Aspiring to make a decent return
Beware the paradox that exists between corporate aspirations and realizing a return on investment.
A few years ago, an OEM in the bioenergy sector embarked on a program to scale up. To sell more of their specialist products they began offering a wider ‘managed service’ into bioenergy plant construction projects. For such a growth market, this made a lot of sense.
While they succeeded in winning new work and growing, their margins took a hit. The ‘project world’ they’d entered so effectively operated in a very different landscape to the world they knew as a manufacturer. Impacts from unidentified risks were eroding value for them across their projects. Which is how they found us.
Aspiration is the driving force behind taking on projects, even for those companies whose business is delivering projects for others. Integrated service providers, EPCs and shipyards are all good examples. Every stakeholder wants a slice of the project pie. Owners seek a profitable return on their investment, while those delivering the project expect profitable margins for their services.
Aspiration (anticipated value) and profit (realized value) make uneasy bedfellows. Placing aspiration over profits (even inadvertently) often leads to value erosion due to impacts from nasty surprises. Further, chasing opportunities increases scope and defers value. Instead, we encourage our clients to prefer ‘project profits over corporate aspirations’. That is, you’re more likely to achieve your aspirations if you shift focus to realizing the value you’ve stated for each project. This shift also helps you see with clearer eyes.
“Project profits over corporate aspirations”
Another example. An upstream oil and gas client was deciding whether to expand its marine and shipping portfolio into offshore drilling-rig operations and began assessing the market and their risks. Recognizing they were entering uncharted waters, one of their legal team referred them to us.
We ran a Resilience Appraisal to help them fully grasp the rigors and nuances of the offshore drilling-rig market. Once the known risks were identified, they could see the anticipated value was outweighed by the reality of what was needed to realize it. They decided not to proceed. A fortunate decision as it turned out, since the rig market crashed soon after.
Both examples concern decisions to take on riskier projects than normal, in novel environments. One took the plunge but didn’t initially arrange themselves properly to prevent value erosion; the other decided not to, after realizing they weren’t set up to handle it.
We helped our bioenergy client refocus on profits by enhancing their project management approach. New protocols enabled them to identify vulnerabilities in their project approach which they could adjust to moving forward. The marine company, realizing they were likely to lose value, dodged a bullet.
Although in very different sectors, the two companies made millions and saved billions respectively. Both continue to place project profits over corporate aspirations in their approaches to this day.