risk management in international, cross cultural projects

Project Management TOMORROWRisk management in international, cross cultural projects

Tischner European University, Krakow

December 8, 2015

By Lecturer Kjetil Gjerdalen, MBA

Buskerud and Vestfold University College, Norway

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Current trends in global economy

• Increasing influence of BRICS and other emerging markets

• China will surpass US as world’s largest economy in 2030

• Wave of mergers and acquisitions

• Trade agreements and breakdown of barriers to trade - fostered by rapid changes in technology, communication and market liberalization

• Concerns on environmental impact of growth – outcome of current Paris Climate Change Conference?

Background for the presentation

• Extensive international experience from small and medium sized companies, mostly CEO, COO or Plant Manager

• Presentation to a large extent based on experience as COO of Luxo ASA, a lighting company listed on the Norwegian stock exchange, running a global operation

• The specific project was to outsource a significant part of the lamp production

from Luxo’s Norwegian plant to a longstanding partner located outside of

Shanghai, China

17.12.15 3Kjetil Gjerdalen

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L-1

Launched in 1937

25 mill units sold

Design icon

Risks involved – overview

Political and contractual risks •Political risk •Currency risk•Conflict on contract•Sustainability of project at partner selected •Child labor, working conditions and environmental issues •Infringements of IPRs Project management risks •Capability at Norwegian plant while building up capacity in China•Cost overruns in project and/or product calculations•Quality issues•Delays in project •Stock out – during project period and regular operations

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Political risk

ISSUE

•Macro and micro risk

•Operational and transfer risk (but no ownership risk in Luxo’s case)

•(Terrorism)

PRECAUTIONS OR STRATEGIES

•Study climate for doing business, assess risk

•Protective and defensive techniques discourage the host government from interfering in operations (no R&D, diversify production and financing, limited local personnel etc)

•Proactive strategies as leveraging international trade and financing agreements

•Lobbying, using embassies, campaign financing, public relation activities, advertising, political interventions

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Currency risk

ISSUE

•Project involved currency exposure to one or both parties. Even if Luxo could buy in NOKs, Luxo would need to find a pricing mechanism that allows the partner to make money in the long run


•Forward contracts require short term horizon and known revenue and cost streams – and come with a cost

•Share risk between two parties involved

•Parties agreed on pricing in USD, quite common in China. Luxo’s income in the US market – in USD – would be offset against Luxo’s costs of production in China. Require fairly predictable purchasing and sales volumes in the long run, however

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Conflict on contract

ISSUE

•Chinese partner accepted and signed Luxo’s proposed draft without considering the contents. Chinese culture has long term view, and expects “guanxi” or good relations. Luxo dependent on steady deliveries and installed heavy sanctions on breach of contract


•Spend time together to build “guanxi”

•Allocate time to negotiate a balanced contract, explain why there must be sanctions. Be explicit

•Balanced contract

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Sustainability/stability of project at partner selected

ISSUE

•“All eggs in one basket” for Luxo. Need to trust sustainability of partner selected


•Maintain capacity at Norwegian plant until Chinese up and running (expensive option)

•Split volumes between two or more parties – which likely will give higher prices

•Study corporate structure and culture, financial situation

•Establish frequent reporting

•Develop and invest in relationship step by step

•Practice “quanxi” if this is what you preach

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Child labor, unacceptable working conditions, corruption, environmental issues etc

ISSUE

•Risk of doing business with partners who have lower standards than corporate policy, legal requirements, international treaties – and than customers expect


•Be explicit on need for abiding by standards agreed

•Training programs

•Explicit right to inspections without prior notice, also at sub-suppliers

•Visit to sub-suppliers

•Monetary sanctions – and incentives?

•Contracted right to immediate cancellation if material breach of contract

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Infringements of IPRs

ISSUE

•Luxo highly dependent on technology transfer to obtain savings as budgeted. Sharing ALL knowledge a requirement for success. China has a negative reputation on infringements of intellectual property rights (IPRs)


•Do not outsource core technology

•Cancellation if material breach of contract

•Develop reputation for chasing all infringements

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Capability at Norwegian plant when building down capacity

ISSUES•Capability at Norwegian plant while building down capacity – and building up capacity in China •Plant ran at marginal profitability due to lack of volumes – future at stake•Motivational challenges •Training Chinese engineers to replace Norwegian staff

PRECAUTIONS OR STRATEGIES •Open and honest communication •Explain criticality of successful project•Challenge staff on improvements that could secure remaining jobs•Incentive systems for staying onboard•Increase inventory levels

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Cost overruns in project and product calculations

ISSUE

•Offer from partner in Shanghai demonstrated potential savings of 50 percent compared to cost level in Norwegian plant. Would such savings be sustainable?


•Meticulous studies of offer, specification and calculation – is everything fully understood?

•Contract on long term pricing mechanisms

•RAM – responsibility assignment matrix

•Monthly reporting of progress and deviations

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Quality issues and delays in the project

ISSUE•Risk of quality issues and delays in a project of critical importance to Luxo

PRECAUTIONS OR STRATEGIES •Maintain capacity in Norway until partner fully up and running (expensive option)•Training in Norway•Meticulous check of drawings and specifications•Luxo project management on site in Shanghai•Frequent visits to partner’s sub-suppliers•Weekly reporting of status and issues•RAM and GANT-chart•Clear contract between parties that includes sanctions if breach of contract

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Stock out – during project phase and regular operations

ISSUE

•Norwegian plant extremely flexible, small orders could be produced and delivered in the afternoon if ordered in the morning, a service highly attractive among sales staff and customers


•Stress need of forecasting volumes – reward solid forecasting

•Establish regulation on air freight

•Make clear consequence of obtaining cost savings is lead times will go up

•Offer price reduction to customers (only if needed!)

•Build extra inventory, especially during initial stages

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Risks involved – summary

• There will always be risks connected to project management

• Risk increases with geographical and cultural difference

• Much can be done to reduce risk

• Impossible – or at least too expensive – to eliminate risk

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risk management in international, cross cultural projects

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