CHAPTER 3
Business Theory Aspects of RBP
Chapter 3 Introduction
In this chapter, we discuss some of the most relevant business theory and theoretical concepts relating to relationship-based procurement choices.
Figure 7 outlines the subsections for this discussion. We begin with a business justification for outsourcing because the make-or-buy choice is an important strategic decision. This is followed by some fundamentals on governance, because that aspect determines how the RMP approach will operate. We also discuss some relevant issues surrounding globalization and general complexity faced by POs.
The Business Justification for Outsourcing
The rationale for infrastructure projects is to deliver a particular set of facilities that in turn generate the required benefits. The project is a means to an end. The rationale (business case) for these projects should be clear and well enunciated. Risks and uncertainty should be well understood. If the base organization (government or private) is clear about the nature of that need, then a clearly scoped and specified brief can be developed to seek tenders from project deliverers. The rationale for sourcing internally or externally can be made, applying an economical, strategic, or tactical/pragmatic logic.
The Economic Logic
This logic is derived from transaction cost economics (TCE). Coase (1937) is credited with developing the notion of TCE. Williamson (1975; 1985; 1991), who cites Coase, explains TCE as being an economic way to explain the rationale for sourcing products or services internally or externally. TCE theory is about the motivation and rationale behind the decision to either do something yourself or get somebody else to do that thing for you. In essence, TCE theory explains decisions to make or buy an infrastructure item such as a bridge, tunnel, hospital, etc. by a government body. The choice is to source this entirely internally (to make) or to (buy) through a subcontract, or to outsource in other ways to get others to develop the item. Undertaking the work internally may involve hiring specialist skills and resources if these are not available when needed, and that can cost money. Even if an organization has the internal resources, the opportunity cost may be high in terms of money and management effort. This cost may exceed the value gained, because those resources may already be engaged on more valuable projects.
There is a transaction cost for getting others to do the work. This includes obvious costs, over and above the resources that may be common to an internal purchase of required resources, such as a search cost to find and recruit bidder,s as well as the cost of tendering, and, of course, the contract management and communication costs incurred. The rationale explained in purely economic terms is that if the cost to do this externally is less than doing so internally (due to efficiency of external sources and perhaps their innovation and intellectual property being superior to that available internally), then it makes economic sense to source the item externally. However, this is an economic rationalist view. In reality, governments and corporations make these decisions based on a range of both rational and emotional criteria—risk assessments, avoiding specialized skill and expertise shortages, social factors (keeping a vibrant and viable private sector), as well as a host of reasons that may be entirely political in nature.
This has an impact upon RBP in terms of the TCE perspective of the cost of trust, because RBP forms are founded upon mutually trusting behaviors between the commissioner of an item and those responsible for delivering it. The cost of trust in project alliances, and ECI for example, becomes apparent in terms of the required probity measures, the cost to the commissioner of the item to supervise the relationship, and costs incurred in developing and maintaining trust. The cost of tendering, selecting, workshopping, relationship building, etc., must be balanced (according to TCE theory) against a comparator of a traditional design, tender, build, or variant of that procurement model. However, a focus on cost has been supplanted by a concern for value (Thiry, 1997; Thiry & Deguire, 2007; Walker & Hampson, 2003b; Walker & Rowlinson, 2008b). The value of developing a mutually trusting relationship as an antidote to wasteful disputation and game-playing tactics to gouge extra money in projects has for a long time been recognized (NBCC, 1989) as a goal worth achieving as a value enhancement and waste-reduction tactic.
Further, the value of knowledge sharing and exchange is now becoming appreciated and ingrained in project procurement decision making (Walker & Maqsood, 2008). This occurs from the perspective of clients better sharing knowledge with a project design team to explain what they need and why they need it, and from the perspective of the design team sharing knowledge with those that will build and maintain the output, for example a hospital, so that not only efficiency is gained but also effective solutions are proposed and considered. While knowledge value in VfM terms has not been very effectively monetized, there is a broad acceptance that even in terms of management energy and attention, the value of effective knowledge sharing is real and should be considered more seriously.
The Strategic Logic
This logic places the organization's strategy as the prime motivator. Thus, if an organization's strategic aim is to divest operations and focus on identified core competencies, and if these do not include “making,” then the organization will choose a “buy/outsource” decision. Porter (1985) describes three types of competitive advantage: cost, position or customer focus, and differentiation advantage. As he puts it,
Competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm's cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price…Interrelationships among business units are the principal means by which a diversified firm creates value’ (Porter, 1985, p. 3).
