Since 1995, owners of European downstream operating companies have changed the way they choose engineering and construction (E&C) contractors.
Several trends have been identified:
- The price of E&C jobs is a more significant factor this year than last.
- Behavioral factors are playing a larger part of contractor selection.
- The decentralized organization of operating companies has raised the costs of E&C companies.
- Retirement by key technical personnel in operating companies has spurred increased outsourcing and numerous knowledge-management projects.
Study methodologyTransmar conducted 60 face-to-face interviews with key decision makers, executives, and technical managers from September 1997 to January 1998. Owners were interviewed from six countries: Belgium, France, Germany, Italy, the Netherlands, and the U.K.
The study was sponsored by several international E&C firms to learn how owners select E&C contractors, today and in the future.
Operating companies were also asked to report the perceived reputation and growth of specific E&C firms. The study found that most European owners have clear opinions about which contractors were "best" and which were performing poorly.
Buying factorsTable 1 [76,259 bytes] ranks the buying factors reported by owners for three separate years. Significant moves in the chart occurred for contractor's price, quality of senior management, project-control systems, and detailed-engineering capability.
Like last year, quality of key personnel and project-management capability are the highest ranking factors.
In 1995, owners put project-control systems, responsiveness and flexibility, and detailed engineering capability above contractor's price. In 1997, contractor's price was ranked more important than those three factors.
According to the study, today's smaller project environment requires less sophisticated project controls and less detailed-engineering capability.
A technical director of a specialty chemical company said, "The majority of our projects are quite small.... We want to work closely with our contractors and supervise things in a hands-on way. We have no need for sophisticated project-management techniques or controls. Engineering requirements are quite modest for such projects."
There were very few changes in ranking in the bottom half of the table.
Behavioral dimensionThe study reports several soft factors in owner selection of engineering contractors for projects. Transmar has seen growing consideration of these soft, behavioral factors in awarding contracts.
Soft factors include personal chemistry, behavioral attitudes, innovative ability, a recent track record, organizational abilities, and commercial considerations.
British Petroleum Co. plc, now BP-Amoco, reported that behavioral factors represented over 50% of its entire scoring system for contractor selection.
BP is not alone. An engineering director for a major European chemical producer said, "Let's be honest. In a world with technical personnel shortage where you need to alliance, the BP approach is logical. If you have to work with contractors on a team basis what can be more important than the chemistry between a contractor's team and ours?"
DecentralizationMany owners have moved their E&C contractor decision-making personnel to various plants, rather than house them in central corporate offices. More site visits, therefore, are required from E&C companies.
One project executive said, "Since our operation moved from the Parisan region we are somewhat isolated and appreciate the occasional visitor. Some companies would send us their sales executives three or four times a year. Now many only visit us annually."
Said a Conoco Inc. representative, "...since we reorganized in 1994, all our contracts are handled at the refinery. We haven't had more than one or two contractors visit us during the last year and those were from contractors that are working for us now."
Although costs of site visits may have increased, E&C companies stand to benefit from an increased need for outsourcing. The staff sizes at these owner plant sites are smaller than the former corporate staffs. Thus, outsourcing has become an option for relieving the workload of in-house E&C services.
A representative from Elf Aquitaine noted, "We are getting smaller and more decentralized. Our central staff is now 50% smaller than in the recent past. This has led to outsourcing more of our needs and moving key technical staff to the plant sites. Headquarters will only get involved in major projects."
Companies from the survey reported varying satisfaction with the performance of outsourcing jobs.
Personnel shortagesOwners cite a shortage of experienced staff and the loss of corporate memory to be major reasons for a decline in engineering-contractor performance.
In the Western European market, according to Transmar, projects are getting smaller in size but broader in the scope of required services. E&C companies often put their best personnel in larger jobs, not small ones.
BP feels that quality is not what is should be. Also, scarcity of quality people who know what works in a situation is a problem. Total said, "We did get good quality on our last refinery job from.... But, the problem is not with big jobs. It is with small jobs.... Too many good people retire early."
E&C firms are not the only ones with personnel shortages. More than 50% of the managers interviewed by Transmar in the 1995 study had left their companies through early retirement. To make up for this loss of corporate experience, companies are implementing intellectual-management systems.
Owners are heavily investing in information technology, such high-tech tools and SAP software. With technology, companies can better exploit their intellectual capital.
A major European petroleum company said, "Information technology makes it possible to transform the high skill knowledge professional[s] that dominate the oil industry into responsible contributors. We have cut thousands of people from our payrolls but productivity is up. We are actually producing more results with fewer people. This is because we are using the wonders of information technology to get more from our intellectual or knowledge base."
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