Project companies and the multiproject paradigm
a new management approach
Marko Arenius, Helsinki University of Technology, Finland
Karlos A. Artto, Helsinki University of Technology, Finland
Mika Lahti, Helsinki Institute of Physics, Finland
Jukka Meklin, Nokia Networks, Finland
The business environment of project-oriented companies has changed significantly over the years. Many companies have originally delivered products that belong to a single product or product family. The final project products have been customized case by case to meet the requirements of a specific customer. However, on the course of time companies have been forced to take wider responsibility. For example, instead of simply manufacturing a diesel engine, new customer demands require that a diesel engine manufacturer must take the responsibility for delivering the whole power plant. This new situation requires a new approach. The management focus has to shift from one project—one product level to the level of project-oriented business as a whole.
Generally, projects can be divided into three main phases, which in many cases have own organizational units responsible for each of them. Names of the phases and units vary by companies, but same main phase structure can be found from many companies: sales and marketing, execution, and after sales are phases. Furthermore, the execution phase can be divided into many subphases like planning, manufacturing, purchasing, and so forth. These subphases, or works, are usually carried out by different lower-level organization units.
Complicated organizational structure and the wide variety of organizational units involved in the project execution causes problems, because of the divisional boundaries hamper information flows (see Exhibit 1). The results from previous studies indicate that current organizational structures and practices do not match the challenges of present-day project companies. Learning from experiences and continuous improvement are important to all companies. However, it is more challenging to arrange effective learning schemes in companies, where activities are based on projects (Meklin et al., 1999).
Exhibit 1. Boundaries Between Different Organization Units During the Project
Exhibit 2. Boundaries Between Different Organization Levels in Companies
The second factor rendering knowledge management and development in project companies is the typical phenomenon of parallel projects. Most project companies are seeking for means to control and manage several parallel and overlapping projects at the same time. This means that the company has to solve the resource allocation problem in multi-project environment and they should be capable of transferring information from one project to another. Furthermore, companies are implementing product development activities and they should transfer new components and systems into practice. At the same time new product and process development operations need information and experiences from the project level. This requires that different organizational levels should receive and deliver information from each other according to a well designed plan (see Exhibit 2). Communication flows in companies are not arranged in a systematic way. A challenge for the future studies and empirical applications on project management is the requirement for them to provide fine-grained knowledge on the information content at the various management levels and their content in the overall organizational management framework.
Project companies face two major problems: integration of divisions within a project and integration of projects within the company. Research, education, and business practices in project management have mainly focused on the management of one single project and have left many important features of the multiproject paradigm without adequate attention. When a project takes place in a project company, the projects have not only external targets set by the customer, but also internal targets set by the business requirements of the company. New management practices and tools have to be developed to cope with that change. Another problem is that project management literature and standards do not define project processes that would cover widely sales and after-sales aspects. Instead, the implicit suggestion in project management literature is that project management processes would be applied in the execution of the project rather than putting the project management to the management context as a whole (see ISO 10006, 1997; PMI®, 1996).
This study contributes to the project management research by developing a three level approach to project business management. Results of the research project demonstrate that there is a need to divide the project business management into three levels: (1) business development, (2) business management, and (3) project management levels. These levels form a hierarchical structure having a different managerial scope. This study puts forward practical recommendations on how to structure project-oriented companies in accordance with the proposed three level management approach. The results and recommendations are drawn from Finnish project company case studies, which are done during the research project named “FIT-PRO—a product-oriented approach to industrial project management”(Meklin et al., 1999). The case companies deliver industrial investment goods, which are customized to meet the requirements of each individual operating environment and customer. The scope of the delivery project varies from a delivery of a single machine to a delivery of a turnkey project. The research data was collected by interviewing project personnel of the case companies, by supplementing it with analyses and observations of delivered projects.
Exhibit 3. Division of Project Companies into Three Categories According to Product Complexity and Level of Routine Operations (adapted from Hameri et al.)
Typology of Project Companies
Many organizations develop either their project level activities to boost their temporary efforts, or whole organization level “management by projects”-related issues.Management by projects refers to an organization's way to conduct its work and tasks in a project form (Gareis, 1994; 1996; Turner, 1993). Artto et al. (1998) introduced the project company management area. They define project company as a company that sells and delivers projects to its customers. A project company applies projects as its major business vehicles, having projects in its production line. Further, project companies could be considered as analogous organizational entities to any project-oriented organization. The similarity of project-based operations with both external and internal customers is provided by Turner and Keegan (1999), who provide a definition that the project-based organization may be stand-alone, making products for external customers, or a subsidiary of a larger firm, making products for internal or external customers.
