Working in media communications, we tend to see our business as unique and esoteric; but it’s just a service business, and sometimes it's useful and enlightening to look outside our own small world and compare what goes on in our industry with other sectors and other industries. But let’s do something more enlightening; let’s apply our own working processes to another business……
Imagine; you work in the tourist industry managing hotels. Your hotels are unique and clients choose them because of that something special; and they pay a little higher price for that extra something.
At the start of the year you make a business plan and decide that to increase sales and profitability, rather than increasing prices, you will open a new hotel.
You decide to employ one company to create a new concept, and another company to do the architectural designs, buy all the materials, construct the hotel and project manage the process.
Your internal construction manager knows that 65% of the capital cost of new hotels is the raw materials, such as concrete, metal, wood etc; and he says he knows the cost of concrete from previous jobs when he built shopping malls, and what his friends in other companies talk about.
So you decide to make the process transparent, and you hold a pitch, and invite construction companies. The construction companies tell you they can provide design architectural plans and project management, and they will charge you only on the cost of buying concrete. This looks like a good deal, almost too good.
Despite all the wonderful design and concepts, there seems no way to evaluate one design from another, and the construction companies offer no design metrics either, and as all the construction companies seem pretty much alike you award the contract to the construction company who promises the cheapest concrete and lowest fees.
They only troubling thing is; all the fees of all competitors are based on commission on the concrete bought. But as the commission is almost nothing and you end up paying them 1.0% commission on the cost of the concrete. Whatever hopefully the Finance Director will be happy.
The construction company tell you that you similar hotels cost $20m: so you allocate them $20m and tell them to build a hotel and report back at the end of the year. In the meantime there will regular status meetings.
At the end of the year, the hotel gets
built, the construction company gets paid, but for some reason, sales are flat, profits
are down ($20m is a lot of money to take out of the bottom line after all), share
is static, and your Financial Director is starting to ask tricky questions. What’s
more, when you talk to your friends who have had work done in the construction
sector, they all claim that their cost of concrete is less than yours. And that
strange payment practises are rife within the industry.
So, you employ an independent construction sector specialist. The specialist claim they can help you deliver results, add value, and save money (and keep the FD happy) by telling you the real cost of concrete.
And they do; not only concrete but wood, metal and plastics. The cost of interior concrete vs outdoor concrete; floor concrete vs ceiling concrete; the list goes on and on. You become a concrete expert.
The consultant does this by comparing prices his clients have paid for dams, roads, and power stations. He doesn’t have any other clients who build added value hotels, but this doesn’t matter as all these differences can be standardised and consolidated. He also can’t seem to create an direct correlation between concrete costs and hotel success and profitability; but whatever.
The consultant tells you that the problem with the hotel is that; yes indeed, you are paying too much for concrete, and the solution is to hold another construction pitch, which he will manage, and the prices will definitely come down, and your next hotel will be more profitable. Your Financial Director is happy.
Of course, all the above is completely ridiculous isn’t it?
Let’s compare the above with what really happens in construction and other large capital projects:
The design and feasibility stage is crucial and no project gets the go ahead until these stages are thoroughly researched, modelled, evaluated, and costed from every possible angle and using every possible criteria.
Third party contracts are awarded dependent on a number of factors including design quality; track record, resource, project suitability and lowest cost. Cost in itself could not be the single factor in decision making.
The design and execution are separated, and a third party project management role is created to mange construction, timing and costs. Key is that; cost decision making and cost execution are separated and made accountable wherever and whenever possible.
Key milestones are created through the project; actions; timing and budget. The project is reviewed regularly and measured and evaluated against these interim milestones. Stop/ go decisions can be made against these milestones.
Separate areas are fully accountable and managed by identified and responsible individuals within the overall project management.
The contractors are paid fixed fees, and penalised for under delivery against milestones (late delivery or over cost), and rewarded for over delivery (early delivery and under cost).
Outside auditors are employed to validate invoices and audit the entire project.
Now, let’s flip it around: how much of the above happens in Media communications? And why doesn’t it happen? After all; $20m is a lot of money. Ask your Finance Director
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