Is your EPC ready for the new business model (Part II)?

In the first part of this two-part article, consultant Jim Sohaney looked at how the integration of integrated IT into core and supporting workflow processes has begun to change chemical, power, pharmaceutical, and process owner-operators and manufacturers. Part II explains how the IT revolution will affect engineering, procurement, and construction (EPC) firms – and how they can adapt to those changes.

By Jim Sohaney
President
Sohaney Consulting Enterprises

A company that has integrated information technology (IT) into all of its operations will likely end up organized around three or so core workflow processes that are totally streamlined to service the customer (Six Sigma model). To reach this state, companies must:

• Reorganize around a core.
• Streamline workflow.
• Integrate IT so that it is ubiquitous.
• Base decisions on measured lifecycle economics.
• Develop change management as a critical competency.
• Treat information as an asset.
• Abandon man-hour billing.
• Reshape software to adapt to existing workflow and culture.

How can EPC's take advantage?
Given the enormous driving forces described in Part I of this column, how can the EPC of the future hope to survive?

There is already a tremendous rationalization of the EPC industry as a direct result of less available work due to improved design and construction productivity. The old business model is breaking down. Margins are being compressed.

Obviously new business models must be sought out if an EPC is to keep from becoming extinct. The next few points describe where I think the EPC's of the future should be positioned to add value:

• Mirror Owner-Operators. EPCs must mirror Owner-Operators by reorganizing their companies around core business processes. They must strip out all unnecessary internal practices and also learn to integrate their workflow with that of their client to eliminate all duplication of resources. Companies like Jacobs Engineering are leading the way in this area.
• Integrate IT tools. EPCs must integrate the latest IT tools into their everyday work. There is no way they can maintain their margins without doing so. For example, the proper use of a good document management system will add about 1% to an EPCs margin on a given job. There are some who would say that they cannot afford these tools. To them I would say that there are ways to integrate these tools over a period of time that won't hurt the bottom line. In fact, they could add to it. EPC's need a multi-year plan to accomplish this goal.
• Seek new opportunities in outsourcing. Maintaining an in-house engineering department will become a very rare thing for Owner-Operators in the future because it is just not a core competency for many. This will also be true for manufacturing as well. More and more of these functions will be outsourced. This will create opportunities for someone to fill. EPCs are certainly positioned to add value in these areas. Some EPCs are already providing in-house maintenance and small project services for their clients. I would suggest going even farther into plant services within the framework of a long-term business relationship based on plant lifecycle metrics. Services associated with safety health and environmental tasks would be one area. There are many others. You don't have to be a major power to implement this strategy. Companies like On-Board Engineering (Edison, NJ) have been doing it for years.
• Maintain plant data. Owner-Operators are going to want to maintain their plant related/engineering assets in order to replicate them over and over. Things like reusing most of an entire 3D design from one project to the next will become commonplace. Who better to do it than their partner EPC? Companies like Kvaerner are beginning to think along these lines. There are some who would say that Owner-Operators will never allow this type of information control by an outside party, and that security is an issue. To these I would say that there is software and workflow methodology available today to address the security issue. The rest of the issues can be worked out in new types of business arrangements. Outsourcing of these functions will become more commonplace.
• Seek niche markets. Smaller EPCs should look for a niche market in which they can specialize. Petrocon of Houston, TX, for example, has become a leader in instrumentation-related projects.

All of this means new types of business relationships or models need to be crafted. Some may be lifecycle-oriented. Others may involve outsourcing of engineering/manufacturing information management on a fee basis. Equity position partnerships may help to drive both parties in the right direction.

One thing seems clear, and that is that these relationships will be long-term ones. They won't just exist for one project or period of time. The EPCs who are pioneering these new models will survive and evolve into something quite different than the EPC of yesterday.

The ones who aren't ready for these new relationships, well………

We optimize your project engineering and manufacturing processes using the latest workflow methodologies and IT software.

To see Part I of this column, click here.

Jim Sohaney specializes in project engineering and manufacturing process optimization using the latest workflow methodologies and IT software. His background includes stints at Trinity Technologies Corp. and 23 years at Air Products & Chemicals, the last five as manager of Chemicals Group capital project lifecycle initiatives. While at Air Products, he led the implementation of PALADIN, which introduced engineering IT tools into the company's capital asset creation process. It remains one of the most successful capital project automation programs ever undertaken.

For more information: Jim Sohaney, President, Sohaney Consulting Enterprises, 2366 Hailey Ct., Fogelsville, PA 18051. Phone: 610-285-4853. Cellular: 610-390-5739. Fax: 610-285-2095. E-mail: Paladin373@aol.com.

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