subsidiary was developing its own information systems with little concern for data compatibility and data communication with the parent company.

CHALLENGES: In addition to the inevitable disagreements between corporate management and operating management, substantial cultural differences contributed to misunderstandings and different goals.

WHAT WE DID: We conducted an extensive review of the subsidiary’s existing systems and its plans for future systems. We found significant incompatibilities between parent company and subsidiary systems, both current and planned. During the course of our interviews, it became clear that subsidiary management’s major concern was that current operations would be disrupted by the pursuit of some ephemeral goal of compatibility.

RESULTS: A compromise was reached. Current systems would continue to be used without reworking to achieve compatibility. A target architecture was designed to guide development of new systems toward compatibility with headquarters’ systems. We were able to facilitate this compromise because our review included not only technical issues but also extensive discussions of business and human factors issues.

OTHER USES: Every large decentralized company faces this issue. A review and planning process that encompasses business, human factors, and marketing issues along with technical issues can go a long way to defuse tensions between corporate headquarters and the operating units.


LEARN FROM THE IT SUCCESSES OF OTHERS