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What if... a tale of problematic primary subcontractors.

"All right, what else can go wrong?"

We were in a weekly planning session at Williams Industries discussing two current construction projects that had been undertaken by the firm. The first was an expansion of an existing plant site, which was three months into a six-month construction period. The expansion was a direct result of an increase in demand for two of the firm's primary products and upon completion would allow the firm to provide the anticipated demand for the estimated remaining four years of the product's life cycle. In three years, the firm would begin a conversion to an enhanced version, which was presently being developed in another section of the plant.

The second project was the design and construction of a new greenfield operation in another state. To save time in the design process, many of the ideas that had been developed and tested in the current plant would be updated and included in the new facility. By combining present operating ideas with the anticipated advances in technology, it was estimated that the new plant could be completed and in a pilot testing mode within four years. The plant was being designed with the capability of manufacturing a number of the organization's present and anticipated products. Therefore, the combination of technology and a skilled labor force were critical to its manufacturing success. Initial marketing analysis indicated an increase in demand for the anticipated product lines, which reduced the anticipated investment risk in the facility.

One of the objectives in the meeting was to identify potential problems that may occur during the design and construction of these projects and the development of a preliminary response plan. Each of us recognized the limitations of this exercise, namely that we could not identify everything that could go wrong, nor could we define a specific course of action for every event, yet the level of intensity of the discussions and the ideas that were suggested showed that participants were taking the exercise seriously.

Towards the end of the meeting, Tim Rogers raised his hand and asked, "What if one of our primary subcontractors has a problem?"

"What kind of problem?" responded Jim Anderson, the project manager for the new plant. "We have worked with many of these organizations before and have developed a good working and communication relationship. So if they anticipated a difficulty, they would inform us as soon as they realized the problem and we would assist them in working it out."

"But what is our responsibility in telling them how to run their business? What if one of their subcontractors had the problem? Then what would we do?"

We now had a set of questions on the table that raised a number of interesting and possibly conflicting answers. However, at that time the alarm clock on Jim's desk went off, signaling the end of the meeting for the week. Jim had initiated a policy of limiting the time of these regularly scheduled planning meetings to one hour to both ensure that something was accomplished during the meeting and that the other work of the organization was also done. He had found that it was too easy to spend an entire day in these "what if" sessions, which while useful, also resulted in late nights to complete the other work of the day.

If a critical matter was being discussed, Jim did not set his alarm clock, but everyone in the meeting knew that they were being brought together to develop a response to a specific situation and not to discuss any interesting, although unrelated, topics.

The meeting broke up several minutes after the alarm and the participants started back to their respective offices and the real problems of the day. As I started out the door, Jim motioned for me to remain.

After everyone had left the office, Jim said, "Check out your mail and let's go out for an early lunch. There are a couple of points I would like to discuss with you."

Nodding in agreement, I headed back to my office to check for messages. A half hour later Jim stuck his head in my door and we started out the building.

As we headed towards the parking lot, he asked me what I thought of the two projects and his weekly "what if" meetings. One easy question with a potentially long and complex response. Not that the issues bothered me, but it may take a period of time to answer his question. Indeed, as an outsider I was not directly involved with either project, but my initial response to his questions and the issues being discussed was positive.

I said that I was pleased with the progress that had been made with the modernization of the plant. The initial planning and design work had been more than adequate and had anticipated many of the problems that may have been encountered with the construction, installation and testing of the new equipment. The cooperation with the primary subcontractors was excellent, construction was almost on schedule and all indicators showed that the project would be completed within a reasonable percent of the budget. That in itself was an accomplishment in view of the short time frame in which the project was being completed.

The greenfield operation was just starting to roll, and from my knowledge of the project and the organizations internal planning and control systems, I was comfortable with it as of that date.

"What about Tim's question?"

It was not the question, but the tone of voice that stopped me. I have known Jim for 10 years and have worked with his organization on several occasions during the past five. Our personal relationship was a strong one built on both professional and social contacts and had lead to many late night discussions on a number of topics, both "real" and "what if."

"Are you trying to say that this was not a 'what if' question?"

"Yeah, I think so."

"All right. Officially, I am working on a special project for your production operations group. They loaned me to your 'what if' group to see if any problems came up that may have an impact on their section. Initially, your concerns are with your section. Therefore, they are officially none of my business. But, if I buy lunch, then we can talk about anything we want and not be concerned with organizational politics. Right?"

"As usual, your thought process is a bit strange, but I never turn down a free lunch," Jim said as he pulled into the restaurant.

"Well, it can't be as bad as it sounds. At least you still have your sense of humor."

