building customer based project organization

Cover
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Building Customer-Based Project
Organizations
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Building Customer-Based Project
Organizations
Jeffrey K. Pinto
Pekka Rouhiainen
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Copyright © 2001 by Jeffrey K. Pinto and Pekka Rouhiainen. All rights reserved.
Published by John Wiley & Sons, Inc.
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For our wives, Mary Beth and Liisa,
with sincerest love and gratitude.
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PREFACE
Businesspeople and readers of the popular press are bombarded with a
host of new books proclaiming that project management’s time has come. Authors cite evidence from
Fortune magazine (proclaiming project management the top career choice for the coming decade),
company after company has adopted project management techniques, growth, professional project
management organizations have proliferated in the past five years, and innumerable articles have
appeared in both the popular and academic presses extolling the benefits of project management. For
project managers and project-based organizations, it seems the good times have arrived. Right? Well,
unfortunately, the answer is still unclear. There is no question that project management has received a
great deal of attention in recent years. The number of firms using project management has risen
dramatically, the number of consultants serving the sector has multiplied, and with them, so has the
number of problems confronted by project management organizations.
Problems? How could that be? With all the hype being generated, new “how to” books coming out
every month, and so many organizations now speaking the language of project management, what kind
of problems could there be? Let us briefly consider some of the evidence: Magazine and newspaper
articles, as well as recent studies by a variety of consulting firms and academic researchers are
suggesting some disturbing signs that the trend toward project management has not come without
serious obstacles and counterevidence.
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Information technology projects continue to fail at astounding rates, approaching 65 percent to 70
percent. Firms that have recently adopted project management as their panacea are looking at long lists
of overruns and schedule slippages in these ventures and are quietly, but seriously, rethinking their
operating strategies. Surprisingly, the same thing seems to be happening within the industries that have
long traditions in project management. For example, most of the deep-water, oil drilling units that were
under construction at the end of the 1990s showed considerable delays and budget overruns.

Researchers are increasingly decrying the lack of “competence” in project management by so many
companies that have jumped on its bandwagon. In short, the promised land has not yet been reached. In
fact, for some firms, Nirvana seems to be actually receding into the distance.
Why are these problems occurring? Just how serious are they? Might they not be the expected side
effects of any new technology that has been adopted too rapidly, without the proper training and
supporting corporate culture? These are all good questions that are at the heart of the problems we are
facing. If the technology is good, what then is the source of the problems? No one answer is possible.
There are many sources of difficulties faced by project-based organizations. Misunderstanding of the
techniques (what they will do and what they will not do), lack of resources and systematic training in
project management practices, misunderstanding of project management’s role by top management,
unwillingness to commit to its goals by functional department heads, . . . the steady drumbeat of
problems continues.
We are not offering an analysis of whether or not project management works (it does), or whether or
not it begets problems (it certainly does). By and large, this discussion would beg the larger question
and miss our key point: Problems illuminate prospects. This is not a book about project management
problems, but project management opportunities. Our fundamental purpose is not to
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point to the problems that exist with project management as it is currently being practiced by a majority
of organizations. The far more intriguing question has to do with the opportunities the steady move to
project management creates for those companies that have achieved success in their operations. And
this is the encouraging message that we hope all readers take from this book: In an arena that contains
its share of project failures, there are also numerous examples of success. How are the firms that make
project management ‘‘work” doing it? What is the secret to their success, a success that offers them a
real competitive advantage in the marketplace? Where do the real opportunities lie?
We believe that the key lies in refocusing our goals toward the customer. Many companies using
project management develop severe myopia, focusing exclusively on internal operations and project
development. They lose sight of the customer, the person, organization, or market for whom the project
was originally intended. In our research, consulting, and business experiences, we are astonished by the
number of firms that seem to forget this most obvious of points: Who is the client? This is not to imply
that customers are purposefully ignored (although that does occasionally happen), but in the long-run,