All three competitive advantage issues are relevant to both government POs and their NOPs in alliances. Cost advantage tracks back to an ability to provide what is quite easily visualized as VfM. The most economical and efficient solutions are developed and delivered. Customer focus relates to the ability of alliance team participants to develop a client-oriented, or in the case of PAs, a best-for-project culture so that they are focused on delivering effective as well as efficient project outcomes. This may be also quite easily visualized in empathic behavior of being keen and mindful in understanding the project owner's fundamental need, so that tacit or implicit expectations are met. In this case, NOPs may, for example, challenge explicit assumptions about what is specified and engage in a debate to unearth better value solutions and approaches to project delivery. Differentiation may be evident in a number of ways. Project owners may differentiate themselves within their organization by proposing projects that present incremental or radical innovation, for example, a road or rail project that helps a transport system better perform in aggregate. NOPs may differentiate themselves through developing a specialized bundle of skills or having a special history of participating in projects where that potential knowledge and experience may be useful in niche specialized areas or as integrated solutions.
This view of sustainable competitive advantage links in well with TCE in explaining the rationale for RBP and the context of required skills, knowledge, and other attributes. Potential criticism about alliancing centers upon the cost of governance, for example, team establishment costs, VfM reporting, and probity. Many infrastructure projects may be purely focused on VfM, but what does VfM actually mean in this context? How does it compare with more traditional and transactional approaches such as DBB forms or D&C that has its focus purely on cost/time and end product quality performance. This criticism of alliancing needs to be seen in term of differences between cost and value within a context of urgency, long-term sustainability and business viability. A best-value paradigm embraces triple bottom line (3BL) project outcome objectives, which may include general industry upskilling or cultural change to a no-dispute or at least minimal-dispute project environment. For project managers, to understand an environmentally sustainable focus on PM will naturally require additional and different skills, knowledge, and attributes to that of a pure VfM performance paradigm. More traditional transactional procurement approaches involve many hidden costs that are borne by the NOPs through the overall cost of multiple tenderers or high governance costs associated with adopting a high control emphasis on project administration. This can result in high disputation and legal costs. VfM does require attempts to acknowledge the value of intangible outcomes inherent in 3BL outcomes, but the very presence of the word “money” in VfM presents difficult challenges in valuing, for example, knowledge, goodwill, collaborative behavior, and other people-supportive behaviors—all skills and attributes that are essential for alliancing. Adopting a best-value procurement basis rather than a VfM focus can present demanding challenges. Therefore, different skills and attributes are necessary for RBP projects than traditional approaches. This helps explain the need for acquiring these skills in project participants as well as their special competitive advantage skills associated with customer focus and service differentiation. Often the pool of potential alliance team members with the required skills and attributes is very small, hence the traditional procurement approach for these projects fails on TCE grounds. The search cost and development cost can be very high. Therefore a best for project/client mindset by the PO and NOPs is essential when the competitive advantage of providing a customer focus is a key strategy driver.
The Tactical/Pragmatic Logic
The outsourcing of project design and delivery may be triggered by a purely pragmatic (lack of) choice. The National Museum of Australia procurement choice of project alliancing was made on the basis of it being considered as the only choice that could deliver the project by the required time as a political promise of a gift by the Commonwealth Government of Australia to the nation (Auditor-General of the Australian National Audit Office, 2000; Walker & Hampson, 2003d). While one view of a government project procurement choice of this kind may be seen as expediency or vote-catching, it can also be argued as a pragmatic response to deliver on a “sacred promise” to stakeholders (voters). Certainly, an RBP choice with an aim of selecting, on the basis of local skills, a local workforce as a means to maintain a viable livelihood to an area is both pragmatic and understandable. Much of the Christchurch, New Zealand earthquake recovery project work is being undertaken on an RBP basis to alleviate severe economic and social distress in that area. This makes valid pragmatic sense.
We can envisage instances where an organization has adequate internal resources to design and deliver a project but chooses to outsource to gain a fresh approach that may deliver unanticipated value in terms of learning. The idea of a “skunkworks” (Tulley, 1998; Wolff, 1987) is relevant here where a radical or controversial project is “insourced” to an especially quarantined group to undertake projects that may need to be undertaken under a radically different organizational culture or governance framework. This happens more frequently in very quick-to-market settings such as radical new product development or radical process change projects such as in the communications sector as described by McKenna (2010).
