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Abstract
Purpose – The purpose of the paper is to discuss the complex issues, obstacles and factors that can
have a significant role and influence on the implementation and execution of a performance-based
industrial service strategy.
Design/methodology/approach – A case study has been performed the oil and gas industry which
maps the issues, challenges and opportunities in the process of implementing and executing a
performance-based service strategy.
Findings – The study identifies differences in practice with respect to conventional as compared to
performance-based contracts. Furthermore, performance factors (i.e. cost drivers, performance killers
and critical success factors) of the service strategy implementation and execution process are
discussed in relation to the oil and gas industry in the North Sea. A performance-based service
strategy needs to be upgraded, modified and customized based on performance measurements, as well
as needs, wants and preferences of the involved parties during the contract period.
Practical implications – The findings and discussions will help service strategy developers,
implementers and executors to recognize the importance of a focused service strategy development
process for industrial services. Moreover, the paper will guide developers, implementers and executors
to decide about factors that need to be considered.
Originality/value – The framework discussed can be used to develop a performance-based service
strategy. The results of the research will ease the process of understanding and defining the
implementation and execution process of a strategy by presenting the possible performance factors in
advance.
Keywords Industrial services, Service delivery systems, Performance criteria, Corporate strategy
Paper type Case study
The authors would like to extend their gratitude to C-Partner, AkerKvaerner Offshore Partner,
and AkerKvaerner Operations, as well as the Center for Maintenance and Asset Management at
the University of Stavanger for financing this research study. Furthermore, they would like to
thank all the excellent employees in these companies and other companies for giving their
valuable time to participate in the case study interviews as well as for providing the authors with Journal of Quality in Maintenance
Engineering
relevant documents and information. The authors also would like to express gratitude to the Vol. 12 No. 2, 2006
reference group for guiding the research and for sharing their extensive knowledge and pp. 105-117
q Emerald Group Publishing Limited
experience. Finally, they would like to thank Doctoral student Sukhvir Singh Panesar at the 1355-2511
University of Stavanger for providing valuable suggestions. DOI 10.1108/13552510610667147
JQME Introduction and background
12,2 In Norway the oil and gas (O&G) industry is entering a new era of development as the
production in some of the fields has entered or is entering the tail-end phase. In this
phase unit operational costs increase due to declining production and stagnant or
increasing operational and maintenance (O&M) costs (NPD Report, 2003). To prolong
the economic lifetime of the field it is essential to reduce the operational expenses
106 (OPEX), and/or to raise the production volume. This may be feasible if the involved
parties manage to get control of the OPEX, and cooperate to optimize performance.
Kumar et al. (2004), underline that “. . .the role of supporting services needed to
exploit product’s function to an agreeable performance is becoming increasingly
important”. Industrial service contracts need to be negotiated carefully to avoid
disagreement and inadequate performance. Companies are becoming progressively
more dependent on service providers to deliver performance at a competitive level
according to stakeholders and market demands. However, to be able to achieve this the
service delivery process need to be carefully defined, negotiated, and agreed upon
considering involved parties’ needs, wants and preferences. Moreover, a service
strategy need to be defined on how to implement and thereafter execute the agreed on
service strategy. One needs to assure that there is no force that can influence the
process in such a way that it threatens to become critical and/or a stopper (Grundy,
1998).
This demands a different business approach for both operator and service
companies. Effective and efficient service strategies are needed where major influence
and performance factors are considered, as well as customers’ demands and
requirements and providers’ expertise and competence (Kumar and Markeset, 2005). In
other words, a prudent organization needs to formulate a service strategy that is
“appropriate for the organization, appropriate for the industry, and appropriate for the
situation” (Alexander, 1991). He further emphasizes that effective strategy
implementation and execution relies on maintaining a balance between preventing
failures and promoting success simultaneously. When there is a proper alignment
between strategy, administrative mechanisms and organizational capabilities, it will
be easier to implement and execute the strategy and to achieve the desired objectives
(Okumus, 2003).