their customers’ concerns just do not seem to matter that much when they are competing with the
activities of the project company. “If you build it, they will come,” is a line from the Hollywood movie,
Field of Dreams. How many of us work for organizations that have a similar, Field of Dreams
optimism when it comes to new product development? “If we build it, they will come” may sell movie
tickets, but it will sell precious few projects.
We recognize that our charge that there is a lack of customer focus is liable to raise a few eyebrows.
Every individual we have ever worked with will resolutely claim that their company is “customer-
focused.” And yet, when we start examining the evidence more closely, it leads to some uncomfortable,
yet inescapable conclusions
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regarding their true level of commitment to the client. Does your organization reward its project
managers and teams for speed to market or level of sales? Budget adherence or minimal customer start-
up difficulties? Achieving technical specifications or gaining repeat orders due to long-term
relationships? In short, is your organization pushing the internal measures of success at the possible
expense of the real goal?
One thing we know: People act in ways that maximize their rewards. When we complain about a
lack of involvement with the customer or excessive bickering across functional departments, is it due to
the reward systems we have put into place and the tacit signals we are sending about what really
matters. Where do the customers fit into this equation? Tom Peters, in his landmark book, In Search of
Excellence, got it right a long time ago: It’s all about taking care of our customers. If we do not,
someone else will.
This book is our attempt to suggest ways in which project organizations can get it right. We need to
clearly articulate the “right” goals that should be motivating our project management. The first “right”
goal has to be an emphasis on establishing and maintaining long-term relationships with our customers.
More and more global firms, including General Electric, Ericsson, Nokia, and many others, are taking a
long-term look at where the balance lies in creating a healthy climate between suppliers and customers;
what is referred to as the supply chain. In managing our supply chains, we start thinking in terms of
stakeholder relations, efficiency, and long-term responsiveness. Our goal becomes servicing our chain
rather than snapping up short-term profits at the expense of long-term profitability.
This book came about as a result of years of working with and observing project-based firms that

have been successful through careful management of their customers and suppliers. As a result, we have
been able to formulate some principles that apply across businesses, work equally well at managing
relationships within
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organizations or between separate firms, and hold the key to success over time, in which past customers
keep coming back for more. Building Customer-Based Project Organizations offers organizations the
key to redefining the focus of their mission, recognizing (perhaps for the first time) what their primary
goal must be. In this way, they become more efficient, more responsive, and far more profitable. Doing
it right consists of doing right by our customers.
JEFFREY K. PINTO
PEKKA ROUHIAINEN
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ACKNOWLEDGMENTS
We would be remiss if we did not recognize the contributions of
numerous people who worked behind the scenes in helping us complete this project. Risto Neuvo,
managing director at Aker Rauma Offshore in Finland was a key catalyst for the formulation of our
ideas. This book would never have happened without his enthusiastic support. Jeanne Glasser,
acquisitions editor at Wiley, was an equally enthusiastic and energetic supporter and was the key to this
book ever leaving the drawingboards.
Many of our good friends have contributed to the ideas that we developed in this book. Special
thanks go to Pekka Laxell from Aker Maritime Inc, Professor Markku Pirjeta of Tampere University of
Technology, and Ellen Coopersmith from Decision Frameworks in Houston, Texas.
For our families, Mary Beth, Emily, AJ, and Joe (for Jeff) and Liisa, Jukka, and Tapio (for Pekka),
we reserve the biggest thank you of all.
J.K.P.
P.R.
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CONTENTS
Chapter One
Why a Customer-Based Approach Matters 1
Chapter Two
Background: The Challenge of Project-Based Work
33
Chapter Three
What Is Project Success and Failure?
61
Chapter Four
Project Critical Success Factors
79
Chapter Five
Managing the Supply Chain for Projects
103
Chapter Six
Value Chains and Projects
127
Chapter Seven
Project Stakeholder Analysis
143
Chapter Eight
Creating Customer-Based Project Organizations
161
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Chapter Nine
Putting the Model to Work: The ARO Story
175
Chapter Ten