Governance Fundamentals
Much is written and spoken about governance and it has a certain authoritative ring about the term, but what does it actually mean in an RBP context? Klakegg et al (2009, Chapter 2) provides a useful summary of public sector, corporate, and project governance. They point out that the concept can be understood from a number of perspectives and they cite several including bureau-shaping, instrumental-structural, network, cultural-institutional, and environmental perspectives. Projects are instigated by a PO who has certain responsibilities and obligations, and the project is delivered by a team of PM team specialists who also have certain responsibilities and obligations.
Governance Concepts and Definitions
Müller (2009, p. 2) provides a simple and understandable definition of project governance. He states that it is “a framework for ethical decision making and managerial action that is based on transparency, accountability and defined roles. It also provides a clear distinction between ownership and control of tasks.” He later brings in concepts of governance being linked to the values of the organization and further develops a typology of governance frameworks based on an outcome control focus or behavior control focus on one dimension and a shareholder orientation or stakeholder orientation on another dimension to create a 4×4 matrix. This provides a useful typology of government paradigms.
Müller refers to a flexible economist paradigm for an outcome control focus with a shareholder orientation. This seems to be most aligned with a traditional DBB form of procurement and many D&C variants, where the worldview is very performative in terms of contract wording and conditions while maximizing protection and advancement of the home-base companies involved, so that each team is aware of its obligations to its shareholders as their top priority. There is a high level of concentration on competencies and a tendency to take a knowledge exploitation rather than a knowledge exploration stance.
A behavior control focus with a shareholder orientation is termed a conformist paradigm. This worldview, as with the flexible economist, has its shareholders as the prime expected beneficiaries of the transaction while adhering to contract obligations, but there is greater emphasis on following due process and behaving in a manner that relies on setting people's behavior patterns in alignment of objectives rather than relying on output targets and KPIs, etc.
An outcome-control focus based on stakeholder orientation relies upon hard performance measures as well as so-called “soft” qualitative measures that deliver intangible benefits to a broader base. This versatile artist paradigm does respect the validity and value in balancing demands of various affected entities, and viewing success in this light rather than by purely economic KPIs.
The final paradigm that Müller (2009, p. 11) identifies is the agile pragmatist. This worldview has a behavioral control focus but with a stakeholder orientation. Success is seen to be project efficiency, effectiveness to all parties that have influence, as well as making a contribution to longer-term business success.
Our perspective from Müller focuses on RBP approaches that are clearly more stakeholder than shareholder focused and are more behavioral than control-outcome focused. RBP approaches are designed to be team inclusive and to align best-for-project behaviors, ethical dealings and these generally have a high focus on triple bottom line (3BL) outcomes. We can see how this may affect the way that a procurement approach can influence the requirements for governance arrangements. Figure 8 serves to guide this discussion.
Figure 8 provides us with a framework for discussion for this section. It takes a structural and behavioral perspective that acknowledges an institutional perspective in terms of legal and regulatory requirements. It provides an illustration of the nature of the organizational structures, how these are institutionalized and embodied in the governance arrangements, and how accountability and transparency influence and provide trust and credibility in this system's capacity to deliver the means to enact the designed governance framework. It also helps us to understand how governance can impact upon ethical behavior.
We investigate RBP from an organizational structure perspective of governance to better understand it in a global context and to enable us to suggest and recommend how we can design a procurement system to effectively deliver value and benefit through an organizational form. Clearly, part of this involves designing a protocol that facilitates effective delivery of the benefit and value through the project vehicle, and this means that we need to understand how that protocol might work and what knowledge skills, personal attributes, and experience would be required.
Organizational structures for governance
Figure 8 illustrates the governance system as having “hard” and “soft” features. The “hard” features include elements relating to the organizational structure design and resource engineering to sustain that structure. Finding and applying the required resources to deliver the project will influence and be influenced by the organizational design. The way that resources are distributed and who is accountable and responsible for those, how risks are managed, and how incentives and penalties should apply are all part of the chosen or designed governance framework.