In Exhibit 3, three different categories of project companies are presented. The categorization is done on the basis of product complexity and level of routine operations. Companies in the first category (I) are traditional project companies that produce truly one-of-a-kind products. They develop a unique design each time and deliver the product according to strict customer requirements; i.e., the products are fully customized. Companies in the second category (II) deliver technologically complex products but they are probably able to modularize and standardize their products to some extent. When some parts of the products can be modularized and standardized, the need for customer-specific engineering is reduced and the design cycles are shortened. The companies of the third category (III) are closest to mass customization and mass production. They are able to modularize and standardize their products quite thoroughly but they still have to perform some customer-specific engineering within each delivery. Characteristic of these companies is the repetitive nature of their deliveries.
As Exhibit 3 presents, companies in the first category can be classified as product-oriented make-to-order companies, companies in the second category as product-oriented engineer-to-order and companies in the third category as capability-oriented engineer-to-order companies. It is obvious that companies in the three different categories have a different project scope in their deliveries. Companies in different categories should also have a different stance towards project business. In categories two and three, the resources may not be allocated full-time for a particular project and they must mediate with multiple ongoing projects. Companies in the first category have only a few large projects per year and the resources are usually reserved only for one project at a time. As products are complex and the degree of modularization and standardization is low, the level of project scope is high.
Organizational Viewpoints in Project Companies: Project Portfolios and the Maturity of Project Operations
Organizational integration was given trust in the 1960s as the matrix organization form was introduced to manage complex and unique efforts that required cross-functional and cross-disciplinary approach to resources. Ever since, the management of multi-project environments has focused on rather operative schemes. One good example of such operative scheme is resource sharing among multiple projects. Today, there is an increasing discussion on project portfolio management in organizations (Dobson, 1999; Dye & Pennypacker, 1999; Jacob, 1999). Establishing project offices in organizations is one solution that is widely suggested for the project portfolio management problem (Block, 1999; Hobbs et al., 1999; Knutson, 1999; Lullen & Sylvia, 1999). Our view to the majority of current project portfolio and project office discussion is that the suggested project portfolio activities and responsibilities proposed for project offices remain at the operative level. Thus, they do not reach the strategic context of linking projects into the strategic business management of the corporation. It is widely suggested that project offices adopt either a project follow-up or supporting function, and that the office is designed to serve as staff role between the responsible company management and project management parties. Another problem with the majority of suggestions to organize for project portfolio management or project offices is the fact that the solutions introduce rather centralized management schemes. Our proposal would be to adopt a more decentralized and holistic management link between the company organization and the projects. Furthermore, strategic project portfolio management practices should be introduced to supplement the current monitoring and supporting oriented suggestions.
Maturity models are designed for organizations that conduct similar projects in a repetitive manner. There are several maturity models designed for different types of environments, say software engineering, product development, R&D, software acquisition. Furthermore, there are maturity models that cover the more project management field and exclude the engineering and manufacturing operations in a company's projects. Almost all maturity models include five levels. At the lowest levels, some form of systematic project management is implemented in projects. As we move to higher levels, the project management practices are standardized across projects in the organization. The high end of the maturity continuum includes definition of measures for projects as a whole, measurement of projects, and improving performance based on the measured data. Typically, the organizational maturity levels from 1 to 5 are (Cusick, 1999):
1. Ad hoc—No formal project management methodology exists.
2. Consistent use of documented plans and processes on projects—Establishment of common goals across personnel.
3. Deployment of standard processes and tools—Processes and projects directly support business goals— Introduction of defect reviews.
4. Definition of quantitative quality goals for all products and processes—Tracking and analyzing metrics across projects and time.
5. Continuous improvement based on quantitative product and process data—Proactive defect prevention.
The assessment with some maturity model products is organized via professional assessors external to the company that objectively recognize the maturity level, whereas other maturity model are based on more self assessment. For more detailed information about project management maturity models, the interested reader is advised to consults, e.g., Fincher and Levin (1997), Goldsmith (1997), and Cusick (1999).
Project Business in the Case Study Companies
The case study companies sell and deliver industrial goods. The scope of the delivery varies from delivery of a single machine to delivery of a whole industrial plant, such as a power plant. As the product and the delivery process have to be customized according to requirements set by the customer and environment, the product delivery process takes the form of a project. Although the case companies can be considered as project companies, they have their roots in machining workshops and equipment deliveries rather than in traditional project business. The companies have manufacturing units, which are responsible for the production of the core products of the project. Previously, the companies concentrated on selling and manufacturing investment goods rather than delivering projects. The projects were seen as an inevitable means to carry out the delivery of the goods sold.
