Risk Management Best Practice 5a – Monitoring for Organization-Wide Performance Risk Associated with Large Capital Projects
Large capital projects represent a significant investment on the part of an organization and can therefore impact, either positively or negatively, the company’s financial position, if not its viability. Consequently, executive and manager attention and financial support may be disproportionately applied to the capital project(s), particularly in the event of overruns, at the detriment of problem resolution at the organization’s other operating assets.
Companies engaged in a large capital project(s) at one or more of its facilities often experience declining performance at their other facilities. This performance decline results from management’s preoccupation with the large capital project(s) and inattention to the needs of operational assets/units. Common operational manifestations of this management distraction include:
- Top performing personnel are frequently transferred from the better performing operational units to the large capital project(s)
- Funding for the large capital project(s) tends to be favored over the operations and maintenance (O&M) budgets at the operating units; holding stagnant or reducing the operating, maintenance, and staffing budgets at the organization’s other facilities
- Top performing personnel at operating units frequently request a transfer to the large capital project(s) because of the project’s importance and a sense of company pride
- Oversight organization budgets and staffing are seldom adjusted for the increased number of assessment activities associated with the large capital project(s); resulting in a diversion of resources and diminished oversight for the other operating assets (see StrategyDriven article, Risk Management Warning Flag – Unadjusted Resourcing of Risk Monitoring Activities)
- Operating unit managers faced with significant issues at times fail to observe and/or react to these issues or defer action in deference to the large capital project(s), typically resulting in adverse operational consequences
Deliberate monitoring for the signs of management distraction, resource diversion, and performance decline by an independent oversight group is often the most effective method of detecting this challenge. While periodic assessments provide in-depth insight as to whether management distraction exists, these evaluations are commonly performed on an annual, biannual, or less frequent basis – too infrequent to effectively prevent this type of performance decline. Therefore, ongoing performance monitoring for the onset of management distraction as associated with large capital projects should be performed by internal oversight groups.
Optimally, internal oversight groups monitor those aspects of organizational performance indicating the onset of management distraction such that preemptive corrective actions can be taken. Such measures may include but are not limited to:
- Capital Improvement Investment Trends – diversion of funding from operating assets/units to the large capital project(s)
- Operations & Maintenance Budget Trends – diversion of funding from operating assets/units to the large capital project(s)
- Elective maintenance Backlog Trends – rising backlogs resulting from stagnate/declining maintenance budgets and an associated increase in the number of deferrals (note that elective maintenance backlogs often increase prior to a change in corrective maintenance backlogs)
- Corrective maintenance Backlog Trends – rising backlogs resulting from stagnate/declining maintenance budgets and an associated increase in the number of deferrals
- Preventive Maintenance Deferrals – rising number of deferrals resulting from stagnate/declining maintenance budgets (note that preventive maintenance deferrals often increase prior to a change in corrective maintenance backlogs)
- Management and Staff Transfers – migration of top talent from operating assets/units to the large capital project(s)
- Employee Satisfaction Rating Trends – declining employee satisfaction ratings and increasing number of employee complaints and employee concerns reports
- Oversight Budget Trends – stagnation in the funding of oversight groups contrary to the increase in risk assumed by the organization as a result of pursuing the large capital project(s)
While somewhat less beneficial, it is important for overseers to also monitor for the outcomes of management distraction. Some such operational results include:
- Equipment Failure Rates – increased number of equipment failures resulting from a lack of preventive maintenance
- Plant Capacity Trends – diminished plant/unit/system output capacity
- Plant Trip/Shutdown Rates – heightened number of plant/unit trips and other significant operational events
- Operational Productivity Trends – erosion of overall operational productivity resulting from diminished management capability and employee productivity
- Product/Service Quality Trends – declined product/service quality and an associated increase in warranty returns/repairs/replacements and customer complaints
- Maintenance Outage Duration Trends – increased maintenance outage durations corresponding to an increasing number of necessary corrective maintenance items to be resolved
- Regulatory Compliance Trends – heightened number of Occupational Safety and Health, Environmental Protection, and other regulatory cited and non-cited violations
- Personnel Injury Rates – elevated personnel injury rates because of a lack or poor condition of safety equipment, diminished management oversight, and low employee moral
- Personnel Productivity Trends – diminished employee productivity corresponding to low employee satisfaction
- Employee Attrition Rates – increased employee attrition corresponding to low employee satisfaction
Note that these measures do not by themselves indicate large-scale management distraction and, as such, should be considered collectively. Furthermore, follow-up action should be taken when adverse trends are observed to determine whether or not these trends are related to the distractions caused by the large capital project(s).
About the Author
Nathan Ives is a StrategyDriven Principal and Host of the StrategyDriven Podcast. For over twenty years, he has served as trusted advisor to executives and managers at dozens of Fortune 500 and smaller companies in the areas of management effectiveness, organizational development, and process improvement. To read Nathan’s complete biography, click here.
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