Figure 9 illustrates a generic project organizational design. The top level represents the executive leadership team that makes high-level strategic decisions. In the case of traditional projects, this team would be external to the project and would be positioned in the hierarchy above the Team 1 to Team n organizations. They would lead company boards of suppliers, subcontractors, designers, and the system integrator. In JVs, that executive leadership team may be created for a specific project or the JV may be engaged in several projects accountable to this board. In project alliances, this high-level board would be called the alliance leadership team (ALT) and would be composed of senior executives from participating organizations. A second-tier senior management team would make mid-level strategic and tactical decisions. Each of the teams would have their appropriate hierarchy to undertake the work. Each level would have its own designated limits and constraints on what it can approve and be authorized to do, and any conflict or questions or required approval would be passed up the chain using a well-understood escalation strategy.
The organizational design may be in the form of a project management office (PMO) or a temporary organization made up of project teams from a range of subcontractors, suppliers, designers, and system integrators. It may be hierarchical or relatively flat in terms of authority levels. It could be co-located or virtual. There are many potential forms: the point we make is that the form should be designed to suit the project design and delivery objective. In more traditional projects, there would be a project integrator organization and each contributing entity would have supporting teams. All teams would have their own reporting arrangements to their organizations, boards, hierarchies, etc. Very large projects would resemble a stand-alone company in many ways as would JVs.
Other “hard” elements illustrated in Figure 8 include the rules, regulations, procedures, work processes, codes of practice, etc. All these are designed, or evolve, to attempt to provide order and guidance to the way that the project is managed and the way that people interact. The external legal and regulatory system that imposes laws, regulations, and processes to obtain and lodge permits etc. provides an addition element of governance to internal and designable governance elements.
Implicit in this, and supporting the governance framework, is a platform that provides communication of data, information, and knowledge as well as decision support through modeling and visualization tools. These may be unintegrated, which may or may not pose interoperability problems, and they may be shared. This platform may be as crucial as the governance system itself in facilitating collaboration and control.
Taking a cultural-institutional perspective of governance led us to include the soft, often forgotten, aspects of governance that include collaborative networks. Even the most transactional and hard-edged procurement approach requires a set of suppliers and subcontractors and unofficial as well as official sources of advice from past projects and associations. These networks have varying value to the project but often they remain unrecognized and/or poorly appreciated. RBP approaches tend to be more active in recognizing their value and, in Australia, the Infrastructure Partnerships Australia (IPA), for example, provides a valuable network of participants in PAs that regularly meet and exchange knowledge. A particularly interesting example of a collaborative network that is used as a governance mechanism to enhance collaboration and business transformation opportunities for change and supply chain integration projects in Latin America is the Atlantic Corridor. Interested readers can refer to Arroyo's doctoral thesis (2009) or several publications that focus on case studies from that work (Arroyo & Walker, 2008; 2009). Collaborative networks can be internal and serve innovation diffusion purposes as illustrated by Peansupap in both Australia (2004; Peansupap & Walker, 2005b) and in Thailand (Peansupap & Walker, 2009). There are many other examples of situated learning networks that can be mentioned—for example, in Sense's various articles (2003; 2005; 2007)—that can be designed as a knowledge creation, sharing, and transfer entity that is designed into how projects are governed.
Other cultural-institutional aspects of our governance perspective are illustrated in Figure 8. These include the designated levels of power and authority that govern approval and decision making, and the leadership style that adjusts and is adjusted by the way that strategy is developed and disseminated, how motivation and behavioral norms evolve, and how the whole cultural ambience of an organization emerges. These “soft” governance aspects transform the designed project intent into action. Frequently unintended consequences arise from poorly thought through “soft” governance elements that can result in rigidity at one extreme and laxness at the other extreme.
From a principal-agency theory perspective, Eisenhardt (1989, p. 58) summarizes agency theory thus:
“Agency theory is concerned with resolving two problems that can occur in agency relationships. The first is the agency problem that arises when (a) the desires or goals of the principal and agent conflict and (b) it is difficult or expensive for the principal to verify what the agent is actually doing. The problem here is that the principal cannot verify that the agent has behaved appropriately. The second is the problem of risk sharing that arises when the principal and agent have different attitudes toward risk. The problem here is that the principal and the agent may prefer different actions because of the different risk preferences.”
One way to accommodate this situation is to ensure accountability and transparency. Accountability traces who is responsible for what, how, and when. Transparency provides the rationale (why) and makes the process as clear and unambiguous as possible so that the constructed meanings of the PO and the agent (the POR and all project team members commissioned at that point) can be aligned as closely as is feasible.
