THE RELEVANCE OF OUTSOURCING IN

CONSTRUCTION PROJECT MANAGEMENT COMPANIES.

A LITERATURE STUDY

A Study Project

presented to the Graduate School of Business

of the University of Stellenbosch

in partial fulfilment

of the requirements for the degree of

Master of Business Administration

by

JJ Venter

Study leader : Professor CBrown

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DECLARATION

I, Johan Jacobus Venter, hereby declare that this study project is my own original
work, and that all sources have been accurately reported and acknowledged, and
that this document has not previously in its entirety, or in part been submitted at any
other university in order to obtain an academic qualification.

September 2000
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ACKNOWLEDGEMENTS

I wish to express my gratitude to the Graduate School of Business at the University

of Stellenbosch and its personnel for the excellent facilities and assistance during my
MBA studies.

I would like to thank the library personnel at the Graduate School of Business whose
professionalism made this study project a pleasant experience.

Thank you to Professor Brown, my study leader, for his assistance, advice, energy
and time throughout the project.

A special word of thanks for the support of my family and friends. Particular thanks to
my mother and father, for their love and for believing in me and supporting me
throughout.

Thank you to Mrs. Rita Maree for her assistance with the editing of work. I will always
remember your kind nature. I truly appreciate it.

To my wife, Elizabeth, thank you for your support, love, understanding and just for
being there. I love you.

Last but not least, I would like to thank my Creator, for giving me the knowledge,
skills and ability to do this work.
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ABSTRACT

This research project focuses on the relevance of outsourcing in construction project

management companies, and will be conducted in the field of project management,
for it is closely related to matrix management and other project management
elements.

The primary aim of this study is to review and summarise some of the more important
literature on outsourcing published in various sources during the past decade. Similar
literature related to project management would also be studied in order to relate the
mostly generic articles on outsourcing to the field of Project Management. A number
of general conclusions will be drawn on the basis of similarities encountered in the
various published works.

The research is divided into the following sections:

• An introduction, explaining the relationship between outsourcing, project
management and a construction project management company.
• The definition of a construction project management company. This entails a
description of a construction project management company and the
organisational structure of such a company. The properties and advantages of a
matrix organisation structure are also discussed, because of the close
resemblance between a construction project management company's
organisational structure and that of a pure matrix organisation structure.
• The definition of outsourcing, to enable the reader to comprehend the title of this
research project. The difference between outsourcing and traditional
subcontracting is explained, and drivers of the outsourcing process are identified.
• The relevance of outsourcing in construction companies is then investigated. This
involves the study of the formulation and implementation of a successful
outsourcing strategy, the establishing of core and non-core activities and the
outsourcing of these activities, specifically in a construction project management
company.
• The relationship between outsourcing and project success is then studied. In this
process, both project success and the critical success factors are investigated
 Stellenbosch University http://scholar.sun.ac.za

and defined that are crucial to the successful implementation of an outsourcing

strategy, together with its advantages and disadvantages.
• All stakeholders play an important role in the implementation of an outsourcing
strategy. It is therefore important to define the roles of the directors, operations
manager, resource manager and project managers in this process.
• In conclusion emphasis is placed on the fact that all construction companies will
have to adopt this strategy or a similar one to become a true virtual construction
company, thus a construction project management company, if their aim is to be
successful by international standards.
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OPSOMMING

Hierdie studieprojek fokus op die toepaslikheid van uitkontraktering in konstruksie-

projekbestuurmaatskappye. Die studie salonderneem word in die veld van
projekbestuur aangesien dit in nou verband staan met matriksbestuur en ander
projekbestuurelemente.

Die hoofdoel van die studie is om van die belangrikste literatuur oor hierdie
onderwerp wat oor die afgelope dekade gepubliseer is, te bestudeer en op te som.
Soortgelyke literatuur oor projekbestuur salook bestudeer word om die onderwerp
van toepassing te maak op projekbestuur, aangesien die artikels oor uitkontraktering
meestal generies van aard is. Gevolgtrekkings sal gemaak word na aanleiding van
ooreenkomste tussen die verskillende gepubliseerde werke.

Die studieprojek sal verdeel word in die volgende gedeeltes:

• 'n Inleiding wat die verband aantoon tussen uitkontraktering, projekbestuur en 'n
konstruksie-projekbestuurmaatskappy.
• Die definisie van 'n konstruksie-projekbestuurmaatskappy. Dit behels onder meer
'n beskrywing van 'n konstruksie-projekbestuurmaatskappy en die
organisasiestruktuur van so 'n maatskappy. Die eienskappe en die voordele van
'n matriks-organisasiestruktuur word ook bespreek, aangesien daar 'n sterk
ooreenkoms is tussen die organisasiestruktuur van 'n konstruksie-
projekbestuurmaatskappy en 'n suiwer matriks-struktuur.
• Uitkontraktering word gedefinieer sodat die leser 'n geheelbeeld kan skep t.o.v.
die titel van hierdie studieprojek. Die verskil tussen uitkontraktering en
tradisionele subkontraktering word verduidelik en die drywers van uitkontraktering
word geidentifiseer.
• Die toepaslikheid van uitkontraktering in konstruksie-projekbestuurmaatskappye
word dan ondersoek. Die studie omvat die formulering en toepassing van 'n
suksesvolle uitkontrakteringstrategie, die bepaling van kern en nie-kern
aktiwiteite, en die uitkontraktering van hierdie aktiwiteite, spesifiek in die geval
van 'n konstruksie-projekbestuurmaatskappy.
• Die verband tussen suksesvolle uitkontraktering en projeksukses word ook
ondersoek. In die proses word projeksukses, die kritieke suksesfaktore met die
 Stellenbosch University http://scholar.sun.ac.za

toepassing van In uitkontrakteringstrategie en die voor- en nadele van

uitkontraktering gedefinieer en ondersoek.
• Alle aandeelhouers speel In belangrike rol in die toepassing van In
uitkontrakteringstrategie. Dit is dus belangrik om die rol van die direkteure,
operasionele bestuurder, hulpbronbestuurder en die projekbestuurders te
definieer en te identifiseer.
• In die slotsom van die studieprojek word beklemtoon dat alle konstruksie-
projekbestuur-maatskappye hierdie of In soortgelyke strategie sal moet volg
indien hulle in die toekoms suksesvol wil wees.
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TABLE OF CONTENTS

PAGE
DECLARA TION 2
ACKNOWLEDGEM ENTS 3
ABSTRACT 4
OPSOMMiNG 6
LIST OF APPENDICES 10

CHAPTER 1: INTRODUCTION 11

CHAPTER 2: CONSTRUCTION PROJECT MANAGEMENT

COMPANIES DEFINED 14
2.1. Description of a construction project management
company 14
2.2. The matrix structure 16
2.2.1. Properties of the matrix structure 17
2.2.2. Advantages of the matrix structure 17

CHAPTER 3: OUTSOURCING DEFINED 19

3.1. The definition of outsourcing 19
3.2. The difference between subcontracting and outsourcing 19
3.3. Drivers of outsourcing 20
CHAPTER 4: THE RELEVANCE OF OUTSOURCING IN CONSTRUCTION
PROJECT MANAGEMENT COMPANIES 24
4.1. Formulation and implementation of a successful
outsourcing strategy in construction project
management companies. 24
4.2. Core and non-core activities in construction
project management companies 25
4.3. Outsourcing of core activities in construction
project management companies 27
4.4. Outsourcing of non-core activities in construction
project management companies 29
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4.4.1. Outsourcing of business processes in construction

project management companies 29
4.4.2. Outsourcing of project specific activities in
construction project management companies 30

CHAPTER 5: THE RELATIONSHIP BETWEEN OUTSOURCING

AND PROJECT SUCCESS 31
5.1. Project success defined 31
5.2. Advantages of outsourcing in construction project
management companies. 32
5.3. Disadvantages of outsourcing in construction project
management companies. 34
5.4. Critical success factors with the implementation of an
outsourcing strategy in construction project
management companies. 34

