This is the first part of a 2-part series of articles covering the relationship between information technology (IT) and capital projects, highlighting a few key aspects, that need to be taken into account by the owner project team, relating to information technology and business systems.
- Part 1 covers some background and the business context of IT.
- Part 2 covers the nature of IT projects and how these can be managed together with the main project.
By Gavin Halse
Manufacturing companies that build and operate industrial plants, rely heavily on business systems and information technology to support, optimise and grow the business.
Information technology (IT) can help optimise capital spend and maximise the return on assets. IT can help reduce costs while increasing market share and revenue. IT can enable companies to manage their operations efficiently and safely. IT can help companies continuously introduce new processes and take advantage of new technologies. On the other hand, poorly implemented IT can quickly destroy value.
Project teams involved in capital projects are primarily focused on delivering a complex plant and have a lot to contend with. As a result, they sometimes pay scant attention to IT during the early stages of a project. The result can be that, towards the end of the project, IT has been poorly scoped and a number of last minute requirements and related costs are required to support the running business. These can cause the project to be overspent, or even delay beneficial operation.
How then should owner project teams ensure that the owner’s IT requirements are properly incorporated into a capital project, and how can the business be assured that they’ll get a working IT system when the new plant is handed over?
IT is a core manufacturing business capability
IT systems are used to deliver value and quality of service to customers, suppliers, employees, distributors and partners (Maizlish & Handler, 2005). When IT is optimised, the business runs efficiently, becomes resilient to change and is competitive. On the other hand, IT that is managed in a chaotic way can present a real risk to the business by inhibiting necessary change and increasing costs. At the end of a capital project, a dysfunctional IT system can even prevent the start-up of a new business.
This is the reason that IT should be regarded as a core business capability and not as a mere “utility service”. The IT strategy, risk and performance must be managed by the business executives at the most senior level. The King III report on Governance (IoD, 2009) devotes a whole chapter (chapter 5) to the governance and alignment of information technology. King goes on to state that IT is ultimately a board-level responsibility (IoD, 2009).
In a manufacturing environment, business and IT are inextricably linked, for example:
- Automated business processes that extend beyond organisational boundaries to customers, suppliers and partners;
- Linkage of manufacturing execution systems (MES) to align production execution with real time business information;
- Differentiated products and customised services personalised to each customer;
- Cost reduction and efficiencies through improving supply chain, manufacturing execution, maintenance and safety, and;
- Compliance to legislation and regulatory standards, including for example Sarbanes-Oxley, Basel, etc.
Several useful models have been developed to illustrate the multiple points of interaction between IT, manufacturing and business. Figure 1 shows the IT business/manufacturing model across three main dimensions as developed by the ARC Advisory Group (Chatha, undated). The value chain domain on the X axis runs between suppliers, manufacturing operations and customers. The production and operations systems at the bottom connect to the business operations at the top along the enterprise domain (Y axis). The product life-cycle, on which new products are developed, is shown on the Z axis.
Figure 1: ARC Manufacturing collaboration model (Chatha, undated)
MESA, in turn, has also developed a model that shows the flow of information from manufacturing systems through operations to support business initiatives. This model is shown below in Figure 2:
Figure 2: Production to Enterprise model (MESA, 2016)
Each of these models is intended to simplify a complex landscape and to illustrate the many touch points between IT, manufacturing and business.
Recommendations: Based on our experience, OTC recommends that project team members should be familiar with the position and architecture of the owners’ IT systems. Business and IT specialists should work closely together during the development of the early business concept to create a clear vision of the future IT system and exploit opportunities for innovative use of technology during the design.
During project initiation and early feasibility studies a business integration model should be developed within the project work break-down structure. This work should ideally be led by a person with the right combination of IT and business skills. The business IT deliverables should be integrated with the deliverables from the rest of the project. This work package should be managed like any other project deliverable with clear scope, outputs, schedule and costs, and be reported on at steering committee level.
IT costs need to be optimised like any other asset
IT can represent a significant capital and operating expense, with expenditure ranging between 0.9 and 2.5% of revenue in industrial plants, and up to 20% and even higher in service environments (Maizlich & Handler, 2005). With more recent developments in cloud computing and software as a service, a big percentage of IT costs are shifting from capital investments in infrastructure (networks, software platforms and servers) to subscription services delivered through the cloud.
Maizlich and Handler (2005) suggest that the portfolio of IT “assets” should be managed just as any other capital asset. Each IT investment must be supported by a value statement with a supporting business case. The value might be financial (cost savings or increased revenue), or strategic (customer retention, customer growth), compliance, tactical (reliability, responsiveness), risk reduction, etc.
However, many companies manage their IT project costs as part of their ongoing operating budget with little visibility of any IT projects and poor understanding of the value created. This “black hole” of continuous IT expenditure is often perceived to be a necessary evil and resented by many executives who have to fund IT from their own budgets.