Transparency and Accountability
Often a business plan or project brief provides a starting point for transparency but it obliges the PO/POR and those engaged in subsequent steps and phases in Figure 2 to be as transparent and clear about what the project's purpose is, what the expectations and assumptions are, and how the relationship between parties will be conducted.
The PO is usually far removed from the project once the initial stage gate DG0 for business development in Phase 1 in Figure 2 and Phase 2 strategy to feasibility study decision gate DG1 have been approved to allow Step 2 of Phase 2 development of concepts to progress. One of the criticisms made of project alliances in Australia (Wood & Duffield, 2009) has been that many POs or their PORs leapt straight into alliancing as a procurement choice without developing a clear business case and rationale for that choice. Additionally, not only do the outputs (deliverables) and anticipated outcomes (impacts and consequences of delivering the outputs) need to be defined, but appropriate measurement devices are needed to be able to define what precisely is to be delivered and what are the limits and granularity of assessment when measuring performance. As noted earlier in the section on Balanced Scorecard and other Performance Implications, the LogFrame approach has been largely ignored by the PM world (Baccarini, 1999), even though it is a useful tool for planning, developing a business plan, and performance measures (Steinfort & Walker, 2011). Once project deliverable output and outcome expectations are clear, it is possible to design a system for reporting on defined KPIs and KRAs and how that may be audited. In defining the KPIs and KRAs, especially if the stakeholder rather than purely shareholder versatile artist or agile pragmatist paradigm is accepted, the importance of stakeholder engagement is vital for learning about what the anticipated benefits are and how they should be articulated and measured, as well as how they should be communicated so that performance is transparent. Finally, drawing upon agency theory, it becomes clear that auditing is linked to the extent to which an open-book approach to transparency is appropriate and just. We can see that stakeholder engagement is vital in understanding their needs and concerns, as is argued by, for example, Bourne (2009; 2011a) and by Aaltonen for work on international projects (Aaltonen, 2010; Aaltonen and Kujala, 2010; Aaltonen and Sivonen, 2009).
Transparency and accountability feed the governance system in that they provide the designed templates of what is to done and how it is to be assessed. For example, in terms of accountability, a role description should not only define what that person is expected to do and who they report to, and are reported to but it should clarify how that role fits into the governance framework in general, what value that brings to the management of the project, and how performance should be measured and assessed. We discuss this in more detail in the next chapter. In terms of transparency, this provides the means by which stakeholders are engaged with (consulted but and kept informed about relevant and important issues that impacts them). It also helps to monitor and evaluate performance against designated KRAs and KPIs and to allow early warning signs to be visible so that problems can be addressed.
Ethics and Governance
Ethics and governance are linked, along with trust and commitment. We mentioned in the section on corporate social responsibility and ethics that an important input into how project managers and team members address ethical dilemmas is through reference to the governance framework. Müller et al. (2012, p. 13) present four types of dilemmas in project managers’ decision making:
Dilemma 1: There is a conflict between two equally valid ethical choices;
Dilemma 2: There is a conflict between what is ethically correct and what company policy is;
Dilemma 3: There is a conflict between what is ethically correct and what the law requires; and
Dilemma 4: There is a conflict between what is legally correct and company policy
These can apply to procurement choices and how to respond to external stakeholders and team-member stakeholders during design and delivery of a project in tendering and selecting project participants, choosing which available procurement form should be adopted, and how project design and delivery should be conducted. The research results published by Müller et al. (2012, p. 16–17) present four propositions relating to governance, trust, and ethical stances of people facing ethical dilemmas.
“P1: In order to be able to delegate the taking/facing of challenging situations the governance structure needs to trust staff's ability, benevolence, and integrity to take appropriate decisions
Similarly, the project managers should fulfil the requirements of trustworthiness in order to be trusted by the governance structure. That forms the second proposition:
P2: In order to act appropriately in the face of challenging situations project managers need to recognize the challenging situation, evaluate it, decide on appropriate course of action, and have the ability, integrity and benevolence to take appropriate action
With propositions P1 and P2 representing the ex-ante situation, the following describes the flow of actions when a situation for ethical decision making arises.
