Framework agreements in multiproject environments
Many organisations have recognised that there is a need to work together as collaborative groups rather than waste resources competing as adversaries. A prime and relevant example of this is the construction industry. Following the Latham (1994) and Egan (1998) reports the present trend within the industry is to use agreements to change attitudes from competition to cooperation in interfirm relationships. A result of this new collaborative approach is the development of more complex, difficult and risky proposals being created due to the increased number of interfaces that exist. Therefore, a more strategic management system is required to administer a structured approach to these groups of projects. Current trends are to support the adoption and employment of programme management to yield the basis for managing these large projects or project portfolios to deliver the benefits to the business.
Framework Agreements follow as a natural consequence of this type of working, often forming part of the legal construction of any collaborative arrangement, they define the parameters the parties must adhere to during the life of the arrangement. This paper offers a clearer explanation of the principles behind multi-project environments, joint ventures and Framework Agreements.
Multi-project Environments and Programme Management
Ferns (1991) explains that multi-project environments exist when groups of projects are managed in a coordinated way to obtain benefits that would not be obtained should they be managed separately. This is often referred to as Programme Management. The emphasis is on coordinated central management, achieving benefits that can be easily switched between the strategic mission policies or the organisation and project objectives. Pellegrinelli (2002) links Project and Programme Management, with Programme Management being hailed as a way of creating the necessary framework within which multiple projects can operate.
The Central Computer and Telecommunications Agency (CCTA) description of programme management relates to delivering the long-term objectives for an organisation and identifying the projects that help attain these objectives (CCTA, 1994). A range of benefits should be derived from each project and should be aimed at achieving the strategic objectives. In other words, programmes of multiple projects need to be selected and planned to improve the operation of one or more business areas. It is the coordinated management of the portfolio of projects that enable common goals to be achieved or the addition of benefits that would not be realised were they managed independently (Roberts, 2001). The advantages of managing multiple projects as a programme come from the enhanced efficiency, economy and effectiveness of the business plans compared with current plans.
The CCTA guide to programme management (1994) suggests that programmes should be used for managing multiple projects when one or more of the following conditions are applicable:
- Shared Objectives: A set of proposed projects and activities address a common problem or deliver a common set of business benefits with significant impact on the organisation.
- Management of Complex Change: The set of changes covers too wide a range of business areas or development skills for a conventional project management structure. There are strong interdependencies between projects that require coordinated management.
- Shared Resources: The use of resources from a common pool can be optimised by coordination across projects.
- Advantages of Scale: The grouping of projects gives cost savings by avoiding duplication of effort.
There are a number of benefits that can be gained from adopting a programme management approach in a multi-project environment. The strategy formulation process determines the chosen strategic change and explicitly addresses how it is to be implemented. This creates a more effective delivery of changes because they are planned and implemented in an integrated method for business users, by developing an ordered framework for the strategic change process, ensuring initial elements are identified and a complete set of actions are specified and assigned without crucial interfaces like dependencies on other projects being overlooked. Thus, projects are driven by business needs of the overall organisation not just one department and, because the wider context is understood and acknowledged, management of risk and project prioritisation is greatly improved.
Better organisation of projects is achieved through project integration and improved resource management including an improved project definition, reducing the prevalence of long duration projects, which have a higher risk of failure and becoming dated. Visibility of projects to senior management is improved through more comprehensive reporting progress. Programme reporting addresses strategic performance by tracking progress relative to competitors, unlike project reporting systems where performance is compared to defined goals and objectives.
As organisations are coming together to achieve common business objectives, rather than to simply undertake a single project, strategic alliances have become important (Bower, 2003). The most significant form of strategic alliance within the construction industry is the joint venture. The aim of a Joint Venture is understanding, teamwork and collaboration. The target when setting up the Joint Venture is to foresee and agree what relationships and commitments between the Partners are needed to control and carry out their external commitments to others, together with the internal mechanisms to deal with differences between the Partners as they arise. The two things that can be absolutely guaranteed within any Joint Venture is that there will be differences between the Partners from time to time, and that some of those differences will be totally unforeseeable until they arise.
