Project managers’ leadership role and formal controls in the success of outsourcing projects

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Master Thesis BA: Organizational & Management Control; January 18, 2015

Project managers’ leadership role and formal

controls in the success of outsourcing projects

A case study at the Nederlandse Aardolie Maatschappij

Christa Broek

University of Groningen, Faculty of Economics and Business S2016036, Beethovenlaan 460, 8031 CE Zwolle

Abstract

By analysing an outsourcing project of a Dutch oil and gas firm, this paper examines how formal control mechanisms and the project managers’ leadership role influence the success of outsourcing projects. The findings suggest that formal controls influence the performance mainly by providing clarity about the demands of the client organization to the vendor organization, by monitoring the progress of the project and thereby signalling the threats to the critical path of the project, by providing stringent rules and procedures on how to behave and by setting incentives on important milestones. Results showed that these controls were necessary to create goal alignment between the two organizations, whereas the controls served as means to convey the requirements of the client organization to the vendor organization. However, the controls were also needed by the vendor organization to perform the tasks properly. Also, the leadership role of the project manager of the client organization appeared important to the project. He influenced the performance mainly through his project team, through the relationship with the project manager of the vendor organization, by influencing superiors and by making decisions by paying attention to the critical path of the project. Moreover, the results showed that the formal controls shouldn’t be considered in isolation since the project manager, to some degree, was able to use the controls to signal risks and to steer the project into the right direction. However, it appeared that it was difficult for the client organization to always have total control over the vendor which made goal alignment between the two organizations very important. Theoretical and managerial implications for outsourcing projects are also discussed.

Key words: inter-organizational relationships; outsourcing projects; formal controls; leadership;

project management

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1. INTRODUCTION

‘NS wants to outsource retail property’; ‘Toshiba is going to outsource the development and sale of

TVs’;’ V&D wants to outsource distribution’ (Nu.nl). These articles are all posted last year which

implies that outsourcing is currently an ongoing topic in the business environment. According to Friedman (2007), outsourcing has become the norm since it is less expensive for an organization to outsource activities to an outsider compared to maintaining permanent employees. Although outsourcing is getting more attention in practice, many outsourcing organizations are unable to achieve success. Moreover, PricewaterhouseCoopers found that 55% of clients reported that they were not realizing the benefits they had expected from outsourcing (Schwarz, 2014). This may be due to increased complexity, since if organizations expand in size, the risks of conflicts and competing goals between units also increase (Geringer and Hebert, 1989). This results in an increased need for top management to monitor, coordinate and integrate the activities of the organization’s business units (Child, 1977; Mintzberg, 1979).

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3 deadlines and limited resources (Karlsen and Gottschalk, 2006). However, the IOR literature has paid little attention to these forms of outsourcing, in which the outsourcing activities resemble general projects. According to Smith (1999), projects in general often not attain the anticipated outcomes, which is not a result of ineffective management tools and techniques, but rather because of a lack of project leadership. However, the project management literature has long ignored the role, style and the competence of a project manager as a project success factor for a long time (Turner and Müller, 2005). Nowadays, more attention is being given to leadership as a success factor in projects (Mir and Pinnington, 2014; Christenson and Walker, 2004; Geoghegan and Dulewicz, 2008; Ong et al., 2009). Formal controls and leadership of project managers do not stand in isolation since the role of controls is to support managers in optimising the organisational performance for the benefit of both the owners and the stakeholders by means of decision-making, planning, evaluation and taking action (Merchant and Otley, as cited in Doeleman, 2012). However, literature that examines the interaction effect between controls and its users on organisational outcomes is scarce (Abernethy et al., 2010; Doeleman et al., 2012; Hartmann et al., 2010). Therefore, the goal of this study is to understand how the project managers’ leadership role as well as formal controls impact the outsourcing project. This is especially interesting since in an outsourcing setting, formal control mechanisms and project managers are both in place to direct the project into the right direction. Hence, this leads to the following research question:

How do the formal control mechanisms and the project managers’ leadership role influence the success of an outsourcing project?