The governance structure sets the framework for project managers to act, thus providing limitations and guidance. To that end the governance structure needs to provide help when project managers are caught in an ethical dilemma. For that, the project managers need to perceive the governance structure as being trustworthy by the time ethical decision making is required. That leads to proposition 3:
P3: If staff members feel they cannot act on their own, they need to have trust in the governance structure's benevolence, integrity and ability to refer the challenging situation back to the governance structure
Once the governance structure has been put to the test for resolving the issue at hand there are two possible outcomes. Hopefully the governance structure helps the project manager to address the issue in an appropriate manner which supports the existing trust in the governance structure. Otherwise, the governance structure is of little or no help for the project manager, which leads to a loss of trust in the governance structure. That forms propositions 4A and 4B:
P4A: If the governance structure works to resolve the challenges it reinforces trust of the project manager in the governance structure and he or she will continue to use the governance structure.
P4B: If the governance structure does not work to resolve the challenges, it damages trust of the project manager in the governance structure. If project managers lose trust in the governance structure they will start to circumvent the governance structure and that, in turn, may damage the trust of the governance structure in the project manager.”
These propositions were tested through undertaking 28 interviews involving nine case studies in Northern Europe, Western Europe, China, and Australia.
We leave readers to follow up on that work, as further publications will follow during 2013 and beyond, and part of that study involves a survey of PM team members in a range of industry sectors and regions. The important message here is that it demonstrates that project governance has highly significant influence on how questions of ethics in procurement are addressed. The governance system frames expectations of accountability, responsibility, and responsiveness. This need to frame expectations links to a need for stakeholder engagement in defining and refining what performance KRAs and KPIs should be designed into project governance for any given project context or type of project. The way that ethical dilemmas are addressed is influenced by “hard” system elements as well as “soft” elements, as illustrated in Figure 8.
As explained earlier discussion on corporate social responsibility implications the model in Figure 10 illustrates the person being ethically confronted. They have a default position that is influenced by their national/regional/local culture, which forms part of the Figure 8 “soft” elements combined with their own ethical stance on issues. The governance framework plays a critical role as propositions P1, P2, P3, P4A and P4B suggest. The person facing the dilemma must decide whether they trust the governance system to support and guide them or whether it proves meaningless and that they would be better to trust their own ethical instinct that is influenced by their work/regional culture and their experiences of what has proved to be authentic or consistent in the past. People may have quite different individual ethical standards that may be driving their perception of the dilemma. There has been a number of studies on national and regional culture undertaken (Chhokar, Brodbeck, & House, 2008; Hofstede, Hofstede, & Minkov, 2010; House, Hanges, Javidan, Dorfman, & Gupta, 2004; Trompenaars & Hampden-Turner, 2004), and all these show variations in national and regional comfort with levels of power and information access that can affect the extent to which individuals may feel it to be their obligation to do something that they instinctively feel may be unjust or unethical. We will discuss how trust works in Chapter 4. Of course, all the judgments about what to trust, who to trust and follow, and how this all makes sense to the person trying to make sense of it all, their judgment is influenced by their perception of how simple or complex the situation is that they are facing. This proves a natural lead into the next section, the role of complexity in designing and implementing project procurement approaches.
Complexity Implications
We argue in this book that an effective design of an RBP system to deliver a project or program of projects is contextually path-dependent. An approach that is appropriate for a simple situation can be highly inappropriate for a more complex one because simple situations generally present less uncertainty than a complex one, and so we need to gain a better understanding of the situational context to best design an appropriate procurement approach.
Tame, Messy, and Wicked Problems
Situations are seldom straight forward. Hancock (2010) provides an explanation in his book for three situational states: tame, messy, and wicked. Tame situations are easily understood and can be dealt with using standard approaches and tools. Messy situations are puzzles so that first the mess needs to be understood and ordered systematically so that they can be resolved. Wicked situations have no correct answer and indeed the questions may be uncertain, needing the application of divergent thinking and analysis. As Rittel and Webber (1973, p. 161) state, “The formulation of a wicked problem is the problem! The process of formulating the problem and of conceiving a solution (or re-solution) is identical, since every specification of the problem is a specification of the direction in which a treatment is considered.”
Making a procurement choice can be a tame, messy, or wicked situation to deal with. If the project objectives are to deliver the project in a quick time and at lowest cost to strictly specified conditions, then this resembles a tame procurement choice problem. However, if the choice involves interpreting European Union directives about contestability and what best value may mean, for example, then the situation looks more messy than tame. Similarly, if we impose upon this situation objectives of maximizing local provider content, delivering excellence in knowledge transfer, and experimentation on a vanguard project, then we may be entering the realm of a wicked problem/situation.
