To improve capital project outcomes, focus less on meeting stage-gate goals and more on creating predictable business systems and organizational habits
“You do not rise to the level of your goals. You fall to the level of your systems. Your goal is your desired outcome. Your system is the collection of daily habits that will get you there.” – James Clear
More than 50 years ago, Boston Consulting Group CEO Bruce Henderson introduced an idea so sensible that it has since woven itself deep into the fabric of modern business thinking: the concept of the experience curve. The experience curve dictates that there is a consistent relationship between the cumulative production quantity of a company and the cost of production. The more widgets you make, the better you get at widget-making, and the lower your cost of producing widgets. Now widely viewed as a keystone of business management theory, the experience curve holds true in many industries but not, it seems, in capital development, where most projects continue to run late and over-budget. Why?
Let’s begin our inquiry with a self-evident starting point: The experience curve has led most capital project organizations to the stage-gate process. Developed in the 1940s, this approach breaks down a project into phases or stages, with decision points known as gates along the way. In his 2016 book, Capital Projects, veteran project consultant and IPA director Paul Barshop says the stage-gate process “is old hat, but the fact is it is the only approach that has ever been shown to work long term.
The Stage-Gate System Works — When Used Correctly
“There is very little substantive difference in the fundamental approach companies take toward capital development,” Barshop writes. “Moreover, the process works — when it is used correctly.” He reports that projects that meet the stage-gate process requirements tend to deliver the expected value, indeed, meeting all stage-gate requirements actually adds 5% more value than forecasted. However, projects that only met some requirements saw 22% value erosion, and those that did not meet any requirements saw 45% of the projected value erode.
Barshop does not say how many projects fall into each of these three categories, but we know from other sources that the vast majority of modern capital projects are both late and over-budget. In a 2016 analysis, McKinsey reported that large projects across all asset classes typically take 20 percent longer to finish than scheduled, and are up to 80 percent over budget. We can deduce from this that most projects meet only some (or none) of the stage-gate requirements.
Where does that leave us, on the experience curve? In capital projects, our cumulative experience has delivered to us a stage-gate system which must be executed with flawless precision in order to deliver expected results. Most organizations cannot achieve this level of perfection and see value erode more than 20%. Teams who falter continuously throughout the capital development process will cost their companies nearly half of the project’s expected value.
I think it’s time for us to search our experience for better answers.
How Predictability Thinking Improves the Stage-Gate Process
Fundamentally, the stage-gate system is a mechanism of predictability. A gate is a safeguard designed to assess whether the project is on-track at a single point in time, and clearing a gate is, broadly speaking, a prediction of future success. The problem is that it is a lagging indicator — you’re looking at a snapshot, in the rear-view mirror.
A lagging indicator is easy to measure but hard or impossible to change. Say I’m trying to lose weight, and I step on the scale each week to assess my progress. If I gain five pounds, I can’t do anything about it — my weight is a lagging measure of my eating and exercise habits over the past week. Similarly, a stage-gate is a lagging measure of your organization’s work over the past year, and if you fail, you can’t do anything about it. Ideally we’ll both learn from our mistakes, but that doesn’t change the fact that we’ve failed.
Predictability Thinking™ introduces leading measures into the stage-gate process. Leading indicators define what actions are necessary to achieve your goals. If I’m trying to lose weight, I ask two questions each day: did I exercise, and did I maintain a caloric deficit? My answer to these questions is a leading indicator of success or failure. If I do these two things each day, I am likely to lose weight. If I don’t, I won’t.
Systems, Habits and Predictability Thinking
What are the leading measures of a successful capital project? What must you do today, and each day, to ensure that you will meet all of the stage-gate requirements and gain that 5% advantage that Barshop promises to those to execute flawlessly? What are the organizational habits that lead to stage-gate success? What systems do you need to introduce, refine, or eliminate? How do you track and benchmark these activities? Most capital project organizations never ask these questions, because the singular focus on clearing stage-gates has conditioned us to think in terms of lagging measures. Predictability Thinking™ is a an antidote, a framework that will help you find the answers you need to deliver predictably, on-time and on-budget.
If you’re interested in learning more about the power of Predictability Thinking™ to improve your company systems, habits and outcomes, the Concord team is standing by to help. Contact us today!