However, a well-developed service strategy does not automatically mean well
implemented (see also Al-Ghamdi, 1998). Strategic management gradually is shifting
from paying 90 per cent attention to strategy formulation and 10 per cent to strategy
implementation, to paying equal attention to both (Grundy, 1998). Traditionally, it is
believed that strategy implementation and execution is less glamorous than strategy
formulation, and that anyone can implement and execute a well-formulated service
strategy. Therefore, implementation and execution has attracted much less attention
than strategy formulation or strategic planning (Alexander, 1991; Bigler, 2001).
Organizations face difficulties while implementing and executing their strategies for
different reasons. There is uncertainty about what these processes include and where
they begin and end. Such uncertainty includes weak management roles in
implementation, a lack of knowledge and communication to guide their actions,
unawareness or misunderstanding of the strategy, poor coordination, inadequate
capabilities, competing activities within the working team, unfortunate marketing
timing, uncontrollable environmental factors, misaligned operation and insufficient
monitoring and evaluation of the process (Alexander, 1985; Gilmore, 1997; Okumus, Industrial service
2003). strategy
Considering the above discussed scenarios a performance-based service strategy
framework was developed as shown in Figure 1. See Kumar and Markeset (2005) for
details. In the framework, factors and their attributes are ranked based on their level of
influence on a service strategy. A list of critical success factors, performance killers and
cost drivers of service strategy and named as performance factors has been presented 107
as well. The framework has been validated for the O&G industry, but can be used for
other industry as well.
In the service strategy implementation process, resources are allocated and an
organization is designed and built to make it possible to carry out the strategic plan
(see also Mintzberg, 1978). Alexander (1991) points out that “strategy implementation
addresses the issue of how to put a formulated strategy into effect – with defined time
constraint, within budget, and human resources, and its capabilities”. In the service
strategy execution process, the organization utilizes the resources to deliver the
services, and to carry out the strategic plan on a continuous basis throughout the
predetermined life cycle. “Without an executable plan – and the resources needed to
implement that plan – even the most innovative strategy is merely words on paper”
(Wery and Waco, 2004). For more details on the strategy formulation and strategy
implementation see, for example, Porter (1980); Hope and Mühlemann (1997); Aaltonen
and Ikävalko (2002). Service strategy implementation and execution is a complex,
crucial and challenging part of the service delivery process. Figure 2 gives an overview
of strategies and service strategy process phases.
In this paper we will discuss the implementation and execution process of a
performance based service strategy. We emphasize that strategy implementation and
execution are different in the respect that implementation has to do with making
resources available and setting up detail plans for strategy execution, whereas the
execution phase the plans are enacted and the resources used. However, in the case
study the main emphasis is on the execution phase. We will present obstacles and
factors that can have a significant role and influence on service strategy execution.
Furthermore, we will present performance factors (e.g. cost drivers, performance killers
and critical success factors) that need to be considered in following-up a service
strategy execution process. Our goal is to describe the complex issues that need to be
considered in a service strategy implementation and execution process.
Figure 1.
A framework for the
development of a
performance-based service
strategy
JQME
12,2
108
Figure 2.
An overview of service
strategy process phases
Case study
To obtain a broad picture and to map the implementation and execution process of a
developed service strategy, a case study was conducted where we studied the contract
for two oil and gas production facilities in the North Sea. We focused the study on the
implementation and execution process of a service strategy. Furthermore, we mapped
two different types of ongoing contracts contents, i.e. a production facility maintenance
and modifications (M&M) contract and a production facility performance based
operational (PBO) contract.
The main purpose of the case study is to map the implementation and execution
process of the performance-based service strategy framework (as shown in the box
with broken lines Figure 1).
To get an overview of the complexity of a service contract we first compared the
content of an M&M contract and a PBO contract. The M&M contract concerns the
maintenance and modification of a production facility located on the Norwegian
continental shelf (NCS), while the PBO contract concern the operation of a production
facility located on the UK continental shelf (UKCS). Secondly, we conducted guided
interviews with management and operative personnel from different companies who
were involved in the implementation and execution process of these contracts.
The interviews were summarized and verified. Some interviews were tape-recorded.
