Creating customer value in a high-growth market

As Western Canada’s economic engine continues to rev up, a rapid escalation of costs threatens to reduce the profitability of associated projects. Collaboration between vendor and customer is the key to success.

By James McKay, CMA

With the feverish project pace in Western Canada, the ability to control costs is key for companies that wish to maintain expected levels of profitability in Canada’s hottest marketplace. Project execution in the current market climate requires collaboration between suppliers and customers, along with the ability to leverage key strengths of each party.

Project execution challenges

As with projects throughout Canada, projects in the Western Canadian marketplace face several execution issues including, but not limited to:

Labour availability, productivity and cost — A company’s labour costs can run anywhere from 125 to 200 per cent of those in the U.S. Gulf Coast region, depending on the index or data set a company uses. With this kind of multiple (and great uncertainty about future escalations), understanding the labour requirement and developing a useful labour cost, quantity and productivity estimate is imperative. Add Western Canada’s well-publicized skilled labour shortage and there is little comfort that these costs will decrease in the near term. As a result of this overload in the supplier market, project delivery uncertainty has increased for projects in Western Canada. Early alignment with strategic suppliers and other parties can provide higher project execution certainty.

Equipment sizing, sourcing and cost — Modularization and transportation constraints are major issues for Alberta because of the province’s geographical isolation from international equipment sources. Many critical project components are shipped in prefabricated sections requiring modularization and final assembly at or close to the project site. Material, transportation and contractor relationships become increasingly important as projects evolve. A further challenge presented to projects is the expectation and requirement to ensure that quality, schedule and cost are not compromised.

Project execution experience — Perhaps the most important component is project execution. A company’s inability to execute a project safely, on time and on budget can yield devastating results not only in terms of profitability, but also on their reputation in the marketplace. For this reason, project owners and suppliers must have well-established expectations and action plans in place to ensure milestones are met. This requires the establishment of robust procedures and plans, along with the discipline to follow them.

Scope definition — This is the most critical component of execution. Time spent early on defining the project parameters can save considerable time, cost and frustration later. Part of this component comes down to expectations. Given the complexity of the marketplace in Western Canada to execute projects today, an accurate proposal or estimate can take up to three months or longer to prepare. Assuming accurate results will come within a one or two week window for a major project component can create unrealistic expectations and cause disastrous harm to the project and customer/vendor relationship later on.

Customer/vendor relationship — The value a customer places on a product or service can vary depending on project size, product/service need and relationship with the supplier. At one extreme is the customer who sees the product or service purely as a commodity (transactional) vs. the other end of the spectrum where the customer puts high value on growing with the supplier at various locations in multiple capacities (strategic). In short, customers want to work with vendors who are easy to do business with and vice versa. Given the project load many vendors face in a hot market, this relationship can have a tremendous impact on the project’s success or failure. (For more on this see Customer Value Requirement and Recognition.)

A model for success

A relationship where customer and vendor are seen as strategic partners has long been touted as the key to a successful project. Flawless execution requires regimented, relentless attention to detail from the moment the project is conceived to the time its up and running and beyond. Below is a high-level blueprint for how to ensure a project gets executed to the satisfaction of all parties involved. (For an example of execution success, see the Praxair project execution example sidebar.)

Qualify customer/vendor relationships early — Understanding the relationship and expectations are critical. If the customer wants a transactional relationship and is prepared to accept the risks associated with doing so, so be it. On the other hand, if the relationship is open, informative, and based on mutual respect as strategic partners, then the foundation for a successful executed project has already been set. In some cases, transactional vs. strategic relationships can be misguided as a result of conditions in the supply market. With an overheated project list, many strategic players can be heavily loaded, and as such, be hesitant to invest the time and resources required to engage in a strategic-type relationship. Based on a strategic win-win type relationship, this type of scenario would in fact create the necessary strategic alignment between parties because it saves time and resources for those involved.

Perfect cost estimate tools — A replicable process for developing cost estimates and proposals provides value for both the customer and vendor in that the quality of the estimate is high from the outset. The difference between a /-50 per cent and /-40 per cent estimate can have a staggering impact on project returns, depending on the size of the project. Having a cost estimate tool and process can ensure a company is providing higher-quality cost estimates in less time. A large organization will have the ability to use the benefit of ongoing value engineering and productivity initiatives to promote continuous improvement.

Improve vendor relationships — For any of the major projects being executed in Western Canada, there are several players involved in the development of the project. Portions of the project the vendor may shop out themselves can include, but are not limited to, project equipment, engineering, consulting, construction, shipping, procurement, site supervision, safety programs, operation, maintenance, etc. Simply put, if a company doesn’t have long-standing valued relationships with suppliers of its own in place, it is potentially putting the success of the project (and relationship with the customer) at risk.

Set milestones and action plans — This is where an open, strategic partner type relationship is important. With the right team, tools and relationships in place, mapping out the milestones and action plans becomes another step in the execution process as opposed to a pending doomsday on the calendar. Develop risk plans ahead of time to prepare for challenges that may impact the project. Common actions here include determining who takes what risk (schedule/material/labour/cost)? Are they capped or open-ended? Are there penalties/bonuses for mutually agreed upon measurement criteria? In Western Canada’s overheated construction market, it pays for relationships between project partners to be open and honest. It makes no sense to push risk back to a supplier if they are not qualified to manage it. All that happens in this case is a non-response or perhaps an increase in cost to the project. 

Commit to an ongoing relationship — The type of relationship with the customer is the cornerstone of this step. If a company is providing an integral part of the project, the customer’s expectation is that the company will be around to provide assistance following startup/delivery. This is obviously going to vary based on the type of product/service being provided. If the relationship is based on that of a strategic partner, a representative from the company would likely be there as a key part of the project on an ongoing basis. This is where things like continuous improvement programs, safety initiatives and support of customer concerns and inquiries come into effect. While the level of interest and required participation will vary based on the product or service the company provides, the responsibility on the vendor to provide a continued value-added relationship for the customer remains a priority in the strategic partner relationship.

The current and proposed level of project activity in Western Canada is poised to continue at a remarkable pace. The key to successfully executed projects lies in strategic vendor/customer relationships and the right mix of tools and project partners.

While these projects continue to grow in number and scope, the importance of value-based strategic relationships continues to rise right along with it.

James McKay, CMA, MBA, CITT (jim_s_mckay@praxair.com) is a business development  manager in Praxair Canada’s Alberta Oil Sands Business Development Group, based in Calgary, AB. With 2007 sales of $9.4 billion, Praxair, Inc. (NYSE:PX) is a global, Fortune 300 company that supplies atmospheric, process and specialty gases, high-performance coatings, and related services and technologies to a wide diversity of customers.  For more information on Praxair, please visit www.praxair.com.

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