Over lunch, Jim explained what happened during the period of time after the meeting and our lunch appointment. During the meeting he had sensed that Tim was concerned about something and was trying to define it before discussing it with anyone else. Tim's primary responsibility was working directly with the primary subcontractors and acting as the primary linking pin between the two organizations. In other words, all communications would be channelled through Tim to reduce both the potential of misunderstanding and the time involved in getting any questions or issues resolved. One of his main talents is the ability to communicate with all levels of personnel within an organization and to get problems identified, and perhaps more importantly, to assist in getting them resolved.

After the meeting, Jim stopped by Tim's office for a short visit. It was during this visit that Tim indicated that he was concerned with Thompson and Wilson, one of the subcontractors on the modernization project. He was still acting from incomplete information and was therefore hesitant to discuss it without obtaining more data. But from several of his telephone conversations, he felt that Thompson was having problems with one of their subcontractors.

He was not concerned with the quality or work performance on the job, but with the billing practices between these two organizations. He had a feeling that several errors had been made in their internal billings, which resulted in Thompson paying too much to their subcontractor. Due to the contract between Williams and Thompson, small cost overruns had to be absorbed by Thompson and any significant differences would be isolated and identified and resolved between the two parties. The contract also provided for periodic audits of Thompson's operations and financial records for the project, so the financial risk to Williams was theoretically within a controllable level. But, that still didn't resolve Tim's issue. And, indirectly, there may be a potential problem for Williams, which raised another series of issues, among them professional ethics, financial risks, involvement with another firm's internal operations and so forth.

But again, Tim was still operating with impressions and incomplete information. Nevertheless, Jim indicated that he was concerned with the issue and with any potential fallout for Williams.

"Jim, do you remember that book I gave you by Mair, Wood and Davis? Computer Control and Audit?"

"Yeah, but what does that have to do with this?"

"Stop and think. From their research, they developed a listing of common business exposures that may occur in any operating environment. Sure it is a generic listing, but it is a place to start looking at this situation. From a business exposure perspective, Thompson and indirectly Williams could be faced with several potential issues. Among these would be erroneous record keeping, unacceptable accounting, erroneous management decisions, excessive costs, and in a worse case scenario, possibly fraud. And I guess for good measure, we may also throw in ethics and possibly a public relations risk. But let's not get too carried away with this thing."

Continuing our discussions, I reminded Jim of the individual definitions of these terms. Erroneous record keeping was the incorrect reading of financial transactions that are contrary to the established accounting practices. This may involve the time of the recognition of the costs, the value or the specific accounting classification.

Unacceptable accounting is the establishment or implementation of accounting practices that are inappropriate for the organization's specific operating circumstances or are not in accordance with the generally accepted accounting practices.

Erroneous management decisions based on incomplete or inaccurate data may result in a number of potential problems in other areas of the organization. Some of these problems may result in significant financial or operational risk.

Excessive costs include any of the organization's expenses that could be readily avoided.

Fraud is a worse case scenario and may be perpetrated at any level within the organization by an employee or member of management. It is a deliberate act and may be difficult to identify or to prove.

The issue of public relations must also be considered. If Thompson does identify specific wrongdoing by the subcontractor, it may have a detrimental effect on them. And since they are one of Williams' primary subcontractors, it may stretch to Williams. However, realistically speaking, this is an issue open to debate and should not be one of the primary drivers in this situation.

Ethics is a difficult issue and one that is becoming more complex all the time. And, unfortunately, many issues of ethics are being decided by third parties, often within a legal environment.

Finally, we come back to the specific issue of Tim and Thompson.

While our conversation was interesting, we were still operating from a position of incomplete information and speculation. Secondly, there was a significant risk to Williams in becoming too involved with the daily operations of any subcontractor's organization, and at this point in time this was perhaps the biggest risk to Williams.

While the organization had the legal right to conduct audits relating to the subcontractor's operations, the abuse of this right may impair future relationships with a number of firms on subsequent contracts.

Yet, could we sit by and do nothing while one of our primary subcontractors faced a potential exposure that may indirectly impact them or our firm?

It almost broke down to that old question of, "What didn't you know about the issue and why didn't you know anything about it?"

Realizing that we had carried our "what if" meeting to lunch, we started back to the office. We each realized that something had to be done, but at this point, other than attempting to collect more concrete information, neither of us were exactly sure of what the next move should be.

Richard M. Morris is president of R.M. Morris & Associates, a management consulting firm in Dayton, Ohio, and is involved in research, management control systems, strategic planning and organizational analysis. A senior member of the Institute, he is the immediate past director for District 6 and the 1992 recipient of the Outstanding IIE Publications Award.
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Title Annotation:Systems Support
Author:Morris, Richard M.
Publication:Industrial Management
Date:Sep 1, 1992
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