The joint venture could take any one of a number of forms (Bower, 2003), these include:
- Horizontal - the Partners can carry out their work, more or less, in parallel and at the same time. This creates a straightforward relationship in which all Partners depend upon each other and all Partners will contribute to and profit from the project at the same time as each other.
- Vertical - the activities of one or more of the Parties are not interdependent, but follow on from each other in sequence. Here the work of some members of the Joint Venture would be complete before the work of the operating/ management Partner could even commence. Relationships in a vertical Joint Venture are obviously rather more complex, (and perhaps rather more subject to stress).
- Homogenous - this will consist of Partners drawn from the same industry, or industries that are related to each other. A homogenous Joint Venture is again straightforward, because the Partners operate within the same contract and technical disciplines as each other. They normally undertake similar classes of work and risks, and therefore understand each other.
- Heterogeneous - this is made up of Partners drawn from different industries or disciplines who therefore normally undertake different classes of work. This type is rather more complex to create and perhaps rather more difficult to manage on a day-to-day basis than a homogenous Joint Venture, but with the right attention to reporting/management/communication aspects, will operate perfectly satisfactorily.
Bower (2003) explains that a Joint Venture may take the form of either a simple partnership, a group of organisations working together under the terms of a contract between them, or a separate company jointly owned by those organisations. The company operates as a legally separate entity independent of its owner Partners, but there should still be a formal agreement between the Partners as to the form that the subsidiary company will take, its scope of activity, and the way in which it will be controlled and then brought to an end. Incorporation is preferable for a project or series of projects, which require the long-term application of management and other resources. A collaborative agreement is preferable when carrying out a single project or contract. It is more flexible in management, capital structure, and profit and loss distribution. Because such a Joint Venture is not a separate entity the client can be rather more in direct contract with those with doing the work for his project.
Most of the risks and problems are predictable and can be avoided or controlled by reasonable forethought. Companies looking to engage in a Joint Venture should therefore adopt a systematic and logical approach to take into account the nature and organization of the Joint Venture itself. Clients dealing with those Joint Ventures should then check that they have done so. The Joint Venture can be an effective system between enterprises. It is potentially strong in pooling resources and expertise but weak in its possible divergence of interests. The Joint Venture is therefore always potentially unstable unless properly assembled at the start and properly managed from the start.
Framework Agreements have been developed to deal with issues regarding the transfer of the relevant businesses or companies by each party to the new joint venture company; the distribution of shares on completion by the joint venture company to the joint venture parties; the principles for valuing each party's contribution and terms for equalising any shortfalls; the warranties and indemnities; conditions precedence's, the conduct of the business of each party prior to completion; and the procedures for completion. These points are relevant to any joint venture structure. Framework Agreements are interpartner cooperation plans to coordinate two or more partners pursuing shared objectives, and therefore satisfactory cooperation is fundamental (Kanter, 1994). This implies that the Framework Agreement must contain the compulsory parts of a contract to form a legally binding agreement. Framework Agreements are often bilateral contracts made between a minimum of two parties and contain an offer, acceptance and consideration. A Framework Agreement is the governing document of a joint venture and the programme management system that can be legally upheld due to its contractual nature. This provides the parameters to all transactions and allows a reliance on litigation should the laws of the Framework Agreement environment be breached by any of the parties privy to the agreement.
The influential constituents to a Framework Agreement are: the Enabling Elements; Confidence in Partner Cooperation, and; Ownership Balance and Structure. It is felt that all these constituents have an equal influence on the operational efficiency and effectiveness of a Framework Agreement. It is clear to see that all three constituents are interrelated and exist in a multi-project environment. The relationship between these three exists because the quantity and quality of the enabling elements affects the ownership balance and structure, and could raise or lower confidence in partner cooperation. Should the confidence in partner cooperation change, a party may deem it necessary to alter its strategic approach through its enabling element provision and this could have a secondary effect regarding the ownership balance and structure. Likewise, adjustments to the ownership balance and structure has subsidiary effects onto the other two constituents.
