In conversations with various owner companies, we realize they are pursuing a number of projects in early project definition or Front-End Loading (FEL). This project development period is typically divided into distinct phases. The first phase (FEL 1) is when a business opportunity is first identified and appraised. The project then moves into the FEL 2 phase where an alternative is selected and formed into a viable solution. The FEL 2 phase is when a team is formed, various engineering deliverables are pursued, and corresponding project costs begin to increase. The FEL 3 phase is when the selected alternative is fully defined and readied for full-funds authorization. The level of effort required to move the project along increases significantly as the project moves through these phases. Thus, having a large number of projects in FEL 2 is both a blessing and a curse.
The benefits of having a number of projects in FEL 2 generally hinge on having various options available should market conditions change. Options provide insurance against unexpected events. The trouble is the options (or insurance) are not free.
The primary cost is an opportunity cost from not pursuing the higher priority projects. For example, scarce owner personnel are required for early project development as contractors cannot provide an owner perspective in early definition activities. These same owner personnel could have been devoted to higher priority projects, yet the owner personnel are thinly spread across a number of projects with overall portfolio progress moving very slowly.
A large number of active projects in FEL 2 indicate vague business and project objectives. Decisions are often postponed until market information becomes more certain. However, decisions are actually delayed because the criteria for making decisions are not sharp. Let’s consider an example.
The price of natural gas in the U.S. is currently relatively low and is used to justify the economic feasibility of various commodity chemicals projects. These projects often benefit from economies of scale, which drive the projects to be very large. The large, relatively glamorous new chemical plant attracts a substantial number of owner personnel to define and shape the opportunity. At the same time, other projects in the portfolio receive less attention and bog down. The net result is little progress and significant churn in the system.
We understand market conditions frequently change and alternative plans are required. The trick is to prevent all alternatives from advancing at the same pace so that nothing is completed. A gate with a hinge is required at the end of FEL 1. Too many companies do not really have a gate or criteria to efficiently evaluate their investment alternatives. Clearly, the key mechanism is gatekeeping.