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Complexity Adds Risk

Issue 1 and Volume 111.

By David Wagman, Managing Editor

On my left sat a woman from an Ohio furniture maker. On my right sat a man from Chevron who drills for oil off the African coast. Scattered around the room were engineers and project managers from manufacturing, government and even a few utilities.

Such an unlikely collection of people had at least one thing in common: all were involved in mmanaging complex projects.

The venue was San Diego in early December where I was a guest of Primavera for its 23rd annual user’s conference (disclosure: Primavera paid my expenses to speak on a panel about energy industry workforce issues).

Talk at the conference wasn’t limited to Gantt charts and logistics issues. It included the growing integration of financial tools with project management software and then extending the reach of these tools across an organization. For some industries such integration has been common for some time. But having spoken with a number of conference attendees, it is a relative newcomer to the utility sector.

At Xcel Energy, for example, work is just beginning on integrating separate capital project planning software with financial reporting and modeling software. A further challenge will be to deploy the integrated package across Xcel, from corporate finance to power plant manager.

The idea for companies like Xcel is to more aggressively manage capital projects to keep them on time, on budget and within scope. Take it as a signal that corporate management will be more directly wired to activities at the power plant. In itself that’s probably not a bad idea, given the enormous investments underway and planned for new construction and upgrades. These projects may well involve hundreds of vendors from all around the world. TXU, for example, says it could source 80 percent of the components for its proposed fleet of new coal-fired power plants from “low-cost countries.”

So consider for a moment the screwup that befell the European consortium building the mammoth A-380 jumbo jet for Airbus. At first glance an airplane project may seem unconnected with electric generation sector building programs.

Think again. The A-380 is designed to carry 555 people on two decks. Its size will require major airports around the world to modify their terminals simply to load and unload passengers. And because Airbus is a venture among European countries, parts for the project are coming from all over the continent.

The A-380 is huge, its cost is enormous and the screwup that is causing fits for the company is so annoyingly obvious as to be almost laughable.

According to news reports, German and French systems engineers apparently used two different and incompatible software packages to design conduit for some 500 kilometers of wires in each aircraft. When it came time to put French version with German-Ach du lieber!-the two failed to fit.

The cost is now being tallied in terms of double-digit months of delay, billions in lost revenue (the breakeven sales point reportedly has moved from 250 planes to 400) and the cancellation of several aircraft orders. In early November, for example, FedEx cancelled an order for 10 of the planes, opting for Boeing technology.

In an unrelated move, TXU in early November published details for how it plans to develop power plants. Part of the vision is to raise the number of systems supplied by what TXU calls “low-cost countries.” Another part is to cut construction times from 50 months to 32 months. A third part is TXU’s plan to push construction costs down from $2,000/kW to $1,100/kW (and even as low as $850/kW), an impressive-sounding goal in an era of rising commodity prices, concerns over labor shortages and stiff competition for infrastructure capital. Driving projects to achieve such ambitious goals is an immense task that grows no easier when the plan is to replicate the feat across 10 expected power plants.

Here is where the Airbus saga becomes instructive. Multiple aircraft components from multiple suppliers (upwards of 3,000 suppliers, by some reports) coming from multiple countries shows what globalization can achieve. But the risk of project failure grows along with a project’s complexity. Communicating across departments in a single corporation can be difficult enough. Add to that multiple languages, standards, suppliers, time zones, legal definitions and so on and the risk of a monumental glitch increases.

Clearly, Airbus has successfully managed complex design-and-build programs. Its aircraft are used worldwide and the company is second (on some days) only to Boeing in civilian aircraft manufacture. Just as clear is TXU’s ability to successfully manage enormously complex power plant construction projects. It is one of the nation’s leading power producers. But it’s been more than a decade since the company has done a major construction program and then it was done largely internally and not in the same context of globalization.

The combination of outsourcing combined with an aggressive delivery schedule that is supposed to be replicated many times over can be an invitation to trouble. A delay here, a court challenge there and project costs can soar. Just ask Airbus.

Or Kansas City Power & Light. The utility said last month in a filing with the Securities and Exchange Commission that cost estimates for several projects have risen 14 percent to 63 percent since they were made in 2005. Changes in the estimated price of labor, materials and equiment made up roughly 90 percent of the increase on one environmental retrofit project. Constrained labor markets and costs associated with sourcing materials from overseas (including customs delays, ocean transport and political instability) heightened the risks associated with its construction projects, the company said.

With complexity comes risk. Managing that risk-increasingly global in nature-will become even more important as new construction projects get underway.