- a little modelling added value for managers tackling performance problems in out-sourced activity
by Rachel Bodle
Managers from a major corporation met with representatives of contractors to whom business-critical activity was out-sourced so that they could review their combined management of performance. Their meeting generated a number of insights as to how they might reverse deterioration in both the relationships between them, and in the performance achieved in the out-sourced activity. However, rather than closing their discussions at the end of the day, the group passed their deliberations over to a modeller who, over the next 24 hours, built a system dynamic representation of their thinking. When the group worked with this relatively simple model, it stimulated further insights and ideas for managing their out-source contracts to the greater satisfaction of both parties.
Out-sourcing is on the increase, and the need for contract management capability is challenging diverse organisations. The ideal of contracts which provide both a framework for a mutually rewarding partnership, and a structure for handling disputes between the client organisation and their out-source service provider, is not easily achieved. In many cases, performance and financial pressures stress the client / service-provider relationship and the contractual arrangement proves to be flawed in practice. Such was the case here. Further, what appeared to be an appropriate management response to performance problems had proved unhelpful: reinforced contracts were introduced but performance levels continued to fall, costs rose, and relationships were becoming increasingly strained.
A small group met to review their combined management of performance in the out-sourced activity. Their workshop-style meeting was spread over two days, with a daylong break between - during which time a simple model was developed for their use. When the group reconvened (day 3), within a couple of hours they found that working with this model added further insights and ideas for implementing changes to their operation of out-source contracts. Their understanding of the dynamic system linking contractors with their business clients may be valuable to others who seek an effective relationship with out-sourced service providers. In addition, the process that helped them may provide food for thought to management science practitioners who must be pragmatic in matching their support to the time and cost budget of their client group whilst leveraging this contribution to maximum effect.
Managing out-sourced activities
The client for this work was a major corporation that used engineering contractors to carry out specialised works on projects around the world. A number of different contractors were used and a reduction in performance, accompanied by increasing contract management problems, was widely apparent.
The small group whose meetings are reported here comprised multiple perspectives on the problem and included a contractor representative, an engineer, a technical specialist, and an area contract manager. Given the history of falling performance levels and strained relationships, the group was uneasy at first. There was some distrust of the client organisation’s motives in holding these meetings, and considerable cynicism about the likely value of any outcome. The use of independent management science consultants to facilitate the group provided a tentative foundation for a ‘fresh start’. One-to-one meetings between each prospective participant and a consultant in advance of these sessions were helpful in surfacing specific concerns and increasing the chances of a constructive outcome. These interviews were used to inform the choice of workshop process. The group’s discussions started with the identification of the various symptoms of problems in the business arrangements between the contracting organisation and the contractors who provided services. The numerous problem symptoms were clustered into key themes or factors. The summary extracts below are given in general terms to protect the client’s confidentiality but are sufficient to indicate the scope of the discussion:
- Increasing Challenge for the Industry
Competitive pressures lead us to undertake more challenging projects which are increasingly complex and vulnerable to technical problems. The new problems are not properly understood: unanticipated incidents often go to costly operational stoppages. Tough performance targets aggravate the problem. At the same time the dramatic increase of activity serves to dilute experience; inexperienced people get into stupid problems. Impact of a shift to suppliers’ market.
- Conflicting Business Pressures
Contract managers are constrained and can get caught out by short notice changes. Project managers have a short-term view of the relationship with a contractor. Because there is not enough project planning time the amount of consultation is reduced, details are not thought through etc.
- The Business Issue
The training & awareness benefits have trailed off. Costs associated with technical problems and stoppages are escalating.
- Contractor Engagement & Quality
Contract teams are not pro-active. Variable ownership of the problem, motivation is an issue. Some contractors have their teams on incentive payment schemes – but the arrangements vary and don’t all match the overall project objectives. Do we have a sound basis for assessing contractor competence?
- Organisational Defects
There is a disconnect between project planning & operations. Plans might be compiled and performance targets set without knowing which equipment will be deployed. The contractor should become more responsible for avoiding technical hold-ups. We want them to build a multi-disciplinary team. A disproportionate number of technical problems arise when a contractor team assigned to the project hands over to a relief team. There is inadequate mutual briefing of planner & doers. We need to look to the design of the whole project programme. Could the planner for a project be part of the team that makes it happen?
- Contract Structure
The structure of contracts is not encouraging. We interfere in contractor industrial relations - we should be using contractors who invest in their people.
- On-Site Supervision and Experience
More inexperienced teams. Variable application of training. Stretching of contractors' organisations. Diminishing quality of engineering supervision. We have learned to react better to problems when they arise, but haven't reduced their incidence. The training given is becoming out of date; based on experience of problems we were aware of 5-6 years ago.