CHAPTER 6: MANAGEMENT OF OUTSOURCING 36

6.1. The role of the top management 36
6.2. The role of the resource manager 38
6.3. The role of the project managers 39
6.4. The role of the operations manager 40

CHAPTER 7: CONCLUSION 42

LIST OF REFERENCES 45
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LIST OF APPENDICES

Appendix 1: The organisational structure of a construction project

management company.
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CHAPTER 1: INTRODUCTION

The primary goal of any company is to add value to a variety of stakeholders. The
realisation of this added value may either be in monetary terms (profits for the
shareholders) or non-monetary terms (contribution to the community in which it
operates). Another primary business aspiration of any company is to obtain a
competitive edge in the face of fierce competition and rivalry in a specific market or
industry. "Those who are considered market leaders share the realisation that
suppliers of services (internal or external) are strategic resources that should be used
optimally." (Viljoen, 1999)

Central to the whole question of optimisation in any company is a strategy. A clear

strategy is needed to attain certain predetermined goals and objectives. However, a
strategy is of little use if it is not supported by an appropriate organisational structure.
The structure of the organisation enables it to pursue the strategies needed to realise
its predetermined objectives. The matrix organisational structure is being used
successfully in many companies. The construction project management company's
organisational structure is based on the matrix model, thus realising the advantages
of this model.

./- 'Realisation of the importance of customer satisfaction also led to modern companies
focusing more on their core areas of business. In doing so, more non-core service
functions had to be removed and handed to external suppliers who were contracted
to perform these functions. It is therefore clear that outsourcing of non-core activities
(or non-value adding activities) is one of the possible structuring tools for
organisations to enable them to achieve ultimate customer satisfaction.

It is assumed that project management is the core activity of a construction project

management company, with all the other activities classified as non-core activities.
These core and non-core activities can be outsourced, resulting in a virtual
construction company, namely a construction project management company.
Although outsourcing is fairly new to SA, especially in the construction industry, it has
already undergone an evolution. What started as the contracting out of "soft services"
such as cleaning, catering, security, training, human resources, maintenance and
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information technology, has grown to encompass traditional subcontractor functions

such as earthworks, plumbing, electrical installations and other project specific
activities. Outsourcing is not simply subcontracting as we know and understand it in
the traditional way. The difference between subcontracting and outsourcing is that
outsourcing involves the restructuring of the company around core competencies and
outside relationships, while traditional subcontracting is simply based on the best
cost versus best quality principle. Traditional construction companies therefore use
different subcontractors and suppliers on various projects, as opposed to a
construction project management company, which usually uses the same
subcontractors and suppliers. These subcontractors and suppliers are collectively
called outsourcing partners. (Bianchini, 1993:27)

Outsourcing allows a construction project management company with fluctuating

needs for scarce resources during and between projects to pay for only what it uses
rather than to maintain such a large infrastructure during off-peak periods. A win-win
scenario for the construction project management company as well as the
outsourcing partners can be realised, for they both benefit from higher competency
through specialization, economies of scale (the same knowledge, skills, and capacity
can be shared with many different customers) and they are likely to charge
competitive prices for these services. Outsourcing partners (subcontractors and
vendors) who work hard and who are well managed increase their wealth as well.
(Cape Times, 1999)

However, not all companies benefit from outsourcing. The disadvantages of

outsourcing can create serious problems for companies if they are not well
understood and managed. The project manager plays a crucial role in the success of
an outsourcing strategy.

This research project will focus on the relevance of outsourcing in construction

project management companies. This concept forms an integral part of the business
process-re-engineering spiral, which contains other buzzwords such as rightsizing,
downsizing, TQM, theory of constraints, value added activities etc. Outsourcing, in
conjunction with downsizing and rightsizing, has been identified as providing the
organisational flexibility necessary to enhance competitiveness. (Egan, 1993.)
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Although a study of outsourcing can fall under any of the fields of Strategic
Management, Production Management, Information Management or Technology
Management, this research will be conducted within the field of Project Management.
The reasons for this are:
• a construction project management company is a project driven entity and can
also been classified as a "project driven organisation";
• the organisational structure of a construction project management company is
based on a matrix structure;
• project managers fulfil the core function of a construction project management
company, namely project management; and
• project management is presently the world's fastest growing profession, and
Oosthuizen et al (1998: vii) claimed that all modern MBA programs must include
this subject in order to successfully prepare future managers.

The study will take the form of a literature study, critically evaluating approximately 35
sources. These sources are a combination of internet articles, newspaper articles,
class notes, business magazine reports and books, all written by prominent and
knowledgeable authors. Viewpoints from a wide spectrum of backgrounds, both
inside and outside the business environment, will thus be investigated. The scale of
what to outsouree and how much a company chooses to outsouree will increase
significantly in future. Outsourcing impacts, and will impact, on all stakeholders in a
company, thus the extent of this term needs to be investigated.

We can conclude that a construction project management company is a modern

construction company, whose properties are based on a virtual company with a
matrix organisational structure. The functions in the matrix structure are being
outsoureed and thus do not form part of the company itself. The construction project
management company thus realises the advantages of both the matrix structure and
outsourcing.
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CHAPTER 2: PROJECT MANAGEMENT CONSTRUCTION COMPANIES

DEFINED

An abbreviation for a construction project management company will be used

hereinafter, namely a CPM company.

2.1. Description of a construction project management company

Successful companies use flat organisational structures to ensure effective

communication and minimum response time in the execution of all functions,
according to Oosthuizen et al (1998: 17). Traditional construction companies use a
functional or vertical hierarchy while CPM companies use a horizontal or relatively flat
organisational structure. Companies could be classified as project-driven, non-
project-driven or both. In a project-driven company, such as a CPM company, all
work is characterised through projects, with each project as a separate profit centre
having its own profit-and-loss statement. The total profit to the company is simply the
summation of the profits on all projects. In a project-driven company, everything
centres around the projects. (Kerzner, 1995: 38)

In order to understand project management, one must begin with the definition of a
project.
A project can be considered to be any series of activities and tasks that:
• have a specific objective to be completed within certain specifications;
• have defined start and end dates;
• have funding limits; and
• consume resources.
(Kerzner, 1995: 2)
Projects make work unique while operations are repetitive. Projects are finite and
therefore exist in many instances for relatively short periods of time, whereas in
operations the emphasis is on creating a stable production environment, which is
expected to last for an indefinite period of time. (Oosthuizen et ai, 1998: 26)
Van der Waldt and Knipe (1998: 59) defined a project as an unrepeated activity,
which is objective-orientated, has limited resources, is quantifiable and brings about
change. Lientz and Rea (1998: 12) described a project as the allocation of resources
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directed toward a specific objective following a planned, organised approach.