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4 leadership role can make a difference in outsourcing projects. They can obtain the required qualities and techniques through training. The insights are especially important to the client organization, since the focus of this study will mainly be the formal controls implemented by the client organization and the project manager of the client organization.

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2. LITERATURE REVIEW

2.1 Introduction

This chapter will elaborate on the topics mentioned in the Introduction. First, the Literature review will focus on the inter-organizational relationships, specifically outsourcing projects. Also, controls and the leadership role of project managers in relation to the success of outsourcing projects will be discussed.

2.2 Inter-organizational relationships

Inter-organizational relationships (IORs) can be defined as “a process where a customer firm and

supplier firm form strong and extensive social, economic, service and technical ties over time, with the intent of lowering total costs and/or increasing value, thereby achieving mutual benefit.” (Anderson

and Narus, 1991, p. 96). IORs can range from contractual outsourcing to strategic alliances in which boundaries of the firms become co-mingled (Marion et al., 2015). Although outsourcing and alliances both fall under IORs, their focus appears different. Namely, the alliance research tends to focus on the mutual benefits each partner gains from the relationship and the purpose of the alliance is the development or acquisition of new resources and capabilities. Conversely, outsourcing research tends to focus mainly on cost benefits whereby the purpose of the relationship is to minimize the resources and capabilities required by a client organization (Marion et al., 2015). Participants in outsourcing activities represent at least two different organizations: the client and the vendor. According to Barthélemy et al. (2003), outsourcing can be defined as “turning over all or a part of an

organizational activity to an outside vendor” (p. 87). Therefore, outsourcing can refer to the

acquisition of a particular manufacturing process, service activity or an entire business process from another company (Kuula et al., 2013).

2.2.1 Outsourcing as a project

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6 often associated with unknowns, complexity and uncertainty (Anantatmula, 2010). According to Gehring (2007), projects have three basic characteristics that makes them difficult to manage: 1. Projects are mostly temporarily activities that do not provide continuous leadership improvement and development.

2. Project teams are either partially assigned to the project or work partially for the project.

3. Multiple groups of people are involved in the project, often with different backgrounds, experiences and motivations. Therefore, it can be a difficult task to bring together individuals for a common goal.

2.2.2 Outsourcing project performance

According to Dasari et al. (2015) the success of a project depends on the completion of scheduled project activities, on-time-delivery of the total project, within budget and with embedding quality into the project. However, this measurement is very simplistic and nowadays, project success embraces stakeholder satisfaction, product success, business and organization benefit and team development as measures of project success (Atkinson, 1999; Baccarini, 1999). For outsourcing projects specifically, partners are not merely interested in the final outcome of the outsourcing arrangement, but they also desire satisfaction with the process (Schwarz, 2014). However, project success does not fit into any predefined criteria and it changes from person to person and from perspective to perspective (Müller and Turner, 2007). What is acceptable in one project without impact on perceived success can be seen as failure in another project. Also, people can judge the success of projects differently depending on their personal objectives (Müller and Turner, 2007). Hence, it can be argued that there is no single measurement of project success.

2.2.3 Summary

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2.3 Control and leadership in outsourcing projects

A project manager’s (PM) role is more challenging than that of a functional manager (Gehring, 2007). According to Anantatmula (2010), “it is reasonable to assume that in project management, it is not

about if the plans will change, it is when, what will change, and by how much” (p. 19). Therefore,

Anantatmula argues that since projects are often characterized by significant changes, the leadership role becomes more important. Moreover, as most managers are risk adverse, it is logical that there are tight contracts in place during outsourcing projects, especially if the outsourced function is of critical nature (Langfield-Smith and Smith, 2003). However, when complexity and uncertainty are encompassed in the outsourced tasks, it is unrealistic to expect that all important aspects of the project and relationship could be specified and incorporated into a contract (Speklé, 2001). Therefore, by only leaning on formal control mechanisms to manage an outsourcing project is insufficient. Hence, it appears that both leadership of PM’s and control mechanisms may play a major role in outsourcing projects. Moreover, it can be argued that the role of controls is to support managers in optimising the organisational performance for the benefit of both the owners and the stakeholders by means of decision-making, planning, evaluation and taking action (Merchant and Otley, as cited in Doeleman et al., 2012). However, little research has been conducted that examines how controls and its users interact and what the effect is on organisational outcomes (Abernethy et al., 2010; Doeleman et al, 2012; Hartmann et al., 2010). Since literature is underdeveloped concerning this topic, it can be interesting to study the formal controls as well as the PM’s leadership role in an outsourcing setting. The next sections will elaborate on formal controls and the PM’s leadership role in outsourced projects.