It is the knowledge and learning transfers that provide the vehicle for these relationships. Without the passing of knowledge around the model, partners to the agreement would not be able to judge any of the three constituents to provide conclusive responses relative to the actions of the other partners. This would mean the Framework Agreement, if possible to create without knowledge and learning transfer, could make no progress forwards (or backwards) upon commencement. The three-legged stool model is shown in Exhibit 1.
Exhibit 1 - Framework Agreements – The Three Legged Stool
As the enabling elements from all parties are collated together, it is the assessment by the respective parties how their peers react to the different organisation cultures and how committed their peers are. This helps to develop a level of trust, an integral part of confidence in partner cooperation. Trust levels are also influenced by the strategic stability and proposals by potential partners, certainly when considering knowledge links, and the issues of knowledge gain and knowledge leakage. Most importantly for any Framework Agreement, the enabling elements identify the goals and objectives of the contractual arrangement. Trust can be built from any of the enabling elements and is an opinion of your partners' collaborative drive in this instance. The most influential element on trust levels is commitment for obvious reasons. From the organisational, strategic and cultural traits of the Framework Agreement a party will have a control level over partners that will help to determine a confidence in partner cooperation.
Exhibit 2 – Enabling Elements
Only through the selection or retention of a partner(s) providing the required skills and competencies can the benefits be realised and thus create a suitable mix of strategic resources (Harrigan, 1985). It has also been shown that selecting the correct partner can result in improved adaptability, improve the strategy-environment configuration and also reduce the uncertainty in the venture's operation (Zeira & Shekar, 1990). The criteria for partner selection are therefore shown in Exhibit 2 and set out below. These are the elements that will enable a framework agreement to be successfully entered into.
- Cultural Traits: Friction can firstly occur when one party unilaterally imposes its own culture and normal behavioural standards on another party within the agreement and does not consider the cultural attributes that could be brought by the other party.
- Strategic Traits: Should a party's market power be proportionally significant it can result in the party been able to direct industry output, increase its bargaining power, and offer economies of scale. An established history and strong background in a market generally means that the party will have a solid marketing and distribution network. Business activities by the strategic alliance or joint venture could be easier to integrate into markets using parents' connections and relationship networks. Should parties create similar products before the formation of the Framework Agreement, it could result in an economy of scale and influence the scope and efficiency of transaction costs due to the use of existing distribution channels, production facilities, marketing skills and consumer loyalty (Geringer et al,1989).
- Organisational Traits: Geringer (Geringer, 1991) pointed out that economies of scale, market power, process innovation and organisational image can all be linked to a party's organisation size, which is positively linked to any strategic alliance's survival and growth. (Granovetter, 1985)
- Financial Traits: Financial interpartner fit concerns the cash-flow position and capital structure similarities between parties. Flexibility may be required from all parties to allow for alterations to asset structures, the whole venture or alliance through an agreed variation to the Framework Agreement. Most important of all is the financial ability of potential partners.
- Goal Compatibility: The compatibility of the goals set for a strategic alliance by its parent's affect how they behave cooperatively or opportunistically (Parkhe, 1993). Goal congruency reduces a party's uncertainty about the future behaviour of another party allowing a better response to other party's strategies, and creating a better organisation fit, commitment and strategic symmetry.
- Resource Complementarities: Resource complementarity allows a reduction in governance and coordination costs, stimulating information exchange during diversification (Yan & Yadong, 2001).
- Commitment: Some would say commitment is the most important element of the partner selection process, because without full commitment, a percentage of opportunism will exist. If partners are perfectly compatible, without commitment to the Framework Agreement, when troubled times arrive, such individual parties will not be prepared to afford the time, finance or resources to keep the agreement functioning.
- Capability: Here capability is the organisational capability of providing an essential supply base for the resources needed to create a long-term agreement. Confidence in Partner Cooperation.