Over the years the case study companies have gained significant knowledge in certain application areas, which has enabled growth and globalization in these narrow market niches. This has meant that the scope of the delivery has become wider as the companies do not deliver a single product but a whole solution including the product itself and several additional products and services, even a turnkey delivery. As the scope of a typical delivery has increased from the delivery of a single machine to delivery of a turnkey project, such as a paper mill or power plant, the whole business paradigm has changed. Good project management has become crucial, as companies are responsible for coordinating not just the production of their own products but also purchasing of several external services and components, and implementation of the final end product. Delivering turnkey projects requires different know-how, infrastructure and processes than delivering customized products. Achieving these competencies in globally distributed business requires significant resources.
Exhibit 4. Levels of Company Management
The different nature of project business in three case study companies is clarified in the following. A detailed analysis of these and few other companies is reported in the book of the FIT-PRO research (Meklin et al., 1999). The FIT-PRO research was carried out during 1998–1999.
Case Study Company 1: A Telecommunications Supplier
The first case study company was a telecommunications supplier. The size and the scope of its projects have expanded recently. Nowadays the company cannot concentrate only on the deliveries of the network equipment. In the present business environment, it has also to be able to manage tasks from network planning to management of entire turnkey deliveries of telecommunication networks. The new situation is due to the change of the customers. Previously, customers have been state-controlled operators that have had in-house knowledge of network planning and implementation. These companies order only the required equipment. The deregulation of the telecom markets has resulted in customers that have more the role of a financier and have selected a strategy to outsource the planning and implementation of the network. These customers want to buy an operating network solution and the telecom supplier company has to be able to manage the whole rollout process of an entire telecommunication network. For this reason that the customers have various backgrounds has led the company to offer service packages to satisfy the needs of different customers. These packages include the tasks that are needed to construct and implement a telecommunication network and that the customer requires to be carried out by the supplier.
Exhibit 5. Standard Structures both for Processes and Products are Combined to Build Up the Project Structure
At the moment, the company has approximately 150 projects per year and of these projects 20 can be considered large projects. The most typical package required in the markets is nowadays the third package. New operators are in a hurry to get to the markets before the existing operators get all the potential subscribers. The most challenging projects are those, which include the project management of the entire rollout process. In these packages the company has to manage the complex entirety formed by the numerous geographically distributed sites.
Case Study Company 2: A Paper Machinery Supplier
The second case study company was a paper machinery supplier. The size of a project in the company can be from 2 to 200 million dollars but on average it is from 10 to 100 million. There are three different scopes for the projects: deliveries of entire production line, deliveries of one or several machines for the production line, and renewals to old production lines. The common characteristic for the different deliveries is that they require the cooperation of 3–15 units inside the case study company to carry out the project. In addition to these units, the contribution of numerous subcontractors and consultants is also required.
Where the challenge in the telecom supplier case study company’s projects is in the management of the entirety formed by geographically distributed sites, this paper machinery supplier has one single complex site that needs to be managed. The demand for deliveries of entire production lines is forecast to increase in the future. These deliveries require special efforts in the management and cooperation between different units.
Case Study Company 3:An Azimuthing Thruster and Deck Machinery Supplier
The third case study company is an azimuthing thruster and deck machinery supplier. It carries out approximately 100 projects per year. The size of the projects varies from 0,5 to 5 million dollars and the average duration for a project is six months. The projects have a repetitive make-to-order nature. This has been enabled by the development of predesigned product architectures that are the basis for each delivered product. Only some parts of the products need to be designed specifically to meet the individual customer requirements. However, some of the larger deliveries include products that require special designing and development. These can be, for example, thrusters of new unit size.
Results of the Study: Organizing the Company for Projects
The findings of the research project reveal that there is a need to divide project business management into three different levels: business development, business management, and project management levels (see Exhibit 4). The two upper levels include company level project management, and the lowest level, project management, includse all activities that concern the management of individual projects. The business development level is usually organized relatively well in project companies. Also, at the lowest management level, the management of individual projects is taken good care of. However, the management level in the middle, business management, lacks systematic and well-organized management schemes.
The business development level at the top of the project business management pyramid includes development of processes and products that will ensure success for the company in the future. As the actual profits are realized on the project level, the business development level ensures that profits will also be available in the changing business environment of the future.
The business management level supports and controls the project management level toward efficient project deliveries and acts as a link between the strategic business development and operative project management levels. Most important content of the business management is to define clear sales policy and look after that it is followed, to arrange standard product structures and standard operating procedures to help sales and marketing, planning, and project management and to ensure that learning occurs and experiences are disseminated in the organization. To fulfill these requirements the mid-level should introduce tools, training, reporting systems, develop competence of the employers, take care from the long customer relations, and arranged structures and models for product and project processes.