Wideman (1993: 11-1)defined a project as any undertaking with a defined starting
point and defined objectives by which completion is identified. In practice, most
projects depend on finite or limited resources by which the objectives are to be
accomplished. According to Lock (1987: 15), the term project is definable in terms of
such attributes as a complete sequence of tasks that has a definite start and finish,
an identifiable goal and entity and an integrated system of complex but
interdependent relationships. Burke (1990: 5) distinguished between the following
features of a project, namely: a life cycle, a start and finish date, a budget, essentially
unique and non-repetitive, consumes resources and has a single point of
responsibility. In the broadest sense, a project is a specific, finite task to be
accomplished. (Meredith and Mantel 1992: 4)

Projects have always needed managing, yet many just limp along at a fraction of
their potential simply because people don't know how to make them run any better.
Project management is of value to any company determined to manage any change
efforts successfully and to all those required to implement corporate strategy and the
transition necessary to keep pace with the evolution of the modern world. (Wideman,
1993: 1-1)
Project management, involves project planning and project monitoring. (Kerzner,
1995: 2)
Lock (1987: 15) defined project. management . as 'getting results through
people ... achieving successful project completion with the resources available'. Van
der Waldt and Knipe (1998: 58) described project management as the planning,
organising, co-ordinating, controlling and directing the activities of a project.
Wideman (1993: 11-1)defined project management as the art of directing and co-
ordinating human and material resources throughout the life of a project by using
modern management techniques to achieve predetermined objectives of scope,
quality, time and cost. Project management is essentially the managing of a project
from start to completion. (Burke, 1990: 6)
Lock (1987: 17) concluded that project management entails the responsibility for
planning, organising, co-ordinating, staffing, leading, major decision-making,
motivating personnel, monitoring and controlling operations on the project.
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In project driven companies, such as CPM companies, accomplishment of the

specific project in the most economical, efficient and effective manner within the
constraints of time, cost and quality is the prime objective. (Lock, 1987: 16)
A critical problem in project driven companies such as CPM companies, is the
availability and management of scarce resources. Most resources can be classified
as scarce, for there are always a limited amount of it. Lientz and Rea (1998: 25)
suggested that scarce resources must be managed across multiple projects above
the level of the individual project. They also remarked that scarce resources couldn't
be assigned full time to one project for an indefinite extended period, but that they
must be released and time-shared among projects. The elements of the matrix
structure are the providers of scarce resources and services, which enable the
company to run smoothly and complete projects successfully. These elements are
being insourced from outside experts and thus not part of the company itself. A CPM
company applies the principles of the matrix structure to gain the advantages of
outsourei ng.

A CPM company's characteristics stand in stark contrast to the characteristics of a

traditional construction company. Some of these characteristics include:
• Flexibility. A CPM company could take on any number and size of projects, for
they use the infrastructures of other companies.
• Low capital expenditure. The acquisition of plant and equipment is not
necessary, as a CPM company outsources all activities to outside providers.
• Technology driven. A CPM company is very dependent on the latest
technologies to make them more efficient. These include cell phones, portable
computers, project management software etc.
• Empowered project managers. CPM companies place great value on their
project managers. Competent project managers are an essential ingredient to
guarantee success.

2.2. The matrix structure

The matrix organisational structure forms the core of the CPM company's
organisational structure, and it is therefore necessary to investigate the properties
and the benefits of such a structure.
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2.2.1. Properties of the matrix structure

Labuschagne (1998: 8) concluded the following properties regarding the matrix

structure: "The dictionary defines a matrix as a pattern of vertical lines overlaid or
imposed on a set of lateral or horizontal lines. A matrix organisational structure is a
horizontal, project-specific organisation overlayed ad-hoc over a function specific
organisation."
The matrix model is thus a structure allowing a company to take on more and larger
projects. The first question that any company should ask is whether it needs a matrix
structure. Kolodny (1980:18) suggested that companies should only turn to matrix
structuring when the following three conditions exist simultaneously:
1. when outside pressures require that intensive attention be focused on two or
more different kinds of organisational tasks simultaneously;
2. when tasks become so complex and uncertain that the information-processing
load threatens to overwhelm the managers; and
3. when the company must achieve economies of scale and high performance
through the flexible and shared use of scarce human resources.

This indicates that a CPM company should use the matrix structure to provide an
adequate structure in which single-point responsibility for multi-functional inputs can
be achieved. Matrix project management is an attempt to obtain maximum
technology and performance in a cost-effective manner within time and schedule
constraints. (Kerzner, 1995: 126)

2.2.2. Advantages of the matrix structure

The matrix structure permits project managers to focus attention on all stages of the
project from start to finish while operating in the traditional functional structure. The
matrix structure allows greater flexibility and therefore is more adaptable to changes
in technology in that personnel can be readily transferred to different projects. This
facilitates balancing of workloads between the demands of all the projects being
undertaken. Better communications are maintained between all parties as well as
better utilisation of resources. Personnel are likely to be more motivated than in a
functional structure. Because the matrix can be considered as an overlay on the
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functional structure the benefit of functional specialisation in maintaining a high

standard of technical excellence is another advantage. (Lock, 1987: 15)
Meredith and Mantel (1992: 119) identified the following advantages of the matrix
structure:
• the project is the point of emphasis. One individual, the project manager, takes
responsibility for managing the project and completing it within the given
parameters of time, cost and quality;
• the talents of different people and companies are available to all projects;
• there is less anxiety about what happens if the project is completed, because
the people return to their home companies and the outsourcing companies to
other clients;
• response to client needs is rapid because of the matrix structure's flexibility;
• with the matrix structure, the project will have a representative of the company,
thus consistency with procedures, policies etc. tends to be preserved; and
• where there are several projects simultaneously under way, the matrix structure
allows a better company-wide balance of resources to achieve the several
different time! cost! quality targets of the individual projects.

Kerzner (1995: 123) identified more advantages of a matrix organisational structure:

• the project manager maintains maximum project control over all the resources;
• policies and procedures can be set up independently for each project, provided
that they do not contradict company policies and procedures;
• rapid responses are possible to changes, conflict resolution, and project needs;
• conflicts are minimal, and those requiring hierarchical referrals are more easily
resolved;
• there is a better balance between time, cost and quality;
• rapid development of specialists and generalists occurs;
• authority and responsibility shared;
• a strong technical base can be developed, and much more time can be devoted
to complex problem-solving. Knowledge is available for all projects on an equal
basis;
• the functional organisation exists primarily as support for the project; and
• each person has a " home company" after project completion. People are more
susceptible to motivation.
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CHAPTER 3: OUTSOURCING DEFINED

3.1. The definition of outsourcing

In the past, outsourcing was synonymous with the management of the technical
infrastructure of a company (e.g. IT systems etc). Today, outsourcing is more of a
method of contracting. It has become part of the philosophy of how directors manage
their businesses, and should form part of the company's core competencies. To
exploit and maintain a competitive advantage requires discipline, efficiency,
adaptability, and a singularity of purpose. Global competition has forced
managements to re-define, refine, and focus intensely on their companies' core
competencies. This emphasis on core competencies has led to increased interest in
contracting non-core support functions to outside organisations - a process known
as outsourcing. (Crino and Drnevich, 1999: 2)
Mariotti, (1999: 1) defined outsourcing as a strategic decision to obtain goods or
services from independent organisations outside of a company's legal boundaries; to
purchase goods or services instead of making or performing them.
According to Dalal (1999), a partner at PriceWaterHouseCoopers, outsourcing is
defined as the long-term contracting of a company's non-core business processes to
an outside service provider to increase shareholder value.
In an article published in Finance Week (1998), outsourcing is defined as the
entrustment of a business process to an external services provider for a significant
period of time.
Outsourcing is not merely subcontracting as we know it, as the emphasis in respect
of outsourcing is on the close and long term relationship between the CPM company
and the outsourcing partner.

3.2. The difference between subcontracting and outsourcing

Humphries (1996: 8) remarked: "Companies are looking at outsourcing vendors in a

new light, seeing them as business partners, not just contractors."
Outsourcing is a management strategy by which an organisation outsources major,
non-core functions to specialised, efficient service providers. Construction companies
have always hired special contractors for particular types of work, or to level-off
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peaks and valleys in their workload. They have always striven to establish long-term
relationships with firms whose capabilities complement their own. Outsourcing is
generally defined in the perspective of medium or long-term relationships, while
traditional subcontracting is only for the period of a certain project. (Bianchini, 1993:
28)
Construction companies have always subcontracted to gain access to resources
beyond their individual reach - whether it be skills, people, technology, products or
materials.
Traditional construction companies labelled business processes such as payrolls,
human relations, administration etc as in-house functions, while CPM companies
outsouree these non-core functions. The close relationship between the CPM
company and the outsourcing partner is subjected to confidentiality of the data and
total control over the process.
Outsourcing partners can thus be:
• Vendors; providing products and materials such as cement, sand, bricks etc.
• labour only subcontractors; providing labour services such as bricklaying,
painting, tiling, etc.
• labour and material subcontractors; providing complete services (labour and
material) such as electrical-, plumbing installation etc.