Building the Customer-Based Project Organization
193
Index 211
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Building Customer-Based Project Organizations
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CHAPTER ONE
WHY A CUSTOMER-BASED APPROACH MATTERS
During the decade of the 1990s, project management came into its
own. Firms who had never considered the use of project-based techniques have embraced the process
enthusiastically while seasoned project management organizations have continued to refine their
practices. Professional societies, such as the Project Management Institute and the International Project
Management Association, have grown at incredible rates, adding to membership rolls that already stand
at historic highs. Project management has become the operational technique of choice in companies as
diverse as electronics, information systems development, construction, banking and financial services,
insurance, heavy and light manufacturing . . . the list goes on and on.
What are the underlying reasons for this explosive growth and interest in project management? Why
is a technique that two decades ago was generally thought of as only useful for construction,
aeronautics, and very few other industries suddenly taking the business world by storm? Why is book
after book being published extolling the benefits of project management? Why are consulting firms
proliferating and companies lining up to board the
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bandwagon? The short answer is that these people are recognizing what many savvy firms have long
known: Project management offers a unique combination of opportunities and challenges that, properly
met, create a tremendous competitive advantage in the globalized marketplace.
Consider the current state of business, both in the manufacturing and service sectors, and how
project management can help organizations address its challenges. We have only to take a cursory look
at the business world to detect some strong trends, including:

1. Shortened product life cycles. The good old days when a company could offer a new product
and depend on years of competitive domination are gone. Increasingly, the life cycle of new
products is measured in terms of months or even weeks, rather than years. We have only to look
at new products in electronics or computer hardware and software to easily understand this
trend. We are seeing similar signs in traditional service sector firms that have also recognized the
need for agility in offering and upgrading new services at an increasingly rapid pace.
2. Small product launch windows. Another issue concerns the nature of opportunity. Organizations
are very aware of the dangers of missing the optimum point at which to launch a new product
and must take a proactive view toward the timing of product introductions. Put another way:
While reaping the profits from the successful sale of Product A, canny firms are already plotting
the best point at which to produce and launch Product B, either as a product upgrade or as a new
offering. Because of fierce competition, these optimal launch opportunities are measured in terms
of months. Miss one, even by a matter of weeks, and many products become also-rans.
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3. Increasingly complex and technical products. ‘‘The world today is a lot more complicated than
it was in my day.” We hear this refrain all the time. And yet, there is a large element of truth in it.
The world is more complex. Products are more complicated, technically sophisticated, and
difficult to create efficiently. The public’s appetite for “the next big thing” continues unabated
and substantially unsatiated. We want bigger and better, more bells and whistles, larger (or
smaller), faster, and more complex than the old model. Firms constantly upgrade their product
and service lines to feed this hunger. That causes nightmares in design and production as we
continually seek to push out the edges of the technical envelope. Unless companies find a way to
maintain control of the process, this “engineering for engineering’s sake” mentality can quickly
run out of control.
4. Huge influx of global markets. In our undergraduate economics courses, we learned the nature
of choices. These choices, often called the “guns or butter” decision, were based on a zero-sum
assumption of a fixed pie. The fixed pie said that there was only so much to go around. Choosing
more guns meant less butter was available. As we enter the new millennium, we see a pie that
continues to expand. The global economic climate is not one of shrinkage or even zero-sum
stability; it represents incredible opportunity on a scale never before imagined. During the stock