2.3.1 Control in outsourcing projects

Control can be defined as “the organization's attempt to increase the probability that employees will

behave in ways that lead to the attainment of organizational goals” (Flamholtz et al., 1985, p. 36).

Furthermore, Tannenbaum (1968) states that it is the function of control to bring about conformance to organizational requirements and achievement of the ultimate goals of the organization. As opposed to internal projects, the controllers and controlees in outsourcing projects are members of different organizations. This may result in difficulty to monitor vendor behaviour because of the dispersion of people, coordination problems and loss of communication (Carmel, 1999). Therefore, in outsourcing arrangements, the controller is responsible for designing and implementing controls, while the controlee is positioned in the vendor organization and responsible for executing the project.

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8 perspective (Tiwana, 2010). Formal control consists of contractual obligations and formal organizational mechanisms for cooperation and can be subdivided into outcome controls and behavioural controls (Ouchi, 1979). Outcome controls refer to the prespecification by the controller of the desired final and intermediate outputs without regard to how these outputs are achieved (Dekker, 2004). Behaviour control refers to the methods, procedures and techniques explicitly prescribed by the controller in order for the controllee to accomplish the project activities (Ouchi, 1977). Behavioural control mechanism can be of significant importance in IORs, since IORs are often faced with goal incongruence and performance ambiguity (Das and Teng, 1998). Choudbury and Sabherwal (2003) found that the outsourced projects in their study began with relatively simple controls but often required significant additional controls after experiencing performance problems. More specifically, the outsourced projects were dominated by outcome controls, especially in the beginning of the project, whereas behavioural controls were often added later to the project.

The key form of informal control is social control, which refers to control through the announcement of common values, beliefs and shared goals between the controller and controllee and through identifying and reinforcing norms of acceptable behaviour (Choudhury and Sabherwal, 2003; Ouchi, 1979). The key difference between social control and formal control is that in social control neither the behaviour nor the outcome is specified in the beginning (Das and Teng, 2001). According to TCE, it is necessary for organizations to have more specific and explicit contracts between the specific parties in order to prevent opportunistic behaviour (Williamson, 1985). Literature in line with this reasoning revealed that for organizations in general and for outsourcing projects in particular, formal controls are prevalent (Cardinal, 2001; Choudhury and Sabherwal, 2003; Eisenhardt, 1985; Henderson and Lee, 1992; Kirsch, 1997). Rustagi et al. (2008) argued that the prevalence of formal mechanisms can be attributed to many factors: the important role that structure and formality play in work settings (Adler and Borys, 1996), the beneficial effects of bureaucracy (Adler and Borys, 1996) and the inevitable use of formal controls in large organizations (Cardinal, 2001). Moreover, Gainey and Klaas (2003) believed that when incomplete contracts are minimized through incorporating high levels of contractual detail and specificity, it is less likely for vendors to engage in opportunistic behaviour. Even though informal controls are also part of the client-vendor relationship, they will not be used that intensively as formal controls (Choudhury and Sabherwal, 2003), partly because of the difficulty of forging the shared beliefs, values and rituals, which underlie informal controls when the stakeholders are members of different firms (Lacity and Willcocks, as cited in Rustagi et al., 2008). Moreover, Choudhury and Sabherwal (2003) argue that

“client managers should guard against underestimating the agency problem even if they feel confident of the vendor’s abilities” (p. 312). However, according to criticism on TCE, controls as a

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9 IOR (Dekker, 2004). By using the organizational theory, Dekker argues that the coordination of interdependent activities performed in IORs may strongly influence a relationship’s governance structure. By entering into an IOR, activities of the partners become more interdependent and more uncertain, which increases the need for coordination and joint decision making (Dyer, 1997; Galbraith, 1977; Gulati & Singh, 1998). Therefore, control mechanisms are regarded as effective instruments in managing the increased information processing requests (Galbraith, 1977; Gulati & Singh, 1998). Based on the information above, this study will focus on formal control mechanisms. Hereby, the control measures of Kang et al. (2014) will be used to examine the formal controls applied in the outsourcing project since these measures are specifically focused on outsourcing relationships. Table 1 gives an overview of the formal control measures.

