IPA Director of Capital Solutions Paul Barshop explains what motivated him to create the IPA Institute’s Gatekeeping for Capital Project Governance education seminar. He also discusses how the seminar was developed to benefit individuals with varying levels of experience.
Tell us about IPA’s experience with project governance and gatekeeping.
As the use of a stage-gate process has increased, companies have correspondingly turned their attention to governance and gatekeeping. The stage-gate process is only as effective as the rules that govern its operation, especially in relation to how the gatekeeping decision is made. Without effective gatekeeping, the whole system falls apart.
IPA completed its first formal research study on gatekeeping in 2008. Since then, I and others at IPA have expanded our research work to cover the broader subject of project governance. Our goal is to help our clients understand how governance and gatekeeping should work and how it needs to be managed.
Who are some of the key players in the gatekeeping process?
Gatekeeping involves a whole cast of characters, which is one reason why its effective implementation can be difficult. Gatekeeping answers two basic questions: (1) Are we ready to proceed to the next stage, and (2) should we proceed to the next stage? Think about all the functions within a company that are involved in answering those questions. The most obvious is the business sponsoring the project. Operations, a key stakeholder, must be aligned with the asset’s scope and design; Finance has to sign-off on the cash-flow requirements; Portfolio Managers have to agree that the project’s business objective is in line with long range business strategy; Engineering must endorse that the project’s strategy and current level of definition will yield reasonably predictable results. This isn’t even an exhaustive list.
What are common reasons for governance and gatekeeping failures?
Project governance fails when its components are out of balance. Think of project governance as a set of checks and balances put in place to ensure project decisions are weighed carefully and that project assessments are rigorous. When the system gets out of balance, the results are sub-optimal.
For example, a critical role of the businesses within a corporate structure is to identify capital projects that will increase shareholder wealth. However, human nature, being what it is, causes business managers to be overly optimistic about the prospects of capital investment. There has to be a counterbalance to this business optimism, otherwise businesses will take on too much risk in the pursuit of profits. That counterbalance is an independent group—often part of corporate management—that is responsible for deciding if further investment is warranted. Said another way, this “investment committee” is meant to prevent the authorization of funds for projects with business cases that overstate the expected return on investment. However, if the investment decision process is so onerous or demands a very narrow range of outcomes before a project can be approved, the company will be too risk-averse and pass on projects that would have otherwise delivered positive returns. Striking a proper balance and maintaining it over a long period has proven to be very diffi cult for many companies.
IPA works with companies in many industries, from mining, minerals, and metals, to petroleum exploration and production, to food and consumer products, and others. How are differences in approach addressed in the seminar?
Overall, governance and gatekeeping does not differ much in form by industry. The questions asked and answered at each stage gate are about the same. What is different is the information developed and used for project decision-making. For instance, the viability of a petroleum or minerals production project is highly dependent on the quality of a reservoir or resource. For specialty chemicals, assessing customer preferences for certain product characteristics is a key input to determining the attractiveness of the project. In both cases, the potential revenue from the investment is a key parameter in deciding whether to continue with the project. The course material we bring to each training session is general enough to cover all industries, but contains specifi c examples tailored to different industries.
Tell us about the research study on capital project governance that you presented at the Industry Benchmarking Consortium (IBC) in March 2013.
The study I presented at the 2013 IBC, “The Dysfunctions of Capital Project Governance Boards,” delved deeper into the subject of steering committees and how these committees function. Steering committees are groups of managers that, as the name suggests, give projects direction. These committees supervise project teams and in many cases endorse projects prior to the investment decision. The study looks at the strengths and weaknesses of steering committees and examines some practices for making them work better.
Who benefits the most from the seminar, beginners, or those with previous gatekeeping experience? And what have you enjoyed most about teaching the seminar?
One of the hardest things about developing the course was preparing the material for people with a wide range of experience and backgrounds. The material is broad, but I try to cater more to the experienced practitioner by emphasizing areas and roles in governance and gatekeeping in which they are likely to be less familiar.
It is always fun to talk to people who are involved in governance. Their backgrounds span the gamut from making the investment decision, to doing assurance reviews, to working on project teams. Because governance and gatekeeping can be organized in different ways and still produce good results, discussing the merits of different structures always surfaces some interesting issues. We get some great dialog between participants, which really adds to the value of the session.
Is there any advice that you can offer up to individuals involved in the gatekeeping process?
That’s a good question. Governance and gatekeeping break down when people do not know what their roles are. And so, my advice is, if you’re new, to learn the company’s rules and the reasons those rules are in place. For example, do you know why it is important for the project sponsor to give the project team clear business objectives to work on? If you know why things are important, you are more likely to follow the rules.
If you are more experienced, the thing you’ve got to remember is people around you may not have as much experience as you do. So, one of the things you continually need to do is educate others. You may have 20 years of project experience, but members of the team whose work you are reviewing may only have one or two projects under their belt. You need to be patient with them, explain their roles, and help them out along the way.
We thank Paul Barshop for sharing his knowledge and insight on capital project governance. Follow this link to learn more about the IPA Institute’s Gatekeeping for Capital Project Governance course.