Figure 3 shows typical IT expenditure categories in an internal IT organisation (Maizlich & Handler, 2005). Obviously the amounts will vary between companies, but it is important for project teams to understand how IT investments will eventually be incorporated into the owner organisation’s operations.
Recommendation: The business case for all new IT investments, both capital and operating should be treated no differently from other decisions during the project design phase. This includes trade-off decisions between capital and operating costs, decisions on whether to source in-house or to buy in from external vendors, etc. The portfolio of IT assets that form part of the project scope should be clearly listed together with the existing systems and the economic value add of each new system quantified during the design phase.
Figure 3: Typical IT expenditure in an operating business
IT is a relatively small cost with a big impact
During the execution of large capital projects, IT is not the major consideration or focus of the project team. After all, the costs are a fraction of a percent of the cost of a major plant. This dilute focus can become a problem, because IT is always “under the radar”.
IT systems can have organisation-wide impact on the business by virtue of common processes, such as those with external parties (customers and suppliers) and the needs of internal stakeholders e.g. shared business services. These organisation-wide processes can extend beyond the immediate scope of the project. They cross the boundaries of plants, sites and different licensor technologies, and therefore need to be integrated carefully. During the initiation and design phase of a project, any organisation-wide implications need to be identified and catered for.
Recommendation: During the initiation and design phase of a project, any organisation-wide processes, operating philosophies and standards need to be identified. Consider the organisation-wide implications of any new IT systems introduced during a capital project. Clearly define the scope of the IT systems delivered by the main project and the IT systems that fall within the scope of work of the business itself.
The right skills are critical during initial project stages
An opportunity will exist during the business discovery and initiation phase of any capital project to identify new IT or business systems that will become integral to the whole business. If these systems are selected early enough, they will have a positive impact on the design itself.
A key success factor is putting in place IT leadership with the right combination of technical and business skills to develop the scope and the integration model. These people should work closely with the business development team and have access to business analysts and other IT specialists who can help develop concepts and turn these into clear deliverables.
Recommendation: OTC recommends that an IT leader of sufficient seniority, decision-making ability, technical and business skill is appointed for all projects with the potential to impact the business. Moreover, the IT leader should be able to communicate effectively with the engineering and project management teams. For major capital projects, this person should be the chief information officer.
Working with an existing IT organisation
Many capital projects are executed with an established IT organisation in place and it is important to coordinate carefully between departments. This IT organisation might be totally in-house, or more commonly a few key in-house people with several outsourced partners and vendors managed by service agreements.
The existing IT organisation will be responsible for delivering and maintaining business systems. This is normally managed as a portfolio. Within the portfolio, IT assets are constantly being acquired, maintained and retired and projects are being executed.
The chief information officer (CIO) is a key player in leading the IT organisation and aligning outputs with the business. This is accomplished through a number of key activities, for example: strategic planning, budgeting, programme management, solution delivery, human capital management, purchasing, research and development, vendor management, and IT operations. The CIO is also an important stakeholder who should be closely involved in a coordinating role with any capital project that will impact on the IT systems.
Remember that the IT organisation is also not a single group of people. It will normally span many levels of the business (including outsourced partners) with specific roles and responsibilities that are shared between the Board of Directors, risk and governance committees, the IT strategy committee, the CEO, business executives, the CIO, the IT steering committee, technology council and the architecture committee. These groups are also significant stakeholders in the impact any capital project will have on current and future IT systems. Good communication and integration of these stakeholders is important.
Recommendation: If there is an existing IT organisation, then the CIO will normally be the owner representative responsible for taking over the systems delivered by the project. He or she is therefore an important stakeholder. If the IT organisation is not yet in place (e.g. a greenfield plant) then the key people in the future IT organisation should be put in place early enough to be involved in systems selection and design.
IT has a vital role to play in helping the business achieve strategic goals. When capital projects are implemented, either as greenfield or integrated into existing business there will be a significant impact on the existing IT and business systems, as well as the IT organisation, which in turn impacts on all stakeholders. This impact needs to be carefully managed in order to reduce risks and achieve the stated benefits.
In Part 2 we will take a closer look at the nature of IT projects and how these can be managed within the scope of the main project and within an overall programme.
Chatha, A., Undated, Driving operational excellence thru collaborative manufacturing, ARC Advisory Group, PDF downloaded from http://www.arcweb.com/key-concepts-presentations/Collaborative%20Manufacturing%20Management%20(CMM)%20Overview.pdf on 28 January 2016.
IoD, 2009, King report on Governance for South Africa 2009, Available from https://jutalaw.co.za/uploads/King_III_Report/#p=1. Accessed on 20 January 2016.
Maizlish, B, & Handler, R., 2005, IT Portfolio Management Step-By-Step, John Wiley and Sons, Hoboken, NJ.
MESA, 2016, MESA Model and strategic initiatives, Available from http://www.mesa.org/en/modelstrategicinitiatives/MSI.asp. Accessed on 20 January 2016.
You can download this and other Insight articles from our website at http://www.otctoolkits.com/download-insight-articles/