In the three months since Steve Morgan joined BAA as its new capital programmes director, he has ripped up just about every rule in the airport operator’s long established procurement book. Antony Oliver finds out what’s changed.
From the moment Sir John Egan, then chairman of BAA, published his influential Rethinking Construction report into UK construction efficiency in 1996 BAA has been at the forefront of innovative procurement policies.
This began with the desire to achieve predictable performance using long term frameworks, partnerships and alliances with its supply chain. By 2000, the format had moved to a second generation of frameworks and the Terminal 5 (T5) agreement which saw BAA control costs by taking on project risk.
A third iteration of frameworks known as “value in partnerships” was introduced in 2009 with new framework contractors in place early this year ready to tackle BAA’s £6bn-plus, five year capital spending programme.
Everything has changed
But since Steve Morgan became capital programmes director three months ago, everything has changed.
“I don’t want to say that ‘you lot have had it too easy’ but we did have an environment where BAA took most of the risk and the margins that we paid were very good,” he explains. “Now to get that kind of return I expect good performance.”
Morgan’s plan to achieve this involves a return to traditional client-contractor relationships with fewer frameworks, partnerships and alliances and more emphasis on good contracts, intelligent clients and contractor accountability.
“Most contractors would agree. It is challenging and frustrating when you don’t know what the rules are. Contracts give you the rules.”
Steve Morgan, BAA
“I am a professional acquisition person − this is what I do,” he says. “I firmly believe that you have got to have a contract and I think if you asked most contractors they would agree. It is challenging and frustrating when you don’t know what the rules are. Contracts give you the rules.”
So from now on the existing BAA frameworks will only be used for work valued at £25M or less. But where possible, when the contract value is between £10M and £25M, he intends to introduce some competition between the framework companies.
In addition he will repackage many of the smaller contracts to give bigger, more attractive, parcels of work.
A different approach
“I am not throwing out [framework procurement] but I am approaching it in a very different way,” he says. “Competition is the best way for me to demonstrate value for money to the regulators. Open competition is even better.
“There is an opportunity for more companies to make money with better margins if they deliver. But there is going to be less opportunity for those companies who sit on their hands and don’t deliver − you are going to have to earn it.”
“There is going to be less opportunity for those companies who sit on their hands and don’t deliver − you are going to have to earn it.”
Steve Morgan, BAA
Morgan explains that the framework approach is really designed for smaller scale projects of short duration as it avoids having to run a long competition for a small amount of work where potential savings from bid competition are relatively small.
“That is not the way we did it here,” says Morgan. “We ran a competition based on corporate CVs. We didn’t have prices or proposed management teams. We didn’t get competition. That is not the way the system is supposed to work.”
His goal is to get better value for every penny spent by BAA and as far as he is concerned frameworks, partnerships and alliances as introduced by Sir John Egan in 1996 are not the way to achieve this today.
“I don’t want in any way to criticise John Egan about what he was trying to do. I might well have come up with the same thing 12 years ago,” explains Morgan. “But where I disagree with him is that you need a contract. I don’t want to smudge the distinction between who is the customer and who is the contractor.”
Being an intelligent customer
Morgan is passionate about ensuring that BAA is an intelligent customer. This means being able to step back from the contractor’s role to focus on defining what it needs. It also means not change one’s mind and, once the contact is awarded, staying out of the way.
Things have moved on in the 12 years since Egan was struggling to deal with an industry locked into adversarial relationships with customers. Alliances and partnering relationships were a solution to the problem and, Morgan says “an interesting experiment” but are not something that he believes will get the best value for clients.
“I want a cooperative incentivised relationship with my contractors but I don’t want to be their partner. That is important. I want to be their customer.”
Steve Morgan, BAA
“It’s not a matter of let’s hold hands and sing kumbaya around the camp fire − it’s more about defining what we are doing and rewarding for performance,” he says. “I want a cooperative incentivised relationship with my contractors but I don’t want to be their partner. That is important. I want to be their customer.
“I want the contractor to be clear about what he is expected to do and can bank on being rewarded if he does it. I want a contract that provides constructive incentives.”
Morgan explains that there will in future be a preference for target cost type contracts but points out that he will be introducing a new device known as the “award fee”.
Getting more done for less
This will see BAA set aside a pool of money each year from which it can reward contractors’ performance on a biannual basis against things such as safety, innovation, cooperativeness and responsiveness.
“What I have told the contractors is that I want them to make more money but that they will have to earn it,” he says. “If they can come up with an idea that saves us money, I will not only protect their fee but I’ll give them a reward on top. We need to get much more done for much less.”
“I want them to make more money but they will have to earn it. If they can come up with an idea that saves us money, I will not only protect their fee but I’ll give them a reward on top.”
Steve Morgan, BAA
And BAA’s spending plans are big. Morgan is in charge of all capital works across the BAA portfolio with the exception of Gatwick, which due to its impending sale is now operating independently. In total that will see him overseeing more than £5bn of expenditure in the next five years with over £4bn being spent at Heathrow alone.
But as he points out, the total value of projects now on the slate already exceeds the money available, hence the need for him to reduce the costs to cover a growing, £300M-plus shortfall. The £4bn T5 programme was BAA’s last major capital project.
Morgan describes it as “an expensive terminal” from which BAA will learn and evolve. In future the strategy will be to open up competition, draw in the best skills in the world and identify the most economically advantageous tenders not just those which are the lowest cost.
“On T5 we were effectively the Tier 1 contractor − that is absolutely not what I want to do now, he says. “That model for T5 may well have been the right model for that era but we are hoping to get something that is equivalent to T5 for £2bn.”
Change starts at home
Achieving this means change and that must start at home, says Morgan, pointing out that the skills in his team will have to evolve as he ensures that BAA spends more time defining what it wants rather than retaining the flexibility to change its mind.
“I want programme managers not project managers,” he explains pointing out that his 500 strong team will inevitably be smaller in future.
“I am recruiting programme managers − people who want to play the role of the intelligent customer.”
Steve Morgan, BAA
“If some of my staff decide that they want to run a project then they will choose to go and work for contractors. I am recruiting programme managers − people who want to play the role of the intelligent customer.”
Of course he also accepts that the current economic downturn will help him to bring down costs with more firms looking for work and prepared to bid hard to win it. But he insists that he will not be looking to exploit or abuse this position and reports that, contrary to his fears, firms have welcomed the change.
“There were companies that got very high margins for taking very little risk. I felt that any proposal to take this away they would resist − that what I was asking them to do might hurt their position. But what I am seeing is that most folks, maybe because of the economy, are hungry to get a bigger piece of the pie and are willing to earn it.”
Morgan has introduced a new supply chain ombudsman to help increase competition down the supply chain by encouraging new companies with new ideas and fresh blood into the bidding process.
“Having new faces is not a bad thing. Having incompetent faces is,” he says.
“There had been a fear that this is a closed shop and the framework system discouraged people to get involved.”
But while firms currently outside the framework system will be pleased to see competition opened up, the incumbents will no doubt be reeling from suddenly seeing a raft of guaranteed workload withdrawn from under their noses.
“Having new faces is not a bad thing. Having incompetent faces is.”
Steve Morgan, BAA
An example of this is the Laing O’Rouke and Ferrovial joint venture known as HeadCo which had been banking on delivering the Terminal 2 building.
Although Morgan explains that time pressures meant that he did not retender the project coordination role, some 88% of the workload that would have automatically flowed to the jv will now be competitively tendered and he expects “to see big savings”.
“They will have to compete for the work against others and so their pencil will have to be sharper,” he says.
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- MBA, George Washington University
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