Forms of Complexity
A number of PM writers have attempted to describe and categorize complexity. Baccarini (1996) was an early writer on complexity in PM and mused on complexity in terms of technical and organizational structure and interpersonal network interfaces. Williams (1999, p. 271) built upon the differentiation and interdependency concepts and concluded that project complexity could be decomposed into structural uncertainty (number of elements and interdependence of elements) and uncertainty (in terms of goals and methods). Perminova, Gustafsson, and Wikström (2008) distinguish between risk and uncertainty by claiming that risk is a causal concept while uncertainty is a consequential concept. There exists a risk that an event may happen but the consequence in terms of scope, scale, and impact is unknown or perhaps unknowable. This debate and probing of the concept was later extended by Bosch-Rekveldt, Jongkind, Mooi, Bakker, & Verbraeck (2010) with an extensive literature review of more recent PM complexity work, where they arrived at the technical, organizational and environment (TOE) complexity classification. Clearly from this work, complexity involved something beyond quantitative factors (numbers of people, social links, scope and scale, etc.) to include qualitative factors such as the nature of influence and ability to recognize and cope with it. Remington and Pollack (2007) wrote a book on various types of complexity, including structural, technical, directional (uncertainty in where the project is/should go), temporal (shifting and changing objectives and timing of project elements), and what tools were available to manage complexity. Remington (2011) later wrote a book on leading complex projects in which she provides very useful guidance based on experiences of a wide range of experienced project managers of highly complicated and complex projects with valuable quotations from interviewees to illustrate and explain their insights. She summarizes complexity well when she states that complexity is characterized by uncertainty, ambiguity, and decreasing levels of trust of people in their relationships or behaviors that suggest unexpected emergence of events that regate held assumptions about the situation (Remington, 2011, Chapter 1).
Perhaps earlier PM references to complexity should have referred to complicatedness characterized by messy problems and reserved complexity for emergence of issues that require revisiting and revising assumptions or perhaps to simply probe and respond to complex situations being faced. This leads to a further characterization of messy or wicked situations into chaotic ones where no clear pattern can be discerned, or that they are in “…disarray, discord, confusion, upheaval, bedlam, and utter mess arising from the complete absence of order” (van Eijnatten & Putnik, 2004, p. 419). Organizations that can transform chaos into order do so through self-awareness and self-learning and become chaordic enterprises (van Eijnatten & Putnik, 2004). Transforming disorder into order can involve numerous strategies that depend upon the knowledge, skills and experience of those making sense of this disorder. Kurtz and Snowden (2003) discuss how leadership groups trained in the use of the Cynefin framework understand the nature of exposure to risk and uncertainty posed by their operating environment. The Cynefin framework characterizes domains of knowledge in organizations as known, knowable, complex, and chaotic (2002, p. 106–7). Known knowledge is acknowledged best practice in tame situations. Knowable knowledge is available from experts who can analyze tame or messy situations and perceive how to respond from understanding patterns and reducing ambiguity, uncertainty, and linkage within and between systems. Complex spaces are where patterns are in a state of flux and there is uncertainty about how, why, and when changes occur, but highly expert people can understand the dynamics of these turbulent patterns. Chaotic is the space where knowledge and thinking must be entrained then used, when and as needed, where assumptions are totally questioned, and response to experimentation is rapid and intuitively applied.
Snowden (Kurtz & Snowden, 2003; Snowden, 2002; Snowden & Boone, 2007) sees situations as being mainly ordered or unordered with a small zone of disorder—essentially this zone is not yet ordered and so open to individuals to make sense of the situation and make an interpretation of what they see as an appropriate response.
We saw earlier in this chapter that infrastructure and engineering projects were suggested by Turner and Cochrane (1993) to typically have well understood goals and methods of delivery. However, their attempts at project classification on that basis appear to be rather coarse-grained when contrasted with the added dimension of project type offered by Shenhar and Dvir (2004; 2007) who consider novelty, complexity, technology, and pace as important project context considerations. Howell, Windahl, and Seidel (2010) classified PM frameworks and approaches based upon two dimensions of uncertainty (the probability of unexpected events) and consequences (the impact or cost of the unexpected). Projects have also been more recently perceived in terms of complex bundles of projects and associated services where innovation and learning features strongly (Hobday et al., 2000). These examples indicate relevance of project complexity, degree of being inherently complicated or their being delivered in a turbulent or chaotic environment, to RBP choice. Undertaking highly complex projects may have project procurement choice implications.