The group went on to explore the ways in which the factors identified impacted one another, a discussion where they joined in creating an influence diagram of the main interconnections. Their diagram described a situation that was clearly dysfunctional with the basic pattern of interaction bringing to mind the ‘shifting the burden to the intervenor’ systems dynamic archetype described by Peter Senge. This is reproduced below in the form of a causal loop diagram where the factors are described in the terms used by this group.
The group saw the financial costs of delay to projects as the signal of the extent of performance problems in the specialised engineering activity carried out by the outsource contractors. In the past, increasing costs had led the corporation to impose ever-tighter contract terms which, in the short term, succeeded in keeping costs down. However, a knock-on effect of these contract changes was deterioration in relationships with the contractors and with morale in the contractor teams. Turnover of contractor staff was high, and there was negligible collaboration between the separate contracting companies used for similar work on different projects. Thus there were adverse longer-term effects of the changed contractual relationships. The interventions made by the client organisation (the externally imposed solution) were seen to be impeding action that would otherwise have been taken by the contractors themselves (the solution internal to the system) – with greater long-term benefit.
S:change in same direction
O: change in opposite direction
Shifting burden to the intervenor
(in the context of managing outsource contracts)
This interpretation of the problem and its symptoms helped the group to produce more detailed causal loop diagrams of the present interaction between their organisations. They also generated a ‘wish list’ for an improved pattern of interaction, identifying the criteria to be used to assess whether a sustainable solution had been identified. Finally, they set about making suggestions for changes that would satisfy these criteria. At the end of this one-day meeting the group had resolved to move towards a greater participative role for contractors:
- using contractors as consultants at the project planning stage,
- joining together for benchmarking and to capture learning from experience that would be fed into updated training programmes, and
- collaborating to set ambitious but achievable performance targets and then sharing the
- financial benefits of improved project management.
The group’s suggestions for change, along with all their diagrams, were used to inform the development of some simple system dynamic models during the following day. When the group reconvened on day 3 they revisited their earlier thinking – testing their assumptions against the formulation and operation of the models provided. A number of additional insights emerged:
- The trend to ever more challenging projects would always stretch contractor teams and it would be difficult to counter this even with improved training. New suggestions were:
- collaborative research might help to identify future needs.
- reduced contractor turnover would help to build more experienced teams. Low turnover should become one of the criteria for selection of a service provider.
- To some extent the incidence of technical problems which could escalate to delay a project was random and outside contractor control. Improved monitoring procedures supported by statistical analysis would enable both contractor and client organisation management to better distinguish between random (intrinsic) variation and adverse performance trends.
These additional insights and change suggestions were carried forward from the meeting and were taken up by a wider change programme in the organisation. Feedback from participants was positive:
- they had found the workshop enjoyable and thought-provoking;
- they were leaving with an enhanced appreciation of how problems were arising and they would seek to spread this understanding;
- the process had been very powerful and should be used more widely across the business; and
- they were surprised by how much had been achieved in a short time.
Leveraging the management science contribution
The use of independent consultants was helpful in getting the necessary people into a meeting. Having got the right people together, facilitation, and particularly the use of a pragmatic problem structuring approach (hexagon mapping), helped to establish a constructive tone for the meeting. With each participant making a contribution from their own perspective, the group as a whole then had the information needed for a better understanding of the problem.
Influence diagramming provided a useful mechanism for catalysing the group’s appreciation of the dynamics of the problems that were arising. It also prepared the way for the introduction of relevant system dynamics archetypes.
The ‘shifting the burden to the intervenor’ archetype was offered to the group Blue Peter style (here’s one I made earlier) with the disingenuous suggestion ‘we wonder if this is relevant’? Clearly, the preliminary meetings with prospective participants had helped us to anticipate some of the archetypes that might be useful to the group. It seemed very helpful to them to have this simple dynamic structure laid bare.
However, the archetype structure was not imposed on their subsequent causal loop diagramming (though they referred to it) and neither were they obliged to include all the factors highlighted in their earlier discussion. In fact, with the changed emphasis upon the dynamics of the process of interaction between client and contractors, some new insights emerged at this stage. These included recognising shortfalls in the information the client organisation collected about contractor performance, and the extent to which contractors had a greater understanding of the project risks than did staff in the client organisation. In spite of now being on new territory, the group’s causal loop diagramming went quickly and easily. They were beginning, quite naturally, to formulate ideas for the more effective management of technical problems that might delay projects. The momentum generated carried them through the review of what they wanted from an improved contract and project management process and on to the diagramming of what this might look like.
Our process design for this first day borrowed a number of elements from David Kreutzer’s documented approach (FASTBreak) for accelerated entry to systems thinking in a group. Things went reasonably well and the group’s diagrams provided a good starting point for model building: in particular, they identified which factors would be central to a useful representation of the contract management process. Even with a streamlined and tested methodology for getting this far, it was something of an experiment for us to set up an expectation of a model to be produced on the day following this one-day meeting. We believed that a model could add value to the group’s thinking, but we lacked the confidence to build the model in collaboration with them. The ‘time out’ solution was proposed as a less stressful route. Even then, as ‘the modeller’ in our team, I felt suitably challenged by the limited preparation that it was possible to do beforehand and the very firm deadline that existed!
