Unleashing the hidden potential

The objective of our initiative was to challenge statements from prominent voices from investors, owners/operators as well as EPC companies to cut CAPEX by 40 to 50 %. Is this utopia, or is this a challenging but achievable goal? The hypothesis that we established as a starting point of our analysis was: If this industry would work as effective as the automotive or aviation industry we were able to save up to 50 % of CAPEX along the value chain. Our team was including experts with hand-on experience in the EPC industry as well as experts with a cross-industry perspective, willing to learn from best practices from other industries, and willing to understand what hinders us to apply these lessons to EPC.

What is the conclusion of our studies? Are we able to save up to 50 % of CAPEX along the value chain? The answer is - Solomon's judgment - principally yes, but…

First of all our business is complex, and every business, every project is special. There is no standard solution that fits all. The same solutions that may work in one business case will fail in the other, as ownership structures, regional aspects, technical conditions or the markets are completely different.

Second no individual player within the value chain will accomplish this target on his own. CAPEX is the total of capital expenditures, including financing, the costs of project development, the costs of engineering/procurement/construction, the cost of project management and project governance. Such radical reduction may only be feasible if developed along the entire value chain, and here the first link in the chain is the investor. The investor defines the strategies for the project development, and he decides between the traditional ‘LSTK’ approach or an innovative partnership approach that takes on board the experiences and competencies of all involved parties from the very first moment.

There are success factors and reasons for failure that follow a larger pattern, and the goal of our report was to capture and evaluate these factors, and to give structure to the overall pattern in a holistic approach. The model we used is a holistic model for business transformation developed by Till Balser covering four success-critical dimensions, ‘People’, ‘Organization’, ‘Processes & Methods’, and ‘Technology’. The basic principle of this model is the experience that any business transformation needs to happen balanced in all four dimensions. Initiatives that limit the effort in only one or two of these dimensions will fail, if the other dimensions are neglected.

Our recommendations are assembled in the format symbolized by a ‘temple’, with digitalization as the leading (and potentially disruptive) technology foundation. On this foundation we define four columns of organizational and process/methods related changes, covered by the roof of human behavioural changes – the people’s dimension and eventually the most challenging part of all.

Digitalization is the foundation. Ten years ago most experts would agree to the thesis that first we shall define the processes, and then we select and define the corresponding IT solutions. In the age of Industry 4.0 we recognize that IT is developing new solutions and new opportunities at a speed that our business processes hardly can follow. We are too slow in evoluting our business processes to give them the lead; digitalization is the driver that imposes changes, sometimes disruption to the traditional business models. In other industries this is already reality, and we shall not principally exclude the same for the future in the EPC of industrial plants. The title of our initiative ‘EPC 4.0’ is taking reference to Industry 4.0 as a ‘fourth’ industrial revolution driven by (software) ‘releases’.

We identified four major fields of action to address changes in organization and in processes and methods, which are all linked to each other:

Collaboration by Partnership is taking reference to the public infrastructure sector, suggesting specifically the investors/owners/operators to consider contractual models different to the traditional EPC LSTK (Lump-Sum-Turn-Key) approach, such as alliance contracts or Lean IPD (Integrated Project Delivery) models.

Flat supply chain is taking reference to examples of supply chain integration from the aviation and automotive industry, suggesting partnerships with strategic suppliers that go beyond the capital project horizon into the field of operation and maintenance.

Flexible organization is advocating standardization of project management, engineering, procurement and construction processes as well as standardization in qualifications to enable the EPC sector to adjust flexibly to the business cycles with organization structures scalable to the market needs.

Focus on core competencies finally is suggesting all participants to share work scope and associated risks to the party who is best capable and competent to manage these. This focus shall release resources for urgently required innovations: Innovations in plant technology, such as modularization, innovation in state-of-the-art information technology to increase productivity and reduce non-conformance and underperformance costs.

The Human Factor. All these changes will not be successful without the support of the people working in our industry. The magnitude of changes through Industry 4.0, in organizations, in processes and methods, requires a transformation program driving a cultural change in the behavior of our human resources. There are well-established tools and methods to guide organizations, companies, or project teams to work towards a change in attitude and mindset.

A reduction of up to 50 % of CAPEX? What on a first glance looks like utopia may not be so impossible if broken down into smaller pieces where we are wasting money in our capital projects today. Planned CAPEX and the as-built CAPEX in reality differ significantly — the cost overrun in megaprojects ranges between 30 to 50 % in average! But even when we analyze the planned CAPEX: The cost of lost productivity, transaction costs that do not add value, such as the costs of mark-up fees, the cost of duplicating project organizations for project governance, the cost of bidding, the cost of claiming and penalties, the cost of risk contingencies in CAPEX… All in all we come to the conclusion that up to 50 % of the money we spend in capital projects is avoidable and does not contribute to the value of the assets we build.

The holistic approach is not complete without continuation of these thoughts into OPEX. A minor additional investment in CAPEX can trigger significant savings in OPEX. Lifecycle asset management does not start with the handover from the EPC contractor to the operator, lifecycle asset management starts during the pre-development phase of the project.

We invite all concerned players along the value chain of EPC and O&M to discuss the thoughts expressed in this report with the authors. We invite investors/owners/operators to challenge us. We invite EPC companies, construction companies, companies of the supply chain to discuss our approach. We do not claim to have patent solutions. But we try to understand what works well in other industries and we have the imagination to adopt good practices to the specific requirements of our industry. We have access to the experts who have the best subject specific know-how in the fields of actions of this report. Now the turn is to the decision makers in the EPC industry who have the courage to simply do it. The ones who succeed will be the leaders of tomorrow in EPC business.

We have the choice: Take the lead, or run behind.