3.3. Drivers of outsourcing

It is essential to identify the reasons why companies, and especially CPM

companies, are following the path of outsourcing. Short-term financial considerations
are the most immediate criteria in a decision to outsource, in particular the
opportunity to transform a substantial proportion of a company's fixed costs into
variable costs. (Bianchini, 1993: 27)

Greaver, (1999: 1) identified six drivers of outsourcing:

1. Organisationally driven: Enhance effectiveness; increase flexibility to meet
changing business conditions, demand for products/services, and technologies;
transform the traditional construction company; increase productivity and service
levels; client satisfaction and shareholder value.
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2. Improvement driven: Improve operating performance; obtain expertise, skills

and technologies; improve management and control; improve risk management;
encourage innovative ideas for improving the business, products, services etc.;
improve credibility and image by associating with superior outsourcing partners.
3. Financially driven: Liquidating asset based investments in order to facilitate
cash flow; generate cash by transferring assets to the outsourcing partner.
4. Revenue driven: Increase market access and business opportunities through
the outsouree partner's network; accelerate expansion by tapping into the
outsourcing partner's developed infrastructure and capacity; expand production
capacity during periods when such expansion could not be financed;
commercially exploit the existing skills.
5. Cost driven: Reduce costs by utilising the outsourcing partner's superior
performance and lower cost structures; turn fixed costs into variable costs.
6. Employee driven: Empower and encourage employees to pursue personal
growth; increase commitment and energy in non-core areas, e.g. the quantity-
surveying department.

Corbett (1995: 39) identified ten more reasons for outsourcing:

1. Accelerate re-engineering benefits: Re-engineering aims for dramatic
improvements in critical measures of performance such as cost, quality, service
and speed. But the need to increase efficiency can conflict directly with the need
to invest in core business. As non-core internal functions are continually put on
the back burner, systems become less efficient and less productive. By
outsourcing a non-core function to an outsourcing partner, the CPM company will
realise the benefits of re-engineering.
2. Improved capabilities: Outsourcing partners invest extensively in research and
development, technology, and people. They gain expertise by working with many
construction companies facing similar challenges. This combination of
specialisation and expertise gives CPM companies a competitive advantage and
assists them in keeping abreast of the latest technology and training methods.
There are also more career opportunities for personnel who are transferred to
outsourcing partners.
3. Cash infusion: Outsourcing often involves the transfer of assets from the CPM
company to the outsourcing partner. Equipment, facilities, vehicles and licences
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used in current operations have value, and are sold to the outsourcing partner.
The outsourcing partner utilises these assets to provide services to the CPM
company. Depending on the value of the assets involved, the sale may result in a
significant cash payment to the CPM company.
4. Making resources available for other purposes: Most CPM companies have
limits in regard to available resources. Outsourcing enables the CPM company to
redirect its resources, most often human, from non-core activities towards
activities which serve the client.
5. Functions difficult to manage or control: Outsourcing is certainly one option for
addressing this problem.
6. Improve company focus: Outsourcing enables a CPM company to focus on
their core business by delegating non-core operational functions to an outside
expert. Freed from devoting energy to these areas, the company can focus its
resources on meeting its clients' needs.
7. Make capital funds available: There is tremendous competition within most
construction companies for capital funds. Deciding where to invest these funds is
one of the most important decisions that top management makes. It is often hard
to justify non-core capital investments when areas more directly related to
producing a product or providing a service compete for the same money.
Outsourcing can reduce the need to invest capital funds in non-core business
functions. Instead of acquiring the resources through capital expenditures, they
are acquired on a temporary basis when needed. Outsourcing can also improve
certain financial ratios for the firm by eliminating the need to show return on equity
from capital investments in non-core areas.
8. Reduce operating costs: Construction companies that try to do everything
themselves may incur vastly higher research, development, marketing and
deployment expenses, all of which are passed on to the client. An outsourcing
partner's lower cost structure, which may be the result of a greater economy of
scale or other advantage based on specialisation, reduces a company's operating
costs and increases its competitive advantage.
9. Reduce risk: Tremendous risks are associated with the investments a
construction company makes. Markets, competition, government regulations,
financial conditions and technologies change constantly. Keeping up with these
changes often requires significant and risky investments such as capital
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expenditures on plant and equipment. Outsourcing partners make investments on

behalf of many construction companies, not just one. Shared investment spreads
risk, and significantly reduces the risk borne by a single company.
10. Resources not available internally: CPM companies outsouree because they
do not have access to the required resources within the company. Outsourcing is
a viable alternative to building the needed capability from the ground. New
companies, spin-offs, or companies expanding into new geographical areas or
technology should consider the benefits of outsourcing from the very start.

Egan (1993: 25) concluded that outsourcing a competency is an option only if it costs
significantly less than the cost of acquiring, maintaining, and managing it in-house.
He identifies additional reasons why companies outsource:
• improve product quality;
• reduce overhead and capital costs;
• flatten organisational structures;
• increase flexibility;
• simplify the management process;
• improve access to new skills and technologies; and
• create employment.

These drivers should be adequate to convince the top management of any traditional
construction company that successful outsourcing is one of the key elements in
building true competitive advantage.
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CHAPTER 4: THE RELEVANCE OF OUTSOURCING IN CONSTRUCTION

PROJECT MANAGEMENT COMPANIES

It is essential to identify specific processes and steps, which should be followed

during the transformation process of a traditional construction company into a CPM
company. CPM companies outsouree their non-core functions and in certain
circumstances their core function, project management, as well.

4.1. Formulation and implementation of a successful outsourcing strategy in

construction project management companies. v

The Outsourcing Institute (1999) identified three major phases in the outsourcing
process:
1. Internal analysis and evaluation: In this phase, top management examines the
need for outsourcing and develops a strategy to implement it. This phase is
conducted at the highest level of the CPM company. For the CPM company to
benefit from outsourcing, the initiative should come from the top as only the top
level executives have the power to define the vision and implement the changes
necessary for outsourcing to succeed. The following should be considered:
• clarifying the goals of the CPM company in relation to outsourcing;
• identifying outsourcing areas: Define both the core and non-core competencies of
the CPM company. The CPM company should outsouree its non-core functions
in order to focus on its core competencies; and
• developing a long-term strategy.

2. Needs assessment and selection of outsourcing partners: In this phase,

people inside and outside of the CPM company provide more detailed information
and advice. In this exercise the CPM company identifies its specific needs, and
selects the most qualified outsourcing partners in order to meet those needs. The
resource manager should develop a framework in conjunction with the project
managers, which deals with issues such as:
• what is required of the outsourcing partner in quantifiable and measurable terms;
• the type of relationship the CPM company is looking for;
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• the typical problems or tasks the outsourcing partner will have to solve or
complete;
• establishing acceptable service levels; and
• calculating breakeven costs of all activities, thus answering the question: to
outsouree or not to outsource?

3. Implementation and management: The CPM company should decide in

advance how they intend to manage the relationship. It is important that the
resource manager, operations manager and the project managers are fully aware
of the relationship with the outsourcing partner and their individual responsibilities
regarding this relationship. The CPM company should create a system that
enables the:
• monitoring and evaluating of performance;
• identifying and communicating of issues timeously;
• timeous and equitable resolving. of issues; and
• assisting people in the CPM company adapt to a new operating systems and
methods.

Greaver (1999: 1) divided the actual implementation process of the outsourcing

initiative into seven segments, namely:
1. Planning initiatives.
2. Exploring strategic implications.
3. Analysing costs/performance.
4. Selecting outsourcing partners.
5. Negotiating terms.
6. Transitioning resources.
7. Managing relationships.