For obvious reasons therefore, the two system dynamic models (using iThink) that were produced were kept simple. They shared the same basic structure and were tailored to represent the current and redesigned project/contract management processes. The models had four stocks the levels of which varied as indicated below.
||INCREASED by a flow linked to
||DECREASED by a flow linked to
|1. Potential incidents leading to project delay
||The probability was maintained at a constant level throughout (generated by a Poisson distribution)
||Level of contractor's ability in relation to technical problems
|2. Contractor's ability in relation to technical problems
||Pace of technology change
Turnover amongst crews
|3. Satisfaction with project engineering performance:
i. Current system
ii. Redesigned system
|Low costs through delays
|High costs through delays
Benchmarking activities & assessment of contractor ability
|4. Accumulated technical know-how & learning in the total system
||Investment in learning
||Pace of technology change
A number of the qualitative factors in the models were represented by simple indices and some crude calibration ensured that the derived costs associated with project delays were in the right ball-park.
In introducing the models to the group, we first talked them through the structure using a projected image of the computer-based stocks and flows diagram. Being a simple model with uncomplicated connecting logic, it was easy for the group to engage with and they readily accepted that the logic reflected their own thinking as articulated at the first meeting. Second, the behaviour of the model was explored - initially by trying it out in an environment where the technical challenge and risk of a project delay was constant, and then in an environment with step changes in the risk. The model of the redesigned management process was then introduced and run under a range of conditions. As each computer run was carried out, the group watched key parameters being plotted over time, reviewing the results and comparing them with their expectations.
The results stimulated some discussion and some fresh insights: for example, the group noted that the current system was slow to respond to change and left the client organisation vulnerable in an environment where the pace of change is increasing. Moreover, the improved contract management process as formulated was not always as effective as the group had expected: it reduced, but did not contain, the increased costs of delays under more challenging technology. Thus, exploring the behaviour of the models led to the group questioning their original thinking and going further. This was in line with what Jay Forrester would have predicted for a group exploring their understanding of a dynamic system through a model of their thinking: he suggested that many organisational policy failures have occurred because people’s expectations about the behaviour of a dynamic system do not match what is known about that system. In this case the group formulated new ideas and suggestions that they wanted to explore through a modified model. Some small changes were carried out and tested successfully on the spot; some other changes were beyond the scope of what could be tackled in the time available.
The group’s feedback has been given above. The session reinforced my belief that even very simple system dynamic models can add value to thinking about systems. Thus I’d want to encourage others to take the modelling step even when time is short and only the simplest of models is possible. I suggest that modelling does not have to be either time-consuming or expensive. In fact, making a distinction articulated by Arie de Geus in his foreword to ‘Modeling for Learning Organisations’, a model designed to support learning rather than one intended to have predictive capability might be more effective for being simple and transparent in its logic. For pragmatists, it is reassuring to recognise that there is no simple linear relationship between ‘development time, model calibration and complexity’ on the one hand and ‘usefulness in application’ on the other!
My partner and mentor on the work described here was Tony Hodgson of Idon Ltd. His skills as a facilitator both simplified my modelling task and gave me confidence that, whatever I produced, he’d help the group to extract maximum value from it!
For the interested reader
- Chawla S and Renesch J (ed) (1995) ‘Learning Organizations: Developing cultures for tomorrow’s workplace’, Productivity Press. See in particularFASTBreak: a facilitation approach to systems thinking breakthroughs by David Kreutzer.
- Dixon N (1994) ‘The Organizational Learning Cycle: how we can learn collectively’, McGraw Hill.
- Forrester J W (1987) ‘Lessons from system dynamics modeling’, System Dynamics Review 3 (No.2 Summer 1987): 136-149.
- Morecroft J D W and Sterman J D (ed) (1994) ‘Modeling for Learning Organizations’, Productivity Press. See in particular Foreword: Modeling to Predict or to Learn? by Arie de Geus, and Hexagons for Systems Thinking by Tony Hodgson.
- Richardson G P and Andersen D F (1995) ‘Teamwork in Group Model Building’, System Dynamics Review 11, 2 summer: 113-137.
- Senge P M (1990) ‘The Fifth Discipline: the art & practice of the Learning Organization’, Doubleday Currency.
- Vennix J A M (1996) ‘Group Model Building: facilitating team learning using system dynamics’, Wiley.
RACHEL BODLEstarted her management science career within British Coal, first with the OR group and then as head of a statistics consultancy service for senior management. In 1991 she completed London Business School’s Sloan fellowship programme before embarking on freelance consultancy. She now works with clients in both the commercial and public sectors. Her particular interest is in supporting corporate planning processes that foster systems thinking and encourage organisational learning.
First published to members of the Operational Research Society in OR Insight January - March 1999