Should confidence be high, the Framework Agreement will run smoothly, attain all goals and objectives of the partners and the agreement. If confidence is low, goals may not be achieved, commitment to the agreement could reduce and peer pressure increase. The utilisation of control mechanisms aims to organise the enabling elements and ownership balance and structure so that the Framework Agreement can be run in a productive manner for all parties and thus increase confidence. Should trust increase, confidence in the Framework Agreement will increase and that party shall be more committed to the agreement. Increasing commitment means that the party will atone its organisation, strategic objectives, cultural adaptations and resource compliments more to the partner and the agreement of compatible goals and objectives. Trust levels also affect the ownership balance and structure. A high level of trust will improve partner adaptability and the willingness to modify the ownership balance and structure for the benefit of the agreement and partners' needs.
For the sake of this paper partner cooperation is defined by the authors as, “The willingness of the partners to pursue mutually compatible interests that creates the Framework Agreement, rather than self-interest seeking with guile.” Partner cooperation is characterised by honest dealing, commitment, fair play and complying with agreements (Das & Teng, 1998). Once control has been achieved and there is a degree of certainty of the outcome, confidence in the form of the outcome will be raised. From this it is believed that trust and control of the Framework Agreement environment are the general sources of confidence. Truthfulness is linked to developing confidence and commitment is an elemental building block to the agreement itself. Parties are expected to chase their own interests, but at the same time ensure the Framework Agreement and the alliance contained within is followed correctly. ‘Confidence in a partner's cooperation is the expectation of a partner's conduct regardless of their own.’ Using the word ‘expectation’ implies a probability of an event occurring. Probabilities imply risks and to be a success risk has to be managed and controlled. By controlling these uncertainties, the confidence in the outcome of the Framework Agreement and the behaviour of the partners can be increased. From this it is clear that trust and control are the Sources of Confidence in Partner Cooperation.
Every project forming the multi-project environment contains an element of trust of all partners within the Framework Agreement. Should this trust be damaged in one project, a detrimental effect will occur in others within the Framework Agreement and multi-project environment to differing levels. Trust is a source of confidence because trust is the degree that the trustor holds a positive attitude toward the trustee's goodwill and reliability in a risky exchange situation (Gambetta, 1988). Therefore, trust refers to the expectations of positive gestures by partners, where confidence is the certainty of these gestures.
There is a theory that there is a substitutive relationship between legal contracts (control) and psychological contracts (trust) i.e. legal remedies can replace trust (Sitkin & Roth, 1993). This states that should there be complete trust, there is no need for control. If guaranteed one hundred percent trust, control is still necessary within the relationship otherwise any member of the Framework Agreement has an unlimited openness to manipulate the agreement to their advantage. From this it can be taken that trust and control have to exist at all times in an agreement and work in parallel. Control mechanisms could be viewed to construct mutual trust through the provision of a track record, developing trust from the successful results of previous outcomes. This suits a multi-project environment, where after the completion of each individual project successfully, the level of trust will increase. It makes sense that a Framework Agreement should include a system of developing trust through control mechanisms.
Ownership Balance and Structure
Ownership balance and structure provide a delivery system to allow the Framework Agreement to function. The ownership balance and structure provide a statement of proportional delivery of the enabling elements. What this means is that the ownership balance and structure can usually be related to the level of commitment, provision of resources, the agreement organisation structure, the financial contribution and so on. Therefore, dependent on the negotiation procedure, the ownership balance and structure can govern what each partner must contribute towards the Framework Agreement. The ownership balance and structure shows the expected work level, provision level and the anticipated grants relevant to the Framework Agreement. Should each partner achieve its necessary investment levels, the confidence in partner cooperation will increase because all partners are apparently committed to the Framework Agreement. Therefore, there is a clear relationship between ownership balance and structure, and the confidence in partner cooperation.