4.2. Core and non-core activities in construction project management

companies

Most businesses are established because someone devised a better way to meet the
client's needs. The client's needs are construction or similar projects in the case of a
CPM company. Many functions must be performed in a CPM company, but not all
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are equally critical to the needs of the client. The most critical functions are "core" to
the business, although others are necessary, but not core. Understanding the core
competencies that make a business special is a critical step in any decision on
outsourcing. (Mariotti, 1999: 1)
An outsourcing initiative cannot operate in a vacuum. The top management, resource
manager, operations manager and project managers must understand the CPM
company's vision, current and future core competencies, current and future
competitive advantages, current and future structure, and current and future
transformation tools. (Greaver, 1999: 3)
It is crucial to establish the core and non-core activities in a company to implement a
successful outsourcing strategy. Core competencies are the innovative combinations
of knowledge, special skills, proprietary technologies, information and/or unique
operating methods that are well integrated into the processes that provide the
product/service benefits that clients' value, and want to pay for. Core competencies
create the attributes that make the CPM company's products/services different, and
more importantly, what satisfies the client's needs. Construction companies compete
for customers, revenue, market share, etc. with products/services that meet clients'
needs. Accordingly, without core competencies, construction companies cannot
compete. (Greaver, 1999: 3)

Van der Waldt and Knipe (1998: 4) defined a strategy as the process whereby certain
policies, strategies and resources are used to achieve the main objectives of the
company. Effective strategy planning begins with a concept of what the CPM
company should and should not do and a vision of where the company is headed.
Visionless companies are unsure as to what business position they are attempting to
secure. A company's business is defined by what needs it is trying to satisfy, by
which client groups it is targeting, and by the technologies it will use and the
functions it will perform in serving the target market. (Strickland, 1998: 31)
A CPM company's strategy should be tailored to comply with industry norms and
ensure competitiveness. A well-conceived strategy aims at capturing a company's
best growth opportunities and to defend it against external threats to its well-being
and future performance. A CPM company's strategy ought to be grounded in its
resource strengths and in what it is good at doing, thus its competencies and
competitive capabilities. (Strickland, 1998: 56)
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The foundation of an outsourcing strategy is the identification of the company's core

and non-core activities. Non-core activities can be subdivided into business
processes and project specific activities. Business processes involve all the activities
usually handled by the head office, e.g. information technology, human resource
management (recruitment, payroll etc.), catering, maintenance etc. Project specific
activities are generally present in project driven organisations and involve all the
scarce resources required to complete a project successfully.

A CPM company is well positioned to succeed if it has an appropriate complement of

resources at its command. Successful strategies capitalise on what a company does
best - its expertise, resource strengths, and strongest competitive capabilities.
(Strickland, 1998: 110). These scarce resources include labour, material and normal
subcontracting trades such as plumbing, electrical installations, tiling, plastering etc.

Egan (1993: 7) concluded that successful companies share the following features:
• they have a clear vision and competitive advantage;
• they focus their energies on their core business and their strengths;
• they are client focused;
• they remove boundaries that prevent them from meeting their client's needs;
• they use multi-disciplinary teams to form closer links with their clients and
outsourcing partners;
• they empower their employees. They select their management carefully, e.g. in
the case of a CPM company, the project managers;
• they value innovation and recognise that the best new ideas often come from
clients, outsourcing partners and staff; and
• they think strategically. They continually research how their client's needs are
changing and look for innovative ways of meeting those needs.

4.3. Outsourcing of core activities in construction project management

companies

Any company must have a reason to exist, whether it is to develop, design, produce
or sell products or to provide a service. This is better known as the core function of
the company. All the other functions are labelled non-core functions. An outsourcing
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strategy provides a structure in which all non-core functions are outsoureed to

outsourcing partners, to enable the CPM company to focus on its core function,
namely project management. In certain circumstances, a CPM company could be
forced to outsouree its core function, project management, as well.
Although there could be many reasons for this phenomenon, the sole reason is
virtually always linked to the availability of competent project managers. The
company may be involved with various projects, or a project of significant size or
complexity, for which they do not have a competent project manager within their
ranks. An outside project manager could then be appointed to manage this project.
Project management will not succeed without good project managers. (Kerzner,
1995: 171)
CPM companies must ensure that they appoint competent project managers with
appropriate qualifications and experience to complete all projects successfully. A
classic project management question is whether or not the incumbent project
manager possesses practical experience pertinent to the project he/she has to
manage, e.g. construction in the case of a CPM company. This is naturally
preferable, for the client or professional team may become annoyed and frustrated by
an incompetent project manager.
Deacon (1997: 3) defined competence as the product of knowledge and experience.
He further stated that a project manager must have characteristics such as: a
positive, can-do attitude; creative and inventive; adaptable; flexible; committed; be
able to cope with stress; a masterful communicator; organiser; team builder; good
leadership and negotiating qualities; and should be assertive and persuasive.
The project manager must become familiar with the operations of each outsourcing
partner, and should have general knowledge of the technology being used. (Kerzner,
1995: 10)
Van der Waldt and Knipe (1998: 70) identified characteristics of successful project
managers such as: the ability to co-ordinate the pool of diverse resources and the
ability to delegate and monitor work. Oosthuizen et al (1998: 17) emphasised that
project managers are generalists. They are not bound to any management discipline,
and their views are not parochial. They accept ownership from inception to
conclusion, and their main commitment is to successfully complete the project. Other
attributes identified by Lientz and Rea (1998: 102) crucial to a competent project
manager are: excellent human relations qualities; ambition; highly energetic; sense of
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humour; willing to accept guidance and suggestions; familiar with the parent
organisation and well organised and self disciplined.
The project manager should also be a facilitator. (Meredith and Mantel, 1992: 88)
It has been suggested that the single common trait to be found amongst successful
project managers is 'an obsession with getting things done.' (Wideman, 1993: V-2)
Mariotti (1999: 1) warns companies not to lose or give away what makes them
unique. This is important in the case of a CPM company as well, not to outsouree
their core competency, which is project management.

4.4. Outsourcing of non-core activities in construction project management

companies

Quinn, (1999: 1) made this extreme remark: " If you are not best-in-world in doing
something, and are doing it in-house, you are giving up a competitive edge. You
could outsouree to the best in the world, up the value and lower the cost".
The company can outsouree activities not considered differentiating for its position in
the market, allowing it to concentrate the available resources on its own core
business. These non-differentiating activities do not contribute in an obvious way to
the company's image; however, that does not mean that their quality, effectiveness
and efficiency are any less important. On the contrary, the company that decides to
outsouree an activity should pay particular attention to obtaining the best service/cost
ratio, for the optimisation of these non-differentiating activities play an important role
in giving a company its competitive edge. (Bianchini, 1993: 26)

4.4.1. Outsourcing of business processes in construction

project management companies

Most companies have basically the same business processes. These are usually
backstage processes or activities that are necessary in any business but not core to
the business.
The following are examples of such processes in a CPM company:
• Information technology: A specialist information technology company could
manage all the hardware, software and system requirements of the CPM
company.
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• Human resources: This includes payroll processing, compensation packages,

recruiting of staff, labour relations, medical and pension packages etc.
• General office administration: The processing of creditors claims, debtors
collections, etc.
• Fleet management: Managing of vehicle leases, maintenance, etc.
• Catering: Catering on projects or other specific functions.
• Cleaning: Cleaning of head offices and yard.
• Mailroom and messengers: Use of specialist companies to fulfil this role.
• Security: Security on project sites and head office.
• legal work: Outsourcing of all contracts, labour problems etc.
• Market research and marketing: Use of specialist companies to establish
market demand and managing of the company's marketing function.
• Maintenance: Maintenance of head office building etc.
• Office equipment: The supply of office equipment such as fax machines,
photocopiers etc through lease agreements.
A CPM company can outsource business process functions such as accounting,
payroll administration, etc. via the internet to an outside partner providing this
service. All the relevant data can also be kept at internet data warehouses, from
which the company can access all necessary data.

