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					Gippsland Water Factory
Governance and Risk Mitigation
Presentation to Victorian Water
Industry Association
27 May 2005


Mark Catchpoole
Special Counsel
   Meaning of ‘Alliance’
Alliance distinguished from:
– Strategic alliance
– Partnering
– Teaming arrangements
– Outsourcing arrangements
   Alliance – a delivery mechanism to:
– Maximise performance
– Proactively manage risk in collaboration
– Reduce CAPEX/OPEX and improve time
  outcomes
– Achieve outstanding ‘Gamebreaking Performance’
  in project objectives
– Principled approach to business
‘An alliance is an integrated, high performance team selected
on a best for project basis, sharing all project risks, with
incentives to achieve outstanding performance in pre-aligned
project objectives with an uncompromising commitment to
trust, collaboration, innovation and mutual support within a
framework of no fault, no blame and no dispute in order to
achieve gamebreaking results.’
   Unique features – combination of:
– Essential features
   – collective accountability and responsibility for all project
       risks
   – unanimous best for project decision making
   – no fault, no blame, no dispute
   – a commercial framework to drive Gamebreaking
       Performance
– single integrated high performance team ‘best person for the
  job’
– deliberate alignment of interests and objectives
    Collective responsibility and
    accountability
–   Collective not adversarial approach to risk
–   Risk shared equitably, not equally
–   Focus on achieving outstanding results
–   Risk/reward not legal liability
    Unanimous best for project decision making
–   Management structure of an alliance
–   Best for project
–   ALT – leadership, direction, vision and governance
–   AMT – delegations and authority
                                 CEOs or Boards of sponsoring and
                                 CEOs or Boards of sponsoring and
                                      commercial participants
                                      commercial participants

Structure – Roles and
                                   Alliance Leadership Team (ALT)
                                   Alliance Leadership Team (ALT)
Responsibilities                  •• Create Alliance Vision, Principles and Objectives
                                     Create Alliance Vision, Principles and Objectives
                                              •• Set policy and delegations
                                                 Set policy and delegations
                               •• Appoint members of the AMT on best person for the
                                   Appoint members of the AMT on best person for the
– Roles and functions of the                              job basis
                                                           job basis
                                •• Empower the AMT to perform the obligations under
                                    Empower the AMT to perform the obligations under
  ALT, AMT and Alliance                           the Alliance Agreement
                                                   the Alliance Agreement
                                  •• Promote commitments, principles and objectives
                                     Promote commitments, principles and objectives
  Project Manager defined in                   throughout the alliance team
                                                throughout the alliance team
                                         •• Resolve all issues within the alliance
                                            Resolve all issues within the alliance
  Alliance Agreement
– ALT - Unanimous decision-
  making and no dispute           Alliance Management Team (AMT)
                                  Alliance Management Team (AMT)
                                (Headed by Alliance Project Manager)
                                (Headed by Alliance Project Manager)
– APM – Accountable to the                   •• Deliver project objectives
                                                 Deliver project objectives
                                              •• Day to day management
                                                  Day to day management
  ALT for performance              •• Provide leadership to the wider project team
                                      Provide leadership to the wider project team
                               •• Appoint members of the wider project team on best
                                  Appoint members of the wider project team on best
                                                  person for the job basis
                                                  person for the job basis
– AMT – Best Person for the                    •• Try to resolve all issues
                                                  Try to resolve all issues

  Job
                                            Wider Project Team
                                            Wider Project Team
                                               •• Deliver project objectives
                                                  Deliver project objectives
                                      •• Single project organisational structure
                                          Single project organisational structure
                                            •• No person to person marking
                                                No person to person marking
                                         •• No duplication of roles or systems
                                            No duplication of roles or systems
   No fault, no blame, no dispute
– No blame culture
– Limited recourse to litigation or arbitration
– Wilful default
   Commercial framework
– Three elements – Direct Cost, Fee, Gainshare
– Alignment of commercial expectations
                                              Gainshare
                                 Increasing levels of
                                   “outstanding”
Commercial                          performance
                                                                            Actual
Framework                                                             performance
                                                             Increasing levels of
– Sole entitlement:           “Normal”
                                                             “poor” performance
                                 Profit
   – Direct Cost (Limb 1)
                              Corporate
   – Corporate Overhead
                              Overhead
     Normal Profit (Limb 2)
                                                          Painshare
   – Gainshare (Limb 3)
– Transparency:
   – Documentation               Direct
   – Audit                       Costs
   – Complete “open book”
    Commercial Framework
    Principles of Gainshare
– Linked to real risks and benefits
– Only way to increase profit margin is outstanding performance
– No win / lose
– Each party has meaningful incentive
– Sponsor commitment to maximising participant returns = win win win
– Links between separate elements – no incentive to play one KRA off
  against another
– KISS
         NORMAL PERFORMANCE = NORMAL REWARD
             POOR PERFORMANCE = POOR REWARD
  OUTSTANDING PERFORMANCE = OUTSTANDING REWARD
               Gainshare



                       Gain
                                 Zero Gainshare
                                                                    Typical Gainshare –
        y%
                                                                    Cost/Schedule
    x%                             Overrun          Actual
  Underrun                         u%              outturn
                                                       cost
                                v%
                                                                    – Only way to increase
Target
                Pain                                                  profit margin is
Outturn Cost
                                                                      increase performance,
                                                                      reduce cost &
                                                                      schedule
  x = designer participant share of gain
  y = constructor participant share of gain


  u = designer participant share of pain (if different from x)
  v = constructor participant share of pain (if different from y)
                    KRA
                  Gainshare

                        J   Zero = Minimum Condition of      Typical Gainshare –
                                     Satisfaction                    Other KRAs
                                        +5 / -5
                                   (margin of error)
                                                          – Only way to increase
             y%                        (Poor)               profit margin is increase
                                        -100
        x%                                                  performance
                                                       Actual
                                     u%           performance
    +100            K
(Gamebreaking)                  v%


                                                     J = maximum KRA gainshare
                        L                            K = painshare for –5 (just less than minimum
                                                     conditions of satisfaction

                                                     L = maximum KRA painshare
   Governance Issues
– Need to keep information from alliance confidential in
  authority
– Board to delegate to key officers
– Need to consider appropriate reporting arrangements
    Critical success factors & challenges

–   ALT – Leadership, support & empowerment
–   Genuine commitment to Alliance principles
–   First principles approach – No Formula
–   Equitable/Effective/Transparent commercial framework
–   Unanimous decision making
–   Personal development
–   Genuine pursuit of & commitment to innovation
–   Target Out Turn Cost Phase
Questions?

Discussions!

Observations!

				
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