Since stakeholder engagement is the key interface between stakeholders and owner/operators, it plays a mission-critical role in project success and satisfaction for everyone.
Lots of ways to fail, so focus on value
Infrastructure and other large-scale projects are unique in their economics and their dependency on success at striking agreements with stakeholders over the course of many interactions. Mastering stakeholder engagement produces happier stakeholders as well as better project results.
The volume of infrastructure projects is projected to increase over the next decade as rebuilding and upgrade projects address aging assets, as well as new capabilities for solar, wind, smart grid, and other responses to climate change are launched.
The players will be different, with new companies on the scene. Old companies will be doing new things across construction techniques, funding mechanisms, and joint ventures. Some governments will be funding Public-Private Partnerships for the first time. The potential for naïve mistakes is large.
Compared to daily company operations, project work has unique features that require attention. The economics are more complex and potentially misleading due to the tendency to focus on the initial investment in design and construction. Projects also have the typical revenue and cost dynamic that all profit-making entities face. The initial attention to completing construction under budget and on time has the potential to sacrifice near-term success for long-term misery.
Further, stakeholders can have a big influence on many dimensions of an infrastructure project. Delays due to public protests can destroy a schedule, as can regulatory inspections and administrative processes. Schedule delays lead to cost escalations, so the original budget is often exceeded by a large margin. Stakeholder demands may require redesigns or changes in planned operations that can make the original cash flow estimates quickly obsolete.
Having clarity on how value is created on infrastructure projects ensures that appropriate investment is made in stakeholder engagement activities and that those actions are taken seriously. Doing so will increase the overall probability of success, as well as define what success actually looks like over time.
The key to seeing the entire value picture is looking past the “veil of completion” on a project and evaluating the impact during the lifetime of operation, as well as on the company’s reputation (which will affect future projects). Value has a much longer “tail” for infrastructure projects than for many operating entities, because of the long life of the asset being created.
Value Mapping an Infrastructure Project
The economics associated with each of the major steps in infrastructure are generally similar. First, a project is conceived and a design is prepared to meet the requirements, and construction is planned out step by step. The design can be preceded by a feasibility study. At that point, or soon thereafter, public consultations may occur. Engaging with stakeholders can start as early as when the idea of the project is conceived, and certainly by the design phase so that stakeholder concerns can be addressed.
Further engagement takes place as construction begins. A good example is during the process of land acquisition or obtaining right-of-way for a pipeline, road, wind farm, solar installation, utility line, or mine.
The exhibit shows the core drivers of value across the three main phases of a major infrastructure project. It shows two parallel streams, reflecting both owner/operator and stakeholder interests. Each stream ends on the right side with value attained by each party. Usually, there will be some interests shared by both. But when they do share interests, they usually differ by a matter of degree that can be large. The exhibit also shows typical expectations that are unique to each party.
Stakeholders Have Valid Concerns…
From a stakeholder perspective, there are a number of possible concerns about the project that drive a range of reactions from curiosity to resistance. Stakeholders may not like certain aspects of the project, are concerned about disruptions to the status quo, want to be compensated for relinquishing certain rights for land use, or have concerns about living near the asset during construction or when operational. There may or may not be any willingness to discuss concerns or negotiate with owners/operators.
The value that stakeholders achieve is a net of the overall project benefits and disadvantages, which may be felt collectively or individually. For example, the benefits may be improved access to electric power, transportation convenience, or local economic development. The project might also come with some downsides, such as disruption of local crops or commerce, or noise. As shown on the far right of the Exhibit, it’s the net benefit that counts.
The quality of stakeholder engagement determines the nature of the interaction between potentially opposing views. Good engagement can prevent a polarized relationship from emerging and can foster a collaborative relationship, even if only for key portions of the project.
…And Owner/Operators do too.
From an owner/operator perspective, there are many concerns about not having to make too many changes to the planned design or budget since modifications can be costly. Also, the later in the project that changes occur, the more costly they become.
The value that owners/operators garner is, at the core, economic in nature. It is best that the project is completed under budget or within the allotted time schedule. It must also meet its design requirements. With a pipeline, for example, it must actually pump a certain volume of fluid during operational testing prior to being put into service.
In addition, the operator wants to be able to actually operate the asset. In order to do so, it must retain its social license to operate by not offending critical stakeholders. Regulators or citizen voters could effectively put them out of business or seriously curtail operations.
As shown on the right of the Exhibit, owner/operators ultimately want to contain the cost to complete the project, be allowed to achieve revenue expectations while containing operating cost so that the project is acceptably profitable. Over the life of the asset, the annual profitability (which may be negative for select years during start-up) in aggregate will determine the asset’s overall return on investment (ROI). Since most infrastructure projects are made possible by equity or debt financing, financial results really do matter. Financing costs alone over the life of the asset can easily amount to an amount equal to the construction itself.
