High performance in infra and construction

Diversification and technical competency will differentiate the wheat from the chaff, say top executives from the infrastructure sector, in a study by Accenture and CIDC. A report by Sanjay Dawar.

More growth opportunities in emerging markets, new funding mechanisms, and evolving customer demands are driving the industry’s players to diversify, both geographically and in terms of their offerings. While global companies are evolved in their adoption of risk management practices and achieving efficiency through automation, Indian companies still need to achieve excellence in programme management and enabling knowledge management through IT. Yet infrastructure executives are optimistic about the growth prospects even in the currently slow economy, says a research paper by Accenture in association with the Construction Industry Development Council (CIDC). The paper, on the infrastructure and construction sectors in India, aims to identify high per¡forming construction and infra¡structure companies to gain insight into the key priorities areas, critical road¡blocks and interventions expected from the government in the construction industry.

Be nimble and diversify

Building the order pipeline with forays into new markets and sectors is the topmost priority for the construction industry. While the industry saw order books grow by 15- 20 percent in terms of value in fiscal year 2011, it has slowed in the first half of fiscal 2011.

Despite the slowdown, respondents were optimistic about their prospects: Nearly 70 per cent of respondents expect revenues to increase by more than 15 per cent. To achieve this growth, organisations are banking on new markets. Nearly 60 per cent of respondents felt the need to look beyond Indian shores to new markets such as the Middle East, Africa and Turkey. About 63 per cent of respondents indicated that the preferred entry strategy for these overseas forays is through joint ventures.

Diversification figured in a major way as well, as 37 per cent noted that diversifying into new sectors like ports, roads, power, plant construction and airports is the best way to ensure better margins and growth. At the same time, several respondents felt that they should only diversify in areas where they have the requisite expertise-as excessive diversification can increase the risk of failure. Achieving operational excellence is another top priority. Respondents felt that by combining the right operating model with superior execution, they could not only ride out slowdowns more successfully, but also emerge from them more quickly.

In the survey, Accenture asked respondents to name the top three factors contributing to operational excellence; the results came up with:

• Project management excellence was identified as the most important factor, cited by 88 per cent of respondents
• Efficient procurement (38 per cent) of raw materials and equipment was the other factor that respondents saw as critical to operational excellence
• 31 per cent felt that superior engineering and design leveraging concepts such as standardisation and 3D modelling were identified as critical enablers

Volatility as factor: While globally, companies look at forward or backward integration to reduce revenue volatility, Indian respondents do not appear as keen on this option, with only 16 per cent of ranking this as important. In past years, secondary market volatility forced companies to turn to high-cost debt to fund projects. With interest rates showing no signs of falling soon, highly leveraged organisations are now worried about servicing their debt. This scenario has impacted project execution with a number of projects suffering from schedule and cost overruns due to delayed payment and working capital issues. Because of this factor, 15 per cent of the respondents ranked capital efficiency as a priority area after building an order pipeline and achieving operational excellence.

Enabling capability: Nearly 75 per cent of respondents rated talent as the most critical enabler. Commonly used measures to attract and retain the best talent are leadership programmes, differentiated pay and stock options. At junior levels, stock options seem to have lost favour with a number of people due to the vagaries of the stock market. On individual and organisational capabilities, 58 per cent of respondents felt that to improve and need to adopt industry best practices.

High-performance businesses are also using information technology (IT) to launch in-house e-learning platforms, and 53 per cent of the respondents agreed to the growing importance of technology as a key enabler, agreeing that technology can help businesses create a virtual environment for collaboration in which all partnering entities can be integrated on one platform. This can result in improved overall project delivery, efficiency, asset operability and cost control through enhanced data and information transparency.

The roadblocks

The CXOs also ranked challenges, with 55 per cent of respondents citing lack of equitable and standardised bidding norms as an important challenge, while half the respondents felt that the unavailability of managerial and supervisory staff is a significant impediment to growth and a major concern for the industry. Nearly half of them said that projects were delayed due to numerous reasons such as lack of project management capabilities, lack of engineering and design capabilities and issues related to environment. The survey revealed that 30 per cent of respondents felt that delay in acquiring land is a primary obstacle to completion of large projects. The delay could be on account of land undervaluation, dependence on state governments for actual land allotment and an ambiguous definition of the term "unencumbered land."

Initiatives needed

On initiatives and reforms the government needs to implement to help remove the major roadblocks faced by the sector. A majority (68 per cent) of respondents said delays in the resolution of issues related to land acquisition resulted in substantial delays in the completion of projects. While 58 per cent flagged bidding process reforms 42 per cent high¡lighted establishing monitoring groups as other important areas requiring the government’s intervention. The respondents listed some steps that the government could initiate:

• Land acquisition reforms: The government should modify existing land acquisition and rehabilitation legislation, which balances the needs of various stakeholders without compromising on the quality and velocity of projects.
• Bidding process reforms: Putting in place stringent qualification criteria at the time of tendering as well as for bidding.
• Contracting philosophy: There is a need to draft model contracts aligned to global and local best practices, with the underlying principle of being equitable.
• Approvals and clearances: The government should review and reengineer the approval process to minimise delays.
• Effective monitoring: The government should establish more monitoring cells on the lines of the investment tracking system planned by the Finance Ministry for all major projects in the private sector, as well as for public-private projects with invest¡ments larger than a reasonable threshold. The government should look at rigorous implementation of guidelines from the Ministry of Statistics and Programme Implementation.
• Dispute resolution: A robust mechanism for fast
• and efficient dispute resolution should be put in place. This should be aligned with international
• best practices and institutional arbitration system.
• Financing: Financing of large infrastructure projects with long gestation periods remains a significant challenge. Industry leaders believe that the government needs to focus on two key interventions-creating an environment to attract investments and structural reforms to enable long-term financing. Institutional lending should be ramped up from
• the current 1.5 per cent to at least five per cent share of total lending.
• Talent: The government needs to play a more
• active role to address the shortage of talent by setting up sector-specific skill councils and skill development institutions.

The derivation from this study is that companies will need to maintain new approaches to risk management and capital allocation, operational efficiency and supply chain management, develop novel ways of attracting, retaining and deploying a mobile and multilingual workforce with relevant skills. Today’s high performers have diversified more than most, developing more efficient and customer-focused ope¡rating models to help them. As the industry continues to evolve from b2b to b2b2cùthese strengths will become even more critical differentiators for the high performers of tomorrow.

Methodology

• The study involved detailed and insightful interviews with representatives from leading infrastructure and construction and financing companies.
• The survey was conducted between April and
• June 2012. Accenture fielded the survey of over thirty business executives from medium to large organisations.

The author is India head of Management Consulting, Accenture.