Framework Agreement ownership has a strong effect on risk sharing and resource commitment of the partners, it is clear that for each partner three types of ownership exist: i) the majority ownership; ii) the minority ownership; and iii) the equal split. The main theory behind majority ownership is derived from transaction cost theory where majority equity is necessary to gain dominance so that the party can effectively minimise transactional risks. Another advantage of a majority-minority ownership is that there is a reduced need for interpartner negotiations and bargaining during any decision making processes. It has been noted (Yan & Gray, 1994) that unequal balances can result in a change of equilibrium of dependence with the majority owner becoming more dependent on the partnership and therefore losing some of its relative bargaining power. There is also a concern that the majority stakeholder may strongly push denouements to a vote, knowing they have a stronger influence. This can create a reduction in the commitment of the minority stakeholder. Equally split ownership helps to ensure that neither parties' aims and interests are quashed by ensuring that the top management from each parent are sufficiently interested to avert problems in the Framework Agreement. The ownership balance is influenced by a number of different factors (Yan & Yadong, 2001), namely Environmental Dynamics; Governmental Policies; Organisational Experience; Mutual Needs and Bargaining Position; Strategic Intention; Investment Commitment; Knowledge Protection; and Global Integration..
In essence, ownership balance and structure is about developing the best control of the numerous influences in the Framework Agreement. Therefore, should one party have a greater control of one area, that party should take a larger stake in the Framework Agreement. Then once all influences have been researched, the ‘scores’ for each influence should be totalled to create an overall ownership balance and structure to be integrated within the Framework Agreement. This has to be one of the most important parts during negotiations and post-negotiations due to the definitive effect that follows.
Knowledge and Learning Transfers
Without knowledge and learning transfers there is no other method of creating an interaction interface between the constituents and without this interaction the Framework Agreement cannot function as intended. Instead the Framework Agreement would be a contractual system of collecting attributes, rather than a good attaining, integration body to be utilised by collaborative partners. The knowledge and learning transfers are not only a medium of information passing, but they are a feedback channel for the partners involved to inform progress and desire for continuation or allow negative directives to pass, say for example, a partner wants to reduce their equity balance within the Framework Agreement this will be communicated to the other partners, reducing confidence and redistributing the provision of the enabling elements. The knowledge and learning transfers allow the new skills and attributes acquired by the partners to become the party's new specific knowledge.
One of the main reasons parties collaborate together using the Framework Agreement format is to gain access to knowledge, skills or resources that cannot be internally created in a cost-efficient or time-efficient style. Framework Agreements is one method where quasi-internalisation (trading of knowledge) and de facto internalisation (acquiring of knowledge) can take place. It can be said that Framework Agreements are a method to gain cheap, fast access to new markets by borrowing a partner's core competencies, innovative skills, infrastructure and local knowledge.
A Framework Agreement is the support for any number of transactions, especially in a multi-project environment or long-term relationship where a large number of transactions take place. In a Framework Agreement, the three constituent elements need to be fully and equally satisfied to ensure a strong Framework Agreement results. Should one of the constituents be neglected this will have the affect of creating an unstable Framework Agreement and should a constituent be missing, either the Framework Agreement will never be formed or will collapse if already in existence. In the Framework Agreement model presented here the knowledge and learning transfers ensure that a relationship exists between all three constituents, providing a system to regulate their influence.
A typical Framework Agreement can contain a large number of conditions, warranties and implied and express terms, from these ownership balance and structure, knowledge and learning transfer systems, the control ingredient of confidence in partner cooperation and a number of enabling elements can be derived, Exhibit 3 shows the elements that would typically be included. The terms and conditions provide the base and direction of the Framework Agreement that is reflected through the three constituents of the model developed. Finally, any relationship has to be designed, co-operation and trust are required if the best result for the parties involved is to be achieved and Framework Agreements provide a way of aligning the supply chain for this to happen.
Exhibit 3 – The Elements of a Framework Agreement
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Denise Bower, Nigel Smith, Paul Garthwaite
Originally published as a part of 2005 PMI Global Congress Proceedings –Edinburgh, Scotland