We can view the complexity of project briefing, design and delivery in terms of what is known and unknown (i.e., risk and uncertainty). The Johari window, originally developed by Luft and Ingham (1955), is a useful tool to map awareness. Its dimensions are “known to self” and “known to others.” Public knowledge is that which is known to self and others. Private knowledge is known to self but unknown by others. Blind is known to others but not to self, and unknown is knowledge that neither “self” nor “others” are aware of. This idea can be transformed within a PM context into self (project team cumulative knowledge) with known “knowns,” and this model can be used to also classify uncertainty and can further be combined with the Cynefyn framework described by Snowden and Boone (2007). Figure 11 presents a transformation of these ides within a project procurement context.
Responding to Complexity
Snowden (Kurtz & Snowden, 2003; Snowden, 2002; Snowden & Boone, 2007) recommends strategies to deal with apparent or perceived disorder by shifting perceptions through use of knowledge and perceptions that can be shared and reframed so that the disorder slips back into either an ordered or unordered state. If the project objectives and methods are known and understood, it is relatively simple to take effective action, using well established protocols and, as indicated in Quadrant 1, a traditional procurement approach may well suffice. Quadrant 2 describes complicated projects that may be effectively dealt with using traditional project procurement approaches as long as the client/project owner seeks and uses expert help to formulate scope, scale, and performance expectations. Relationship-based procurement strategies begin to appear more attractive when the PO is blind to potential problems in complex projects. In this situation, a lot of mutual adjustment is required between the PO and project teams in facilitating clear scope, scale, and performance expectations. This is where a panel of experts can undertake experiments and try things out in a measured and professional way. This situation is suggested by Quadrant 3. Quadrant 4 illustrates a chaotic state where the environment is highly turbulent or circumstances and required knowledge are changing more quickly than can be formulated into medium-term plans such that the response can only be reactive, and therefore all team members, including the POR, must be focused on action that moves the project completion forward and be prepared to make sorties or probes into finding a plausible way forward, and be speedy and resilient enough to be able to change plans to adjust to emerging realities. In his YouTube presentation, Snowden explains clearly the role of disorder and explains that most of us are in a state of disorder where we are not quite sure which quadrant we are actually in (see http://www.youtube.com/watch?v=N7oz366X0-8). Our response to moving from disorder (being unclear what is the best way forward) to the apparent order of one of the quadrants is governed by our predisposition. If we convince ourselves that we are probably in an ordered state, then we will use tried and tested ‘scientific’ approaches, but we may be in a chaotic quadrant, and so our choice of response may have disastrous consequences. In procurement terms, we need to fit the flexibility/rigidity framework to the context, circumstances and capacity of our project team to adapt and adopt the most sensible approach to managing a project.
Figure 11 introduces general issues of complexity and complicatedness in terms of the need for the PO and NOP team to share knowledge, insights on the implications of prescribed (planned) actions, and performance expectations. It hints at the importance of mutual understanding of what is required, what needs to be done and how to resource and mobilize resources to achieve the intended project outcome, as well as the need to define performance expectations. From the PO's perspective, performance may mean benefit realization through the project outcome and this could encompass a number of stakeholders, such as end-users, as well as “the environment.” From a NOP's perspective, performance may include financial rewards as well as intangible returns such as kudos, learning, relationship building, and a range of other benefits. Figure 11 is useful because it provides a framework for understanding the need and project circumstance that could govern the degree of relational consideration that the project procurement form must encourage to be effective in facilitating clear enough scope, scale, and performance expectations to enable the PO and the NOP project team to be able to deliver a successful project. Explicit articulation of performance in terms of delivering expected benefits is critical to achieve project success.
Chapter 3 Summary
In this chapter, we provided several business theory aspects of PM. We began with the business justification for outsourcing. This was followed by a section on governance fundamentals in which organizational structures, transparency, and accountability are explained as linking governance and ethics and how that may impact project managers facing potential ethical dilemmas. A section of complexity then followed.
The chapter sets the salient business theory to PM that can help us better understand project procurement rationale in general and RBP in particular. Business justification for outsourcing helps set the context. Governance aspects are critical parts of a procurement system in defining how they will work and understanding any unintended consequences. Procurement system design and delivery needs to take into account varying levels of complexity and its likely impact and implications.
The next chapter deals with the last important aspect of RBP theory that is necessary to understand human behavior aspects.