After the credit crunch, a global perspective
The downturn and its aftermath have had a huge effect on construction projects worldwide. But though we generally speak of a ‘global’ downturn, the effect has not been uniform, and attitudes to procurement are shaped as much by culture as by the economic environment.
A recent Turner & Townsend roundtable allowed us to explore the cultural and regional factors affecting the supply chain in our projects. A key question was how the culture of respective regions usually drives supply chain strategies – and whether (and how) the credit crunch has changed the approach.
UK: building better relationships
The UK has been consciously moving away from transactional procurement to a more relationship-based approach for over 20 years. John Boultwood sees two main drivers of this cultural shift. “First, there was a move towards a form of contract in which we split project management away from design, which changed the way we manage risk in the UK. Second, new legislation enforced prompt payment and swift adjudication, protecting contracting parties and reducing disputes.”
A survey in the 1990s described 90% of UK construction projects as adversarial. Ten years later a follow-up reported this figure had reduced to 50%.* John doesn’t see the credit crunch moving British industry back in the other direction.
“In the UK we’ve seen clients put the squeeze on their supply chain, but they’re not moving fully back to a transactional approach. Constructing Excellence surveys “That said, it may be one-off procurers who take advantage of the market – but when pressure is passed down the supply chain, the organisation that can’t ope with the deal made above it in the chain is at serious risk – as is the project itself.”
Middle East: returning to tradition
Construction projects in the Middle East are generally transactional, but the building frenzy in Dubai particularly challenged this model. “The sheer volume of work during the boom forced parties into a more collaborative way of working to ensure projects were completed,” says Alan Talabani. “While Dubai’s 15% year-on-year construction cost inflation may have been bearable in an overheated market, the squeeze has seen parties return to a more traditional transactional approach.”
“On the other hand, relationships are also important here. We have witnessed scenarios where the tender process is used to merely determine the price and not necessarily the successful bidder.”
Australia: preferring partnership
In Australia however, the skill shortage over the past decade has resulted in a more collaborative culture, says Dave Liddle. “There’s a recognition that there are very few people in the market, and you’ve got to work together to deliver for the client on complex jobs, particularly in bigger markets such as oil and gas, mining and infrastructure projects. That’s where we are seeing a tendency towards alliances and partnering – because that’s the way to bring together the skills. “To an extent we’ve suffered less from the credit crunch – Australia has avoided a ‘technical’ recession, and the banks have stayed reasonably solid – but much of the money comes from overseas, so we’ve definitely had a downturn. “In this environment we’ve helped clients get a better price in the market by advising them to fully document their projects – we helped one of our major clients save AUD20 million by changing to lump sum procurement – and we’d expect this approach to endure for a year or two.”
Europe: reassessing the markets
Parts of Europe have been heavily affected by the crash. James Dand reports that while the credit crunch hasn’t created a shift towards alternative procurement routes, it has had a significant effect on how people operate within their recognised frameworks. “Bidding trends throughout the supply chain in countries like Ireland are not sustainable at current levels. There is real nervousness about who is going to be around in six months’ time and this is a significant barrier to integration. In Russia we are now seeing clients re-assessing the contracting market, undertaking wider pre-qualifications and in some cases attracting tender lists with 10 or more bidders. The emphasis on lowest price is leading the ‘high costhigh quality’ international contractors to exit the market.”
On the other hand, some parts of Europe demonstrate strong examples of supply chain integration. One is Syngenta in Switzerland, which has taken a market-leading approach whereby total supply chain alliances are formed and its members are remunerated on the basis of the overall success of the project. James sees this as a characteristic of specialised sectors where there are fewer players and clients have to think more intelligently about how to influence and incentivise their supply chain to work in a collaborative way. “To make it work you need alignment of goals, longevity of relationship and a real understanding of each other.”
USA: relying on the lawyers
In the US, Peter Walker has experienced an emphasis on relationships in the private sector, while finding the public sector more transaction-oriented, largely due to the rigorous enforcement of procurement regulation. But he says the key cultural difference lies in attitudes to lawyers: "What’s particular about procurement here is the emphasis on the legal aspect – much more strongly than anywhere else, people establish their relationship through a strong and often bespoke legal agreement. And, as soon as there is an issue they say ‘shall we get counsel in?’ While each of the states has experienced the downturn differently, we find this cultural approach across the country.”
Asia: sticking to the contract
Asian businesses present a completely different model. As Stephen Gibson in Korea notes, many of the client organisations are conglomerates with their own contracting businesses. Additionally, transactions are very relationship-based: contractors give a price very early on, and absorb the risk. “It’s almost a no-no to go back later and say ‘can I have more cash?’. Claims are almost unheard of – the contract is pretty much left in a drawer once it’s signed.”
Conclusion: trust your proven partners
Whatever the global differences, a consistent message came through from our discussion. The credit crunch has led clients to look hard at costs, and they are now quicker to go to the market for the best price. But they also recognise the importance of relationships – the market may reveal the price, but businesses want to work with partners who have served them well before. Bidders who win tenders on price across the world are finding clients reverting to the firms they know – at the best price the market can offer.