4.4.2. Outsourcing of project specific activities in construction project

management companies

Project specific activities in a CPM company usually involve all the scarce resources
that are required to complete a project successfully.
Providers of these resources can be categorised into the following categories:
• Vendors: Providing products and materials such as cement, sand, bricks etc.
• labour only subcontractors: Providing labour services such as bricklaying,
painting, tiling, etc.
• labour and material subcontractors: Providing a complete service (labour and
material) such as electrical installation, plumbing etc.
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CHAPTER 5: THE RELATIONSHIP BETWEEN OUTSOURCING AND

PROJECT SUCCESS

Successful project completion is the backbone of any CPM company. It is therefore

necessary to define project success and investigate the role outsourcing plays in
achieving it by studying the advantages of outsourcing. Outsourcing also has
disadvantages which should be identified, as they may have a negative influence on
project success. By the same token a successful outsourcing strategy and its
implementation is critical for success of the project. It is therefore vital to identify the
critical success factors crucial to the successful implementation of such a strategy.

5.1. Project success defined

Project success is a vague term. The Sydney Opera House is an excellent example
of a successful project, however one of the greatest failures in terms of project
management. The project took 16 years to complete and the final cost at completion
exceeded the original budget 15 times over. Yet 25 years after completion, the
Sydney Opera House is the most successful tourist attraction in Australia. (Deacon,
1997: 3)

Kerzner (1995: 118) remarked that the project manager has total responsibility and
accountability for project success. He further defined successful project management
as project completion using assigned resources effectively and efficiently in order to
comply with time and cost constraints without compromising quality.

Lientz and Rea (1998: 315) identified the following key questions when assessing
project success:
• Was the project completed within schedule, budget and specified quality?
• Is the end product of the project being used?
• How did the project manager and project team perform?

According to Van der Waldt and Knipe (1998: 59), the critical elements of project
management are time, cost and quality. These elements interact constantly and a
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balance must be established and maintained between them. If time and cost are
given priority, then quality will be neglected, and vice versa.

Wideman, (1993: VIII-3) concludes that project success comprises three basic
dimensions, namely the implementation process, the perceived value of the project
and the client's acceptance and use of the project. The first dimension, the
implementation process, concerns the internal efficiency with which the project was
developed and includes measures of time, cost and quality. If the only objective of
the project is completion within time, cost and quality parameters, then degrees of
success can certainly be measured against these parameters. However, when
measuring project success, one must consider the interests of all the involved
stakeholders.

5.2. Advantages of outsourcing in construction project management

companies

The most compelling reason for outsourcing is that the non-core or peripheral
functions of a CPM company are given to an outsourcing partner whose core
competency lies in the functions being outsourced. This enables the company to
concentrate on the product or service it delivers, which leads to increased
productivity, client satisfaction and a clear strategic focus. The company's resources
are therefore focused on its core mission, or in other words, these resources are
utilised optimally. This optimum utilisation of resources is one of the determinants of
project success. Outsourcing allows management to focus on the company's
strategic objectives. The many diverse functions of running the business have
caused fragmentation of the manager's time in the past, with too much time being
spent on non-critical or support functions. The clearer strategic focus derived from
outsourcing may be duplicated at all levels so that every single employee can relate
his or her task to the company's overall objectives. This, for example, enables project
managers to focus on the successful completion of their projects within time, budget
and quality parameters. Outsourcing enables a CPM company to buy a service only
when required. Capital expenditure is reduced by outsourcing a specific service to an
appropriate outsourcing partner who has maximised economies of scale by servicing
a variety of companies. Costly investment in technology that becomes outdated very
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quickly is eliminated in this way. This overall cost reduction results in improved cost
control on individual projects, thus adding to their success. The focus of outsourcing
companies is to provide a quality service. These companies are equipped to provide
a full complement of services. They have better procurement power and because
they have multiple clients, they can accommodate fluctuations in demand.
Outsourcing companies strive to provide a quality service by employing skilled
professionals and utilising the latest developments in construction technology.
Outsourcing offers a choice in the marketplace and companies can choose the most
appropriate outsourcing partners to suit their own company's characteristics and
flexible demands. Attractive approaches and innovative ideas from outsourcing
partners can be explored and developed. The business risk of a company that
chooses to outsouree is reduced significantly as this risk is now shared with the
outsourcing partner. Risks are much lower in terms of labour unrest, restructuring
and career paths for support staff, as these risks are all absorbed by the outsourcing
partner. Although a company cannot avoid their legal responsibilities, an outsourcing
partner ensures that all these conditions are attended to as needed. (Viljoen, 1999:
12)
Egan (1993: 7) concluded the following advantages of outsourcing for a CPM
company:
• reduced overheads, capital expenditure, and labour costs;
• higher quality and greater flexibility than internal staff can provide;
• access to leading edge technology such as that provided by outsourcing partners;
• access to the world's best talent - i.e. project management expertise which is in
short supply;
• a leaner company that is more focused and less bureaucratic, with less internal
politics and conflict; and
• a more client focused company with more opportunities for individual growth.

It is clear from the advantages discussed that outsourcing can playa significant role
in achieving project success. Although the advantages provided by outsourcing seem
to outweigh the disadvantages, there are nevertheless disadvantages that should be
considered if outsourcing is to be successful.
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5.3. Disadvantages of outsourcing in construction project management

companies

As outsourcing usually requires organisational restructuring, the changes sometimes

create political problems both inside and outside the company. The risk of service
disruption to the company may simply be too high for it to be placed in the hands of
an external provider. The construction company may be stable and react adversely to
the sudden changes that outsourcing would initiate. There might even be an attitude
of "don't fix it if it's not broken". Ironically, there is often more inherent risk in utilising
smaller outsourcing companies for menial tasks than when contracting with a large
and established outsourcing partner. The initial cost of the outsourcing process may
discourage some construction companies. The cost of funding a redundancy
programme, additional training programmes and the transfer of liabilities in terms of
staff joining an outside provider also have to be considered. Although these
disadvantages must be considered, a strategic approach to outsourcing will save
money, raise the quality of the workplace and ensure that all services that are
purchased are working as efficiently and enthusiastically as the core business.
(Viljoen, 1999: 14)

5.4. Critical success factors with the implementation of an outsourcing

strategy in construction project management companies. v

A successful outsourcing strategy can play a significant role in achieving project

success, while a poorly implemented strategy can have disastrous results.
Humphries (1996: 12) revealed the following critical success factors for the
implementation of an outsourcing strategy:
• Stay in control: Set clear, measurable objectives for the outsourcing partners
and ensure that emphasis is on service rather than on product.
• Vet your outsourcing partners: Pay close attention to the references,
reputation, and existing relationships with other construction companies.
• Look long-term: Do not over-emphasise short-term benefits at the cost of long-
term benefits.
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Egan (1993: 5) identified more critical success factors regarding outsourcing:

• outsourcing cannot be done in isolation. It must be viewed as part of how the
CPM company should be structured if it is to achieve its competitive advantage;
• outsourcing should only be considered after the CPM company's core
competencies have been determined;
• activities that add little value to the final product, or those that do not give the
CPM company a competitive advantage, should be outsourced;
• the purpose of outsourcing is not simply to save costs. Expect and demand
benefits such as increased quality, quicker delivery times, greater flexibility and
lower costs from outsourcing partners;
• outsouree activities to as few outsourcing partners as possible, e.g. use only one
company per trade e.g. plumbing, etc. However, the resource manager should
stay in contact with other possible outsourcing partners to take advantage of new
technologies, better quality, competitive prices, etc; and
• develop close supportive relationships with outsourcing partners. Develop a
greater openness and win-win relationships with outsourcing partners.
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CHAPTER 6: MANAGEMENT OF OUTSOURCING

Construction companies rushing into outsourcing without carefully considering their

objectives, may find themselves entangled in a contractual battle with the chosen
outsourcing partner or in a worse position than before. The strategic decision to
outsouree is initiated at top management level, while the more technical aspects are
dealt with at a middle management level. Outsourcing is synonymous with change in
operational methodology. Outsourcing is ultimately changing the way business is
transacted, functions are managed, and management roles and responsibilities are
assigned. It enables companies to move from vertically integrated islands, to
complex matrixes of interrelationships. (The Outsourcing Institute, 1999)
Quinn, (1999:1) stated that one actually needs a higher quality management than
usual in order to outsouree successfully.

