A great time to cancel bad projects

There is nothing like using bad news to cover up your own mistakes.

Announcements of project cancellations in recent weeks reek of managerial opportunism – with the plummet in commodity prices there has never been a better time to cancel bad projects with a minimum of investor consternation.

As a long term project and valuations specialist in mining, clean energy and oil and has I have seen both from the inside and as an observer just about every variation on project initiation and project death.

There is a basic rule of thumb – the bigger the hype up front, the harder it is to kill a project. There is even a phrase for this,  “the hiding hand of the market’.

Here are a few of the variations I have seen on using bad news to allow companies and governments to kill bad projects.

1.  Let it die a natural death – typically expressed as ‘additional funding couldn’t be found in the current market’ – or some other variant of this. Funding is doled out over time, reducing each quarter, somehow the project never progresses, and lower and lower calibre staff and project management are brought in to flog the dead horse until it slips out of the memory of everyone. One variation on this is to put it up in a special project office away from the rest of the organisation, this makes it easier to kill off as the project office is like a leper colony in that nobody wants to know them or help them.
2. Political finger pointing – ‘the carbon tax renders our project uneconomic’, or ‘the change in the royalty regime has forced us to cancel our projects here and look at opportunities overseas.’
3. Supplier greed – this one is typically used by government to kill their white elephants – variations around construction contractor greed, or the greed of other financiers, etc. is used to kill a bad idea.
4. Don’t blame me, it was my predecessor – typically when a new management team or government come into power there is a honeymoon period during which investors or voters will allow you to throw out stupid ideas and projects, blaming the inherent idiocy of the prior incumbents for poor decisions.
5.  Homeopathic approach – in the same way that homeopathic remedies dilute ingredients to the point that the ingredient is statistically unlikely to be actually present in the remedy, management and government never waste an international headline grabbing event such as 9/11 or a plane crash to slip out press releases. That way, there is so much other news and reportage happening that the chances of anyone picking up on your bad news, let alone publishing it, are close to zero. Governments in particular must have a slew of press releases ready to release in such an event. If you think I am being cynical about this, you need to have a look at press releases when such events happen – it is enlightening.

There are surely many more bad news events used to mask press releases, and variations thereof. Any suggestions on others are welcome.

There is some truth in the excuse that it is difficult to fund projects in this low commodity price environment. As share prices drop, the balance sheet shrinks, and the ability to take on new debt also decreases. Commodity price drops lowers your ability to service new debt. And bankers (as much as I like you guys) become massively risk averse.

If a project truly is a good idea, but commodity prices plummet, you will do whatever you can to preserve an option to pick that project up in a few years by putting it on a drip feed, or you may still go ahead if you believe commodity prices will recover in time for completion.

Using market conditions to kill a project is an excuse, not a reason.

In the end, it is good for companies to kill uneconomic or plain daft projects, but when you see rank opportunism used as the excuse to kill a project then if you are an investor I would say it is time to agitate for a change in the management, if not the Board. 

Has outsourcing gone too far? - a few comments on the trend of firing technical subject matter experts to save money.

The outsourcing of corporate functions has become the default answer in the current round of cost cutting. The numbers underlying this trend are simple: reduce the headcount of people who you only use for part of the year, then bring in consultants as you need them.

The logic is compelling, however, the problem comes when everyone decides to do the same thing.

In the market right now, I am seeing major companies making their technical subject matter experts ‘redundant’, with the accompanying statement, “we’ll just buy in expertise when we need it.”

I would like to challenge that on two grounds; one, the consultants may not be as expert as you think, and two, they may not have the experts available when you need them.

Your team should be better than consultants

Your technical subject matter experts (usually engineers) have spent years learning how your plant works over the various maintenance cycles. They have been keeping abreast of trends and changes in technology, they have been assessing the validity of claims by vendors and consultants, and they have been tweaking and trying out changes to see how they help improve production and reliability.

YOU CAN’T BUY THAT EXPERIENCE OR EXPERTISE FROM CONSULTANTS!!!

I make a living out of selling consulting in these areas, and even I think the trend has gone too far. [If you need a hand with technical subject matter experts, please give me a call. ;-)  ]

What you need is to be an informed buyer. You can’t afford to let the consulting firms try out untested theories or to train up their own people by learning things the hard way. That will cost you more money over the next couple of years than keeping a few of the grey-hairs around.

Yes, you can hire in consultants and contractors to form your owner’s team on projects, however there are two flaws in doing this in the current market. First, with capital rationing and cost cutting in effect you are unlikely to receive a budget adequate to do this. Second, the best people to do this are the same subject matter experts who you have just let go – and they are all on gardening leave or acting under restraint of trade clauses - so it's not a simple matter of hiring in someone who used to work for a competitor.

What happens when everyone decides to outsource, but not buy the service.

The biggest problem facing companies at the moment is that everyone is attempting to outsource, but they are putting off using those skills for as long as possible. In other words, they are firing their subject matter experts, then telling the consulting firms that they will use them in the future, but no one is buying the services for the next 12 to 18 months.

In case you hadn’t heard, most of the engineering consultancies have reduced their staffing by 50% to 75% over the last 12 months, and, for the listed firms at least, if staff aren’t 80% billable, then they are let go. In other words, if nobody is offering work to the specialist subject matter experts, then the engineering consultancies can’t actually offer the skills the companies need as they fired those teams before you could use them.

The answer is to pay to keep your core competencies in-house

The antidote to all this is to recognise that your company has a core set of technical competencies that need to be retained in order for your company to maintain its competitive edge and grow in the near future. I am not talking about keeping everybody – I am talking about keeping those people who understand in intimate detail how your plant works, why decisions were made, where you can take a bit longer in the maintenance cycle and where you can’t afford to be cheap as it will cost you too much.

When a company is run solely by commercial types with an attitude that everything can be outsourced, then you know your company is truly in trouble. Sure you may be okay for the next 12-18 months, but if you don’t maintain your core technical competencies, then that will come back to haunt you.