We used the same questionnaire for all participants of the case study. A reference
group with two participants from industry and three senior researchers was
established to assure quality and to guide the research project. Initially, a draft copy of
the questionnaire was sent to the reference group members and some relevant
personnel from the targeted companies as a pre-test to improve the quality and to
validate the questionnaire. They were requested to give their feedback concerning
ambiguity, non-relevance of the survey for the study, etc. Their comments and
suggestions were considered and implemented.
The research data and information were gathered from four companies (i.e. the
production facility owner, production facility operators, and service providers). We
interviewed 13 employees from top management, middle management and operative
personnel. Conclusions and suggestions are drawn based on collected information from Industrial service
documents, experience, and interviews. strategy
To get an overview of service strategy formulated goals and intentions we analyzed
the contracts with respect to focus, differences and contents. Thereafter, we analyzed
the interviewed participants’ responses.
109
Analysis part 1: contract comparison
The M&M contract. In the M&M contract all terms and conditions (e.g. time period,
amount of work, cost, hours, etc.) were defined. The payment was based on hours
within a specified timeframe and budget. In the M&M contract there were conventional
and straightforward contractor-client relationships. The client defined the
requirements with respect to work scope and volume. Thereafter, the contractor
fulfilled the defined requirements at agreed time and cost. The M&M contract content
can be summarized as:
.
scope of work;
.
method for payment (hourly-based);
.
time-cost-resources focus;
.
performance goals and incentives;
.
requirements with respect to HSEQ (health, safety, environment and quality);
. subcontractors’ roles and issues;
.
liability issues.
The contractor provides the M&M support services specified in the contract, whilst the
customer (client/operator) has the responsibility for the operation of the production
facility. The production facility operator arranges beds, transportation, access to the
work site, and all main safety functions for personnel, plant and environment, for the
service process.
The PBO contract. In the PBO contract all terms and conditions were defined as
well. However, since the contract implementers and executors receive payment based
on performance, both parties seem to be more flexible than in the M&M contract. In the
early stage of the contract, an execution model was developed, but the model had to be
changed several times during the contract period. The changes were made on the basis
of the client’s needs and preferences, identified gaps between actual delivered services
and required services (as defined in specifications), as well as the performance of the
service provider.
In the PBO contract the contractor and client collaborated and shared risks, but not
profits. Roles, responsibilities and liabilities during the project life were clearly defined
in the contract. The content of the PBO contract can be summarized as follows:
(1) scope of work;
(2) method for payment (performance-based incentive compensation model with a
bonus scheme based on cost reduction and HSEQ goals);
(3) responsibilities with respect to safety (the safety case);
JQME (4) cost structure based on key performance indicators (KPI) – cost driving: HSEQ,
12,2 production level, cost reduction: OPEX (operational expenses) targets, profit
basis, administrative costs;
(5) team based integrated management;
(6) liability issues.
110 Analysis part 2: analysis of guided interviews
The guided interviews focused the contract implementation and execution. The
questionnaire was divided in three major focus areas:
(1) Mapping of industrial service process.
(2) Contract execution model.
(3) Service strategy performance measurements.
Mapping of industrial service process. Analysis of the responses revealed that both
contracts are similar to some extent. Almost the same types of services are required to
operate, maintain, and modify a production facility. Common contract reasons were
identified, such as sharing risks, requirement with respect to buying the required
services at competitive rates, HSEQ, etc. However, the implementers and executors of
the PBO contract were more focused on reduction of operational expenses (OPEX) and
maintaining HSE standards. The implementers and executors of the M&M contract
stated that:
.
The focus was on their core business activities.
.
Cost benefit analysis is the basis for the contract.
.
It was not worthwhile to have all kinds of service expertise in-house. Some
services can be bought in the market at competitive rates with the required level
of competence.
The implementers and executors of the PBO contract stated that they work very
interactively and closely with their customer. The PBO service provider was
responsible for the operation of the production facility, but both the client and the
service provider were involved in the process of running the production facility.