6.1. The role of top management v

T op management should define the objectives that they want to achieve with an
outsourcing strategy. Outsourcing should be approached carefully, systematically,
and with explicit goals. Outsourcing should not be used as an escape vehicle for top
management when dealing with a costly, poorly managed or misunderstood business
function. Top management must understand all the risks inherent in a business
function before evaluating its potential for outsourcing. Otherwise, top management
would probably decide to outsource for the wrong reasons, and thus may enrich the
outsourcing partner at their own expense. Furthermore, they are likely to start a
relationship that will be unsuccessful and end painfully. It is thus crucial for top
management to implement an outsourcing strategy for the right reasons. They need
to assess outsourcing's potential benefits, which include cost reduction, cash
infusion, increased client satisfaction, and other effectiveness and efficiency
improvements. Most importantly, if the outsoureed function is not a core competency,
the energy applied to it can be redirected to more important tasks. If an outsourcing
strategy is implemented for the wrong reasons, potential disadvantages could
surface, e.g. losing control of a scarce resource, losing personnel who have been
trained in the company's particular business practices, and the risk that the
outsourcing partner may not be able to achieve the desired benefits or may fail in
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providing critical services, etc. The Outsourcing Institute (1999: 1) suggests that top
management should address the following questions in conjunction with middle
management (resource, operational and project managers):
• what are the company's core competencies?;
• which services or corporate support functions are not integral to or close to their
core competencies?;
• what are the barriers raised by the company culture?;
• what is the cross-functional impact?;
• can the company fulfil the function themselves before considering outsourcing?;
• what might be better accomplished by an outside partner?;
• what are the goals they want to achieve from outsourcing?; and
• what kind of relationship with an outsourcing partner is most appropriate?

Top management should consider all stakeholders when implementing of an

outsourcing strategy. They should be able to predict the likely impact that outsourcing
will have on the company's stockholders, clients, suppliers, subcontractors and
employees. Top management should also involve the right people and the right
partners. Early in the evaluation, people who will assume leadership responsibility,
perform the analysis, and make the decisions, must be identified. The personnel
involved will depend on what is to be outsourced, and the circumstances surrounding
the outsourcing decision. These persons include the resource, operations, and
project managers. These people should form part of the team that drafts the contract.
Their inclusion is critical for several reasons.
Firstly, there is no better way to understand the issues involved in outsourcing than to
be implicated in all aspects leading up to the deal.
Secondly, relationships with outsourcing partners commence the moment
discussions begin. Being on the ground floor and maintaining continuity in the
relationship with the outsourcing partners contribute to success.
\ Once top management has decided to outsource, responsibility for oversight and
\
\ \ management of the outsourcing arrangement and relations with the outsourcing
partners can be delegated to the resource manager. However, the value of
outsourcing should be recognised by top management if outsourcing services are to
be optimised.
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6.2. The role of the resource manager

In the matrix structure of the CPM company, the resource manager generally decides
who will be the construction project management company's outsourcing partners.
(Deacon, 1997:3)
The resource manager should always be on the lookout for new outsourcing partners
who could provide better service at a lower cost. This is important, as it ensures the
existing outsourcing partners competitiveness. This could be done in conjunction with
the quantity surveying department during the tender stage of a new project, by using
pre-qualification documentation. This documentation will determine the properties of
the new proposed outsourcing company.
The main items in this documentation are:
• details of similar projects undertaken;
• value of these projects;
• dates of commencement and successful completion;
• notarised copies of contract award letter;
• names and contact addresses of clients;
• notarised copies of the company's annual report (if available); and
• bankers' references.
(Fletcher, 1997: 11)

According to Bianchini (1993: 27), the outsourcing partners must be chosen not
merely for their size and technical skill, but also for aspects such as financial
structure, shareholder solidity, management capacity etc. Maree (1998: 21) identified
three important aspects which should be taken into account by the resource manager
in both selecting and managing outsourcing partners:
1. The basis for future pricing adjustments and penalties for poor performance.
2. The need for the CPM company to have regular insight into the financial state of
the outsourcing partner to ensure their financial stability.
3. The need for the outsourcing partner to have a stable and secure workforce. The
temptation on the part of some contractors to under-employ, under-train and
exploit workers could result in inferior skills and industrial relation problems,
which will adversely affect the quality of their service.
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The Outsourcing Institute (1999) emphasises that the resource manager should be
satisfied that the outsourcing partner demonstrates:
1. a clear understanding of the CPM company's needs and the ability to solve
problems;
2. financial stability;
3. cultural compatibility; and
4. a proven track record, thus can the partner handle the associated risks.

They also suggest that the resource manager should attend to the following once the
outsourcing partner has been chosen:
1. negotiate a reasonable price and performance parameters;
2. communicate often and openly;
3. display eagerness to achieve a win-win situation; and
4. establish penalty clauses for under achievement.

A further important responsibility of the resource manager is to negotiate a sound

contract with the outsourcing partner.
This is made up of several critical components. From the outset the emphasis should
not be on who wins the best deal, but rather on negotiating a fair and reasonable
contract for both parties. Because each aspect of the outsourcing relationship is
governed by the contract, both the CPM company and the outsourcing partner must
agree on every aspect. This also means that the resource manager must think of
every possible contingency to be covered in the contract.
The parties should also agree on how to resolve disputes after the contract is signed.
Such an agreement should not take the form of an open-ended assurance of goodwill
but should clearly stipulate the who, what, when, and where of conflict resolution.

6.3. The role of the project manager

The project manager's responsibility is broad and primarily falls into three separate
areas: responsibility to the parent organisation (CPM company), responsibility to the
project, and responsibility to the members of the project team. The project manager
is entrusted with the responsibility to ensure that the project remains within
predetermined cast parameters. (Oosthuizen et al. 1998: 61)
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Quality management is an integral part of project management, and the project

manager must manage this important project management function continuously.
(Oosthuizen et al. 1998: 95)
Meredith and Mantel (1992: 90) distinguished between seven special demands on
the project managers, namely acquiring adequate resources, acquiring and
motivating personnel, dealing with obstacles, making project goal trade-efts, failure
and the risk and fear of failure, breadth of communication and negotiation. Lientz and
Rea (1998: 99) identified the following duties as well: directing, motivating, planning,
supervising, administering, interfacing and co-ordinating, training, counselling,
delegating and resolving conflicts. Van der Waldt and Knipe (1998: 180) concludes
that the core functions of a project manager are planning, organising, leading and
motivation, control and co-ordination. According to Wideman (1993: V-2), the project
manager's role may be elaborated as follows: interpersonal, informational and
decisional. The project manager is responsible for co-ordinating and integrating
activities across multiple functional lines. (Kerzner, 1995: 3)
Kerzner (1995: 171) further distinguished between the following major responsibilities
of a project manager:
• to produce the end-item with the available resources and within the constraints of
time, cost and quality;
• to meet contractual profit objectives;
• to make all required decisions whether they be for alternatives or termination;
• to "negotiate" with all functional disciplines for accomplishment of the necessary
work packages within time, cost and quality; and
• to resolve all conflicts, if possible.