Owner’s and stakeholder’s main concerns are significantly different. It does not mean that owners cannot empathize with local stakeholder concerns and incorporate them into the project design. Nor that stakeholders cannot appreciate the need for the company’s or government’s need for an economically viable project. Both sets of needs must be met to an acceptable level for both parties for the project to proceed.
Keeping the Communication Channel Alive
While perspectives change over time, the only way the two positions meet is through stakeholder engagement, shown at the midpoint of the Exhibit, between the stakeholder and owner/operator value streams. The interaction is the main mechanism for communication for the life of the project. The interface between owner/operators and stakeholders can have an outsize impact on overall project success and collective satisfaction. Often, it is the interaction across this interface that determines if a project proceeds to the next phase. In other words, stakeholder engagement is the oil that allows the gears of the project to keep turning.
As indicated by the elongated and loopy depiction in the Exhibit, engagement is iterative, continuous, and lasts beyond construction and into the lifetime of operation of the infrastructure asset.
Budget and Schedule are important, but short-sighted goals
While containing the cost of design and construction can get a lot of attention in the early stages of putting an asset into use, the “long tail” of its operating life is just as important. It might take 2-5 or more years to settle on a design, finalize that design in detail, build and prepare the asset for use.
The Value Attainment Phase (shown on the Exhibit) that accompanies active operations can easily last from 10 to 30 times as long as the design and construction phases are put together. Since it occupies such a long duration, it can have a magnified effect on project economics.
So, don’t focus only on meeting the original budget and schedule to the extent that it will hurt the later revenue and profit-producing stage of operations. There is a potential trade-off relationship between the initial (up-front) cost for putting an asset into production and the (back-end) profitability of subsequent operations. The trade-offs must be understood before any new commitments or changes are made. This is why stakeholder engagement and negotiating win-win solutions are so valuable to everyone.
Many Ways to Kill a Project
Assume a project that has budgeted $1B for design and construction, will take 5 years to design and construct, and operate for 25 years with an annual cash flow of $250M. It helps to appreciate that:
- A reduction in operating profit of just 10% for the life of the asset, will cut the overall ROI of the project by nearly 15% because the impact is felt for 25 years.
- An increase in design and construction costs by 10% to accommodate stakeholder concerns cuts the original ROI by almost as much (just above 13%), not only because of the extra $100M in the construction itself, but also the cost of financing that extra amount over 25 years.
- In contrast, a 10% increase in design and construction cost for just one year instead of all five will reduce overall project ROI by less than 3%.
To respond to stakeholder concerns, owners/operators can adjust the project features through its investment in design and construction, or in how it operates the facility which will affect the asset’s annual profitability. Since time has such a big effect on the overall financial result, it is important to analyze options closely and with an eye to the duration of any proposed changes.
There is a potential balancing of adjustments made in one part of the project with changes made elsewhere on the project. Adjustments can affect the same phase, or be made across phases.
For example, providing alternative transportation pathways (e. g. temporary bus service for locals) during the most disruptive portions of construction will increase the cost of construction. But it could also be balanced out with an adjustment to operations constraints such as hours of operation or size of the facility in a way that slightly enhances operating profit. The net result is preserved ROI for the overall project, along with a satisfied local community. A win-win.
Stakeholder concerns might affect either the upfront or back-end aspects of the project. If alternatives that help preserve project ROI while meeting stakeholder needs can be developed and evaluated, a productive negotiation is likely that meets both stakeholder and owner interests.
There may be many ways to kill a project, but there is only one way to keep it alive, and that is an effective stakeholder engagement process.
As Stakeholder Capitalism Grows, Your Competitors will also be Engaging Stakeholders
Not only is Stakeholder Engagement needed for project success, but it is also needed for competitive success in your industry, and if relevant, your stock price.
Stakeholder capitalism is gaining ground at the expense of shareholder capitalism, leading companies everywhere to evaluate their stakeholders and proactively engage those who can impact their success. This includes your competitors. It means that all other things are equal, you could soon be competing on the basis of how well you listen to stakeholders.
Some Tips on How to Strengthen your Stakeholder Engagement capability
Here are some quick ideas to consider as you move forward:
- Adopt stakeholder engagements as part of your stakeholder capitalism motto or mission statement
- Drive stakeholder engagement from the top leaders, explaining why is it valuable to the company, and what process to use
- Be sincere in any public communications, as well as internal communications. It is not worth saying that you do not care about the ROI of the project when one of the primary reasons you are in business is to make a return
- Hire talented front-line representatives and train them well so that your company is getting the most value from its stakeholder engagement work
- Keep good records of all stakeholder interactions so data can be analyzed for patterns and future learning. Solid records also are critical in the event of employee turnover, so that the company can remain available and be a consistent partner with stakeholders.
- Use effective stakeholder management software that supports defined processes. Good software can smooth out the road of stakeholder interactions. Bad software can add hills, ruts, and potholes to that road.
- Manage the process actively. Categorize issues, review their status, make mid-course corrections based on what you learn, and report your insights to the senior leaders and the Board so they too see the impact that stakeholder engagement can have on project success.