Larsen & Toubro Institute of Project Management Uses @RISK to Develop Project Delivery Schedule Identification Methodology for Engineering Outsourcing Assignments
Larsen & Toubro Background
Larsen & Toubro Limited (L&T) is a technology, engineering, construction and manufacturing company. It is one of the largest and most respected companies in India’s private sector. Set up as a centre of excellence in project management, the L&T Institute of Project Management provides high quality education and research in the field and collaborates with leading institutes of repute across the globe for research in this area.
The Institute used @RISK, Palisade’s Monte Carlo simulation tool for a study to develop a methodology that service providers in the engineering outsourcing industry could use to identify risks that impact the accurate determination of project scope, scheduling and therefore delivery.
Issues faced by the Indian engineering outsourcing industry
Over the last 20 years, the Indian engineering outsourcing industry has established itself as a provider of reliable services, leveraging the country’s skilled workforce and cost arbitrage. However, during this time, the complexity of software technologies has grown along with customer expectations – greatly increasing the risks related to successful project development and execution, which left unchecked could significantly impact the growth and reputation of the engineering outsourcing industry.
It is imperative that service providers in the engineering outsourcing industry develop processes and tactics to mitigate some of these risks.
Sources of uncertainty
Aside from the market uncertainties emanating from political, economic, social, regulatory and environmental factors – which no industry is immune from – there are many sources of uncertainty that affect service providers in the engineering outsourcing industry. Given the nature of the sector, the technology-induced risk factors are very significant. These could be from service providers’ inability to use the latest technologies due to proprietary reasons or from cutting-edge work that is being undertaken by their competitors, but not yet known to them.
Uncertainty also arises from the relationship between engineering outsourcing teams and customers due to a cultural mismatch or lack of synergy between expectations of sales and delivery teams. People interaction and processes also create uncertainty caused by personal aspects of knowledge workers (e.g. their drivers and motivations), organisational structures of service providers and customers, trust between teams, continuous on-boarding and attrition of personnel and the like. Furthermore, gaps in technical understanding and alignment of project objectives across outsourcing and customer teams also add to uncertainty.
Uncertainties impact project scope and delivery schedule
These uncertainties give rise to a combination of project scope and schedule risks during execution that greatly impact the successful delivery of customer assignments and in turn the customer satisfaction delivered by engineering outsourcing service providers. For instance, a lack of a project scope model from a process standpoint often results in estimation errors creating scheduling problems for assignments. Similarly, inaccurate specifications, lack of alignment with customer-specific practices, poor communication between onsite-offshore teams and differently orientated sales and delivery teams create project scope issues. These risks cascade downstream, creating a multiplier effect that impacts other stages of the project.
The L&T Institute of Project Management decided to undertake a study to determine a methodology that service providers in the engineering outsourcing industry could use to determine risks affecting their ability to accurately define project scope and schedule – an area of most concern for both service providers and customers.
Use of @RISK to develop a methodology for determining project risks
The Institute chose @RISK as its solution of choice for quantitative statistical modelling. “We chose @RISK for its ease of use and compatibility with Microsoft Excel,” said Dr Chakradhar Iyyunni, Deputy General Manager and Faculty at the L&T Institute of Project Management. “@RISK imports all the analysis into Excel, which means that we can use all the formulae in the software alongside all the @RISK features – a powerful combination for statistical analysis.”
The Institute, working with engineers in the delivery team, set up the study based on a typical outsourced design project of 800 hours and included 15 key activities that are characteristic of such an assignment – ranging from panel, process and layout studies; fixture design; review of design with simulation and client teams, design quality control, preparation for assembly through to final quality control. For each of these activities, the study considered the impact of eight key risk triggers such as lack of clarity on project requirements from customers, skill resource availability, environmental risks and technology.
“As many of the projects are small and resources are not dedicated to the team, it is difficult to implement a structured risk management programme,” commented Vishal Patil, one of the team members of the design project. “Monte Carlo simulation-based risk analysis is a more reliable approach.”
Using a three-point estimation (optimistic, most likely and pessimistic) for each of the 15 activities, the team was able to construct probability distributions in @RISK to represent the uncertainty around each activity. They then conducted simulations consisting of 15000 iterations each as part of the experiment. This means the team was able to examine 15000 different scenarios with the click of a mouse.
The analysis showed that at a 90% confidence level, an engineering project team could complete the work in 887 man-hours as if the project was being undertaken for the first time. For a 95% confidence level, the man-hours required would be 902 hours. This estimate could be used for repeat projects. 107 of these 902 hours could be used for contingency and a partial use of these hours would likely be acceptable to the client at the time of pre-project approval for billing. However, for a 99% confidence level, the team would require 925 hours to complete the project including 130 hours for contingency and a partial use of these hours would be acceptable to the client (pre-project approval) for billing as a trade-off to adhering to a stricter schedule.
The experiment also found that for a mature outsourcing team, this distribution could be narrow and the deviation between 795 hours (the sum of the most likely times of all the activities) and 99% confidence level would be marginal, translating into approximately less than 2% in cost terms.
Monte Carlo simulation better than traditional risk analysis, study concludes
This study concluded that this kind of three-point estimation using Monte Carlo simulation was a better way of creating robust project delivery schedules as opposed to a detailed risk analysis exercise, especially for short duration projects that are the norm in the engineering outsourcing industry. This is also a more vigorous way of deriving risk schedules. For instance, it takes into consideration the risk perception and control available to the teams, which are mostly seen as ad hoc methods in other risk analysis methodologies.
Furthermore, this approach would not put additional burden on delivery teams to conduct detailed risk analysis.
Based on the success of this experiment, the Institute is looking to use @RISK to develop an approach that helps outsourcing project teams to develop risk mitigation strategies.
Iyyunni concluded, “The wider IT industry has developed methodologies to deal with some of these issues, but they are not always readily applicable for the engineering outsourcing industry. As the Indian engineering outsourcing industry matures, new service offerings emerge and the cost pressures and virtualisation of work increases, we need to develop more customised and scientific approaches to project management and delivery in order to enhance the competitiveness of engineering services organisations in India. We will continue to build on this study via team level risk attitude and behavioural assessments.”
The study used triangular distributions for the study as it is, in the absence of historical data, the simplest approximation to a 3-point estimate. With the use of historical data and the involvement of the team (using wideband Delphi, for example), a more accurate distribution can be constructed.
This graph shows that the team can be 90% confident that the project can be completed in 887 man hours if the team is executing an assignment of its kind for the first time.
About Palisade Corporation
Palisade is the market leader in risk and decision analysis software for Microsoft Excel and Microsoft Project. Headquartered in Ithaca, New York, where the company was founded, Palisade also maintains offices in London, England; Sydney, Australia; and offers special services to Latin American customers. Palisade users can be found in over 100 countries, and include the likes of AT&T, Hewlett Packard, Hitachi, IBM, Proctor & Gamble, Dow Chemical, Citigroup, Bristol Myers-Squibb, PricewaterhouseCoopers, Unilever, London Underground, Infineon and Statoil.
About Larsen & Toubro Institute of Project Management
Larsen & Toubro Limited (L&T) is a technology, engineering, construction and manufacturing company. It is one of the largest and most respected companies in India’s private sector. Set up as a centre of excellence in project management, the L&T Institute of Project Management provides high quality education and research in the field and collaborates with leading institutes of repute across the globe for research in this area. www.larsentoubro.com and www.Lntipm.org