6.4. The role of the operations manager

The operations manager manages the project managers, thus managing intellectual
resources and not physical resources such as material, money etc. Quinn, (1999: 1)
stated that managing of intellect is a combination of a human and software
management process. Investment is not a hard investment in equipment or physical
resources, but in training, knowledge generation, knowledge capture and knowledge
leveraging. He remarked that one cannot give orders when managing intellect. Giving
orders is diametrically opposed to what one is trying to accomplish - that is to give
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41

the project manager an opportunity to generate his/her own ideas. Farrelly (1997: 15)
claims that the overarching project management mega-trend over the past few years
has been a move to programme management. Previously the main challenge was to
find someone to run the project, but now it's finding people who can step up to a
higher level of managing programmes i.e. portfolio related projects. A programme is
a group of related projects, which are jointly managed in a co-ordinated manner to
obtain synergistic benefits that would not be available if those projects were
managed independently. Project management focuses on the integrative
management of all tasks within a single project, but programme management
focuses on the integrative management of all related projects within a programme.
(Sparrius, 1997: 20)
In a CPM company, it is the responsibility of the operations manager to take up this
position. He/she is not only responsible for appointing a suitable project manager to a
specific project, but also managing the whole portfolio of different projects. Probably
the most difficult decision facing the operations manager is the selection of project
managers. (Kerzner, 1995: 171)
Sparrius (1997: 20) identified the following roles of a portfolio manager or in the case
of a CPM company, an operations manager:
• decides which activities should become candidate projects;
• determines which candidate projects are most desirable, prioritises each new
project and reprioritises all existing projects, determines whether the candidate
project should be initiated, appoints a project manager, delegates appropriate
authority and authorises the project brief;
• continuously manages each project according to its suitably-tailored life cycle
model, specifically by approving project baseline, authorising each project phase
to continue, and terminating a project if needed;
• manages the interactions between individual projects, for instance by resolving
resource contentious problems; and
• measures the performance of the overall project management process and
systematically improves it.

The most difficult issue is the management of the interactions between various
projects, and the most vexing problem is inadequate capacity.
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CHAPTER 7: CONCLUSION

The CPM company should treat the outsourcing partner as a part of the company
itself. This means that they will not only share the benefits of the outsourcing
agreement, but the risks as well. Thus, the contracting companies gain an
opportunity to lower their own business risks. In an uncertain modern business
environment, less exposure to risk is a great advantage. Although it was historically
aimed at gaining cost competitiveness and expertise, using different
suppliers/subcontractors is not conducive to creating and building the all-important
partnering relationship. The relationship between the construction project
management company and the outsourcing partner should be based on mutual trust.
If such a partnership develops, it will provide unparallelled competitive advantages
over every competitor in the marketplace. The foundation of an effective strategic
partnership is a well designed contract. Both parties should manage the contract
although the CPM company maintains ultimate control over that function. The
contract should be flexible to ensure that market innovation evolves into tangible
benefits for both parties.

The implications of what is outsourced should be clearly understood. These

implications are not only strategic, but have political and managerial ramifications.
The reasons for a certain function being outsourced should at all times be clearly
understood and well documented. The strategic risk of outsourcing a certain function
should be understood. Risk should not be limited to financial risk in this context, but
should take due account of legislation and political conditions. The likelihood of
outsourcing success should be carefully investigated in each project scenario.
Outsourcing properly considered and implemented, will lower the overall business
risk.

Although an incremental approach to outsourcing services is beneficial, this does not

hold true for the appointment of different outsourcing partners for different functions.
Outsourcing the right work to an outsourcing partner with complementary skills and a
compatible culture can be a powerful strategy. A company should always be wary of
sharing too much information pertinent to its core competencies with its outsourcing
partners. CPM companies should take care not to avoid taking responsibility and
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43

ownership of existing problems that are theirs to rectify. By shifting them to an

outsourcing partner, they effectively surrender control of their ability to deal
conclusively with them. (Mariotti, 1999: 2)

The nature of the outsourcing industry is also changing. Shared vision and mutual
objectives between the outsourcing partner and the construction company are
essential to the success of any alliance. This means both partners contribute to a
process of mutual disclosure and consensual agreements, and continue to evolve a
working relationship based on common goals. The course set by the transformation
created by synergistic outsourcing is building a whole new way of doing business
through partnerships, alliances and strategic relationships. New associations
between companies, and higher-level deals are launching outsourcing into a new
phase, categorised by dramatic and hard-hitting trends.
The Outsourcing Institute (1999) revealed four such new trends:
1. More complex and higher-level deals: As it becomes more and more difficult for
one company to do it all, many are actively looking for and finding partners to
enable strategic development and competitive initiatives. This means outsourcing
decisions are made higher up in the organisation and with long lasting results.
2. More long-term relationships: As outsourcing shifts from cost-control solutions
to improved utilisation of assets and development of strategic services,
relationships become more long-term. This demands attention to corporate
culture, leadership, and shared goals and vision.
3. Win-win approaches between outsourcing partner and client: The move from
viewing outside relationships as a buyer-and-supplier scenario to a more equal,
win-win model, requires a shift in perception and exposes a variety of underlying
issues. Open communication is vital, as companies identify and discuss what is to
be accomplished, agree on mutually beneficial terms, and select partners who
can work together.
4. Relationships that are more like alliances and partnerships: "Partnership" is
more than just a catchword designed to mask a less than equal relationship. True
partnership requires a balancing act between participants; it introduces the idea of
shared risks and rewards and mutually beneficial strategies. For those companies
using outsourcing strategically, the focus has shifted from the tactical details to
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whether the relationship is comfortable, the companies' cultures are compatible,

and whether there is a mutual understanding of the business needs of all parties.

The end result of outsourcing will be many smaller companies which will be highly
innovative because they are more flexible and have concentrated resources. These
smaller companies will then feed into a series of companies which have other core-
competencies.

When companies downsize by intelligent outsourcing, they eliminate their inefficient

activities and those employees not adding value to the company. Recent studies
show that those who left the company are in better jobs, smaller companies, and a lot
happier than they were before. (Quinn, 1999: 1)
It is likely that in the near future these trends will impact on the strategies of CPM
companies. Taken to its logical (or absurd) conclusion, companies will become
virtual, executing only core processes and contracting everything else out to
outsourcing partners who are more efficient at executing a particular support
process.

Traditional construction companies must consider the benefits of a matrix

organisational structure and its outsourcing, and make a conscious decision to
change their strategy accordingly. They will otherwise not be prepared for the rough
road into the 21 st century's construction industry.
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LIST OF REFERENCES

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under control. Information technology review, June, 26-28.
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of Stellenbosch.
3. Burke, R. 1990. Project Management: Planning and Control. Unique Press.
4. Cape Times. 1999. Outsourcing in the new millennium. July 29.
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Managing Office Technology, September, 39-41.
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Management Interactive Journal.
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July.
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16,42-49.
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Available: http://www.outsourcing.com/howandwhy/interviews/greaver/main.htm
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John Wiley & Sons.
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19.Lientz, B.P., Rea, K.P. 1998. Project Management for the 21st Century. Second
Edition. Academic Press.
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APPENDIX 1: An organisational structure of a construction project management company.

Top Management I
I
f
Operations Manager
I
•
Resource Manager
I
~ ~ ~ -" ...
Quantity Surveying I Materials Labour Only Labour and Material Business
Department Subcontractors Subcontractors Processes

u
" "
,. ..
Tenders Bricks Bricklayers Plumbing Information
New Projects Cement Carpenters Electrical Technology
Final Accounts Sand Labourers Air -conditioning Human Resources
Etc. Wood Operators Etc. Administration
Etc. Etc. Etc.

~ Project
II'

Manager 1
..
II'

--.... Project
Manager 2 ....

.... Project ....

Manager 3

.. Project
,
II" II"

Manager 4
" • 'P'
"