Therefore, an interactive relationship was required. A whole year was spent
integrating personnel and organization of the two parties to assure that everybody was
working towards the same goals.
Contract execution model. To ensure the achievement of requirements and goals of
the customer, service provider (contractor) and authority, the service provider
normally develops a contract execution model. This is often referred to in the industry
as a project execution model (PEM). The PEM is developed in the early stage of the
project, and thereafter followed throughout the contract period. Figure 3 illustrates a
typical PEM for an M&M type of contract as used by some of the companies on NCS.
The M&M type PEM normally covers multidiscipline engineering projects where
progress and quality is very much dependent on excellent internal and external
activity coordination. The main objectives of the PEMs are to control management,
assure and maintain HSEQ, streamline the execution process, and create clear and
transparent interfaces between the involved parties.
Furthermore, the PEM describes which, when, and how activities are to be Industrial service
performed, and functions as a basis for interface between involved parties. The PEM strategy
defines work orders, roles, interfaces, responsibilities, and the time-period.
Furthermore, checklists, tools, standards and procedures are referred to, and
milestones, processes, influencing factors, acceptable quality level, etc. are defined as
well. Some key deliverables of a PEM include, for example, a pre-study report, task
schedule, supplier documents and drawings (SDD), system processes piping and 111
instrument diagram (P&IDs), engineering registers, 3D models/layout, installation
method, etc). Normally, a PEM is defined for:
.
new large production platform construction projects;
.
larger modifications projects;
.
M&M projects;
.
PBO projects;
.
installation removal projects.
The PBO contract implementers and executors stated that the original project
execution model was very different from the updated model currently in use, and that it
is an evolving and developing process. Activities not needed were removed or adjusted
which resulted in substantial cost reductions over time. On the other hand, M&M
contract implementers and executors stated that the PEM was more or less defined and
fixed throughout the project life cycle.
Implementers and executors of both types of contracts gave examples of factors
influencing a contract implementation and execution process. Some of them were
related to:
(1) People and relationships:
.
relationship with and between management and personnel;
.
culture of company;
.
communication;
.
trust and dialogue;
.
openness and commitment;
.
level of turnover of personnel;
.
age combination of personnel.
(2) Management and performance:
. management philosophy;
.
mutual understanding between involved parties;
.
alignment of objectives;
Figure 3.
A typical PEM for an
M&M type of contract
JQME .
focus on performance;
12,2 .
HSEQ (health, safety, environment and quality) mindset;
.
delivery as promised.
(3) External factors:
.
oil price;
112 .
government regulations and policies.
115
Concluding remarks
To realize the objectives and to create maximum value for involved parties, the
service strategy needs to be implemented and executed appropriately. Moreover, to
achieve customer satisfaction and to create a win-win situation in the market, gaps
between required and delivered services need to be avoided (Kumar and Kumar,
2004). Thus, a service implementation and execution framework that responds to
the requirements of all involved parties is needed. Hiles (1994) asserts, “Whatever,
service targets are set, they must be stretching but achievable. Under-promise and
over-achieve” seems to be the motto of successful implementers (also see
Manarro-Viseras et al. 2005).
The service strategy developers, implementers and executors should clearly
understand the process requirements and preferences. Based on this, they should be
able to predict obstacles and prepare for possible solutions before the strategy is
implemented and executed. Moreover, it is necessary to monitor what is actually
happening to analyze how to deal with emerging problems, to seek solutions and to
decide what modifications might be needed. When developing a contract
implementation and execution model, implementer and executor attempt to consider
all possible influencing and performance factors and to predict what services will be
needed.
To ensure that a chosen strategy is effective as well as efficient, one needs to be
aware of the related strategic and operational issues, challenges and opportunities that
arise at various stages of the implementation and execution process as well as need to
be flexible enough to adapt to changes to compete in the market. Services are based on
relationships, finding solutions to customers’ problems, and building relationships.
The services’ content is delivered in processes and driven by people.
Figure 4.
Service strategy
implementation and
execution process
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117
Corresponding author
Tore Markeset is the corresponding author and can be contacted at: tore.markeset@uis.no