Move with the times

In a recent survey by AVEVA Consulting, almost half of respondents described the adoption of Internet technology by engineering companies in the process industry sector as 'dinosaur-like'.

Digital technology, particularly the Internet, is a prerequisite to gaining competitive advantage and engineering companies need to act quickly to remain profitable. So why is it that engineering companies are dragging their heels?

All companies are being subjected to the same major macro-economic drivers - globalisation and digital technology. The process industry competitive environment is brutal, with substantial overcapacity, very low margins and pricing challenges as capacity switches from the developed world to the developing world.

Adversarial relationships exist within a competitive arena of one-off short-term fixed price contracts. Punitive penalty clauses can literally bring a company to its knees. Davy Corporation's ill-fated Emerald offshore facilities contract so weakened its owner that the whole group, Trafalgar House, was taken over shortly afterwards by Kværner.

Against this harsh economic backcloth is the information age, where knowledge is progressively becoming the key factor of production, superseding capital and organised labour. Digital technology is providing a similar technological engine for global economic growth as the railway networks of the mid-19th century.

CEOs are today judged on shareholder value. This takes into account expected future profits and revenues. However, the existing structure of the process industry conspires against sustaining and increasing shareholder value.

Increasing shareholder value calls for different strategies for different business circumstances. First, operational efficiency squeezes more output from the existing organisation, fundamentally through cost-cutting. The primary emphasis is to increase profit margins, but removing costs is not the basis of a sustained strategy - in the long term, it can weaken the company.

Second, organisational effectiveness means executing the same business but adapting to the competitive environment with new capability and ways of working. This implies deep improvement in business processes. Third, the organisation can begin to 'break the mould' and transform itself by chasing new business opportunities in a more entrepreneurial, but riskier, way.

It is clear that an adaptable workforce, capable of taking advantage of new opportunities, is required to avoid corporate extinction in the 21st century. The workforce needs to be directed towards profitable adoption of digital technology.Engineering has a high information intensity. So, it is fundamental that an information strategy must be in place.

So what steps does an engineering company need to go through to take advantage of digital technology? As stated above, the company needs to have a clear view of future business strategy and how the subordinate information strategy aligns with it.

However there is the perennial danger that 'dynamic' fire-fighting activities, responding to short-term, immediate project demands, are equated with a long-term strategy.

Fundamental questions need to be posed, for example: what strategy exists for capturing and reusing corporate knowledge from previous projects, such as procurement and supplier trends? Does the organisation have the capability to deliver the respective business and information strategies? Has it conducted a capability audit to establish if it there are any organisational shortcomings which need to be bolstered?

Initial technology adoption has often derived from business process automation with the introduction of high-value 'island' applications, like 3D CAD and materials procurement in engineering companies. The quality of such implementations can sometimes vary across regional offices, detracting from optimal organisation-wide potential. Full advantage may not have been taken of potential improvements to business processes. In one documented case, McKinsey consultants estimated that for every $1 saved on simple business process automation, $4 more could be saved through significant business process improvement. The same is true in the process industry.

As Bechtel and GE can testify, business change programmes are fundamental to evolving the enterprise and developing the capability of the organisation. Such programmes can then be selectively tailored to the appropriate adoption of Internet technology. They are not to be undertaken lightly; they involve substantial changes to the organisational infrastructure.

An example best illustrates this point. BP formed a pioneering alliance with seven engineering contracting companies in the mid-1990s to develop the $560 million offshore oil production facilities of the Andrew field. It focused on a common business goal for the North Sea project, with sharing of risk and reward. BP deployed business change management techniques to tailor the project's capability to work as a unified team and encourage co-operation and innovation.

The strength of the organisational capability of the Andrew project is measured by the fact that that the facilities were completed 20% under budget, and no less than six months ahead of schedule.

New opportunities are not for the faint-hearted. The 'dotcom' bubble has sorted the (small number of) men from the (large number of) boys. But Bechtel, GE and, more recently, the British engineering contractor AMEC have demonstrated that clear business strategy executed with corporate focus and organisational capability, underpinned by business change management, can re-direct 'dinosaur like' information-intensive engineering organisations away from a low-margin strategic cul-de-sac into high-margin specialist service providers, with long-term customer relationships.

Neil McPhater is the business integration manager at AVEVA Consulting