Exhibit 6. Systematic Learning Process of a Project Company
In any project company, the project management level must be emphasized as an important part of the management system. The project personnel has to cope with changes, problems, and even faults no matter how well the project is prepared and how much support and instructions the company level management has offered. The point is that the projects are in all circumstances so challenging that the company management has to use every opportunity to decrease this challenge by their activities.
Company Level Project Management
The project company has to have strong company level management above the individual project. The company level management is responsible to for managing whole delivery process and other processes, which support the project management in the company. In the case study companies three company level management areas that need improvements were identified:
- Sales management
- Structures and standard models for projects
- Learning between projects.
These areas are discussed in more detail in the following.
The success of the sales phase determines the success of the whole project. If the sales phase is poorly managed, the project management has no chance of implementing the project successfully. During the sales negotiation phase, the commercial aspects of the contract tend to dominate while the technical aspects are clarified often even after the contract is already signed. Clarifying all the technical details would require a huge amount of engineering work during the sales phase, which would take too much resources and time. Thus, the company has to have a clear sales policy, which determines the preferred solutions and excludes the impossible solutions as early as the sales phase.
The completeness of the sales specification is one of the important factors that predict the success of the project. The open questions include risks that may violate the profitability of the project. Only some of these questions are related to customers’ decision-making while the rest depend on the project company's internal processes. Typically, the technical solution includes unknown features, which are studied when the project is already in the implementation phase. Risk management is important already in the sales phase.
Standard Structures and Standard Models for Projects
The project company must have predefined structures and models both for its products and processes. In project deliveries, the delivered product is always somehow unique and it is in practice tailored to match the customer's requirements. The project company also has to tailor the delivery process case by case to match the requirements of the customer (see Exhibit 5). Application of standard structures and models enable:
- Faster project startup and implementation
- Better project plans and budgets
- Reduced risks
- Distributed operations and use of third parties.
The first step toward better managed projects is a modular project plan, which includes predefined project phases. The phases must enable several potential variations that each corresponds to different business cases. They should determine the required tasks as well as the resources and tools that are needed to accomplish them. The ISO 9000 standard and other quality standards have the same idea, but the current empirical implementations are not often accurate enough for the use in daily project management. Many project companies have defined standard operating procedures that are used for defining the preferred practices.
Learning between Projects
Distributing the learning results among projects is necessary for a project company in order to ensure its long-term success. The learning process takes place in several different levels. The lowest level occurs with an individual working on a project. This individual gains experience in a current project and transfers this experience to future projects. This kind of learning is quite random and its use is limited as the experience is tied up with the individuals. Another learning scheme in a project company is to ensure that experiences are distributed among project personnel. The learning in the project may take place in the social communication between group members and through different project documents (see Exhibit 6).
The tight schedules and geographical distribution of projects have reduced the amount of social communication that takes place in projects. When this social communication is missing, the project must develop specific means to increase communication. Such means are the use of say problem solving databases and document archives. However, the technical tools cannot replace social communication completely. Meetings are still needed to guarantee possibilities for open discussion: project kick-off, review meetings, project close-out workshops. In meetings the progress of the project, its problems and successes have to be analyzed jointly:
- What in the project went especially well?
- Project phases where special problems appeared and why?
The learning between the projects requires certain practices and it is not possible without adequate technical support. It is especially important from the point of view of other projects that the results of a project are reported and are transformed into formal modes.
Project management research and development have mainly a focus on developing project management practices for single projects. Business management, and especially special requirements of management of project-based industry, needs more attention.
Due to the growth of the companies and the changes in their markets, project companies are struggling to find the appropriate ways of doing business. In this environment, there is a need for development and recurrence. The most important issue of development is to shift the managerial focus from the problems of one individual project to the management layer above the projects to the management of the project business as a whole.
The FIT-PRO research suggests that companies should have strong business management level above the project level in the organizational hierarchy. The role of the business management is to take care of long-term customer relations, develop project and product processes, develop project personnel, and enhance learning in the project company.
The study introduced a subdivision of project business management into three different levels: business development, business management, and project management levels. The business development level includes development of processes and products that will ensure success for the company in the future. The business management level supports and controls the project management level toward efficient project deliveries and acts as a link between the strategic business development and operative project management levels. Most important content of the business management is to define clear sales policy and look after that it is followed, to arrange standard product structures and standard operating procedures to help sales and marketing, planning, and project management and to ensure that learning occurs and experiences are disseminated in the organization. To fulfill these requirements the mid-level should introduce tools, training, reporting systems, develop competence of the employers, take care from the long customer relations, and arranged structures and models for product and project processes.
The company level management activities that required improvements in the case study companies were sales management, structures and standard models for projects, and learning between projects.
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Proceedings of PMI Research Conference 2000