market boom of the 1990s, it was routine for firms to be valued at 70, 80, even 90 times
projected future earnings. Analysts took a look at the potential for future development and drew
the obvious conclusions: There is a gold mine out there for the companies that can exploit it.
Project management firms, aiming at market agility while keeping a disciplined hand on costs and
development times, are ideally poised to reap the benefits of the global marketplace.
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5. An economic period marked by low inflation. The economic mood in the developing countries
remains highly favorable. One of the key indicators of economic health is the fact that inflation
has been kept under control. In the United States in particular, low inflation has been one of the
triggers for the continued economic expansion and stock market boom of the last decade.
Unfortunately, low inflation has a challenging side effect for business; it limits their ability to pass
along cost increases in order to maintain profitability. Jack Welch, former CEO of General
Electric, took a hard look at this problem recently and suggested that when wages are added in,
we are actually in a period of deflation, in which prices are diminishing. The implication is that
successful companies of the future will be those that increase their profits through streamlining
internal processes, saving money by “doing it better” than their competition. Project management
is a tool to realize these goals of internal efficiency and profit in a low inflation time.
6. General requirement for higher profit from investments. In the highly technical world of Internet
companies, the investors are looking for better and faster return on their investment. For the
industry, this means that there is no time for staying idle, firms have to act fast when they see an
opportunity. From the project firm’s point of view, this means greater need for flexibility in
developing projects faster under greater uncertainty, often learning more about the opportunity
while doing. In general, project implementation has to take place in a shorter time than it used to
which means using a larger number of suppliers and subcontractors. Maintaining high standards
for safety and quality while at the same time employing methods such as multiple working
hypothesis and concurrent engineering, sets great and often conflicting requirements for the
project management.
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Oil field developments are a good example of this last phenomenon. As more and more of the word’s
oil is found in the ultra-deep water, the money involved in both oil exploration and development has

achieved epic proportions while the risks involved have increased proportionally as well. Basically, the
“distorting lens of deep water” requires higher dollar decisions to be made quicker and with less
information than ever before. As a result, the industry has turned to the use of decision tools, such as
decision analysis, to make better decisions faster, recognizing the range of possible outcomes. This has
led many oil companies to seek flexible field development solutions soon after discovery, rather than
delay by gathering more information and “optimizing” their development solution. The petroleum
industry has finally recognized that no matter how much information is gathered, the final performance
of their oil fields will always be unknown until the last drop of oil is produced. Hence, flexible solutions
and improved decision processes are changing the way oil companies run their business.
These are just a few of the reasons why project management has become so popular in recent years.
Project management is more than just the latest management fad. There is enough evidence of success
to recognize that it really does deliver on its promises . . . sometimes.
The fact is, however, that for all the apparent logic behind the use of project management and the
success stories that we experience or read about, it is by no means a perfect picture. A disturbing trend
mirrors the increased use of project management. The degree to which new projects, and in some cases
industries, are failing is alarming. Let us consider some recent research examples, just from the
information technology sector, regarding the viability of new projects currently being developed:
l A recent study of over 300 large companies conducted by the consulting firm Peat Marwick
found that software and/or hardware development projects fail at the rate of 65 percent. In
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other words, 65 percent of these companies reported projects that were grossly over budget or
behind schedule (up to and over 200 percent), employed technologies that were nonperforming,
or all of the above. Perhaps even more distressing, over half of the top managers interviewed
considered these results ‘‘normal.”
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l A study by the META group found that
more than half of all IT projects become runaways
overshooting their budgets and timetables while failing to deliver fully on their goals.”
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l Applied Data Research surveys report that up to 75 percent of software projects are cancelled.
3

l The Standish Group found that of approximately 175,000 projects costing more than $250 billion
each year, almost 53 percent will overrun their initial cost estimates by an average of 189 percent.
Most of these projects will be delivered with less than 75 percent of their original functionality.
They conclude that the average success rate of business-critical application development projects
is a miniscule 9 percent.
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What is going on here? This was supposed to be the golden age of project management. At a time
when literally hundreds of firms are adopting project management techniques, we are showing the kind
of results that would scare off many risk-taking CEOs. Critics of these results could argue that high
failure rates are in the nature of the business anything that offers high profitability for taking risks
must have a significant downside as well. And yet, although there is an element of logic in this
argument, it is not satisfying. Are failure rates of up to 91 percent simply the law of the free market or
is something else at work here?
In a recent book, a noted project management researcher and author, Dr. David Frame, decried the
lack of competence in our project-based firms.
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Dr. Frame knows whereof he speaks: As director of
certification for the Project Management Institute for