FORMAL CONTROL

Outcome control Behavioural control

Clear outsourcing goals Strict implementation of procedures and rules Detailed specification of outsourcing tasks Strict reporting system on proceeding status Evaluation criteria on outsourcing outcomes Clear job descriptions

Incentives based on outsourcing outcomes Active monitoring of supplier’s behaviours

Table 1: Formal control measures

2.3.2 Control and outsourcing project performance

In the IOR literature, much has been written about the role of controls in IORs. For instance, Van der Meer-Kooista and Vosselman (2000) argued that the structuring and control of IORs requires the establishment of suitable management control systems and processes. Moreover, Ireland et al. (2002) showed that IORs often fail primarily because it is hard to manage this relationship. In line with this reasoning, Kremic et al. (2006) and Lonsdale (1999) argue that suitable control mechanisms have a positive effect on outsourcing outcomes by reducing the overall outsourcing risk factors (e.g., relationship risk and performance risk) and maximizing the outsourcing benefits. Hence, management control is a governance mechanism which can be helpful in reducing outsourcing failures (Kang et al., 2012).

2.3.3 Summary

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10 outsourcing relationships are hard to manage. Therefore, effective controls can reduce serious outsourcing failures.

2.3.4 Leadership in outsourcing projects

After reviewing the leadership literature, Stogdill (1974) concluded that “there are almost as many

definitions of leadership as there are persons who have attempted to define the concept” (p. 259).

More specific, Stogdill found that leadership has been defined in terms of individual traits, leader behaviour, interaction patterns, role relationships, follower perceptions, influence over followers, influence on task goals and influence on organizational culture. The only thing most of these definitions have in common is that they involve an influence process. For outsourcing projects specifically, there are some IT outsourcing studies that have examined the role of PMs (Gottschalk and Karlsen, 2005; Karlsen and Gottschalk, 2006). Karlsen and Gottschalk (2006) argue that the success of outsourcing will not be achieved unless the risks are properly managed. Therefore, the PM and the IT executive of the IT department in the organization are mainly responsible for realizing the benefits related to the IT outsourcing project (Karlsen and Gottschalk, 2006).

2.3.5 Leadership and outsourcing project performance

For many years now, there has been searched for factors that lead to the success of projects. However, Turner and Müller (2005) reviewed the project management literature and found that the existing literature largely ignores the role, leadership style and the competence of a PM as a project success factor. They found that in the general management literature, it is widely recognized that the performance of the functional manager’s leadership style contributes to the success of the organization he or she manages. After the review of Turner and Müller (2005), numerous studies have looked at the effect PM’s have on the success of projects (Anantatmula, 2010; Mir and Pinnington, 2014; Christenton and Walker, 2004; Geoghegan and Dulewicz 2008; Ong et al., 2009; Yang et al., 2011). For instance, Mir and Pinnington (2014) and Christenton and Walker (2004) found a significant positive effect of PM leadership on the success of a project. Also, Yang et al. (2011) conducted a study in which they found that PM’s who adopt transactional and transformational leadership may improve team communication, team collaboration and team cohesiveness. Moreover, the results indicated that teamwork is positively related to project performance. Also, projects with high complexity were more likely to be successful when they experienced a high level of team communication, collaboration and cohesiveness than those with less complexity.

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11 the quality of the vendor leaders’ personnel relationship with the client leader is usually a driver. This relationship can have an important effect on the wider relationship between the client and vendor organizations.

2.3.6 Summary

In the general management literature it is widely recognized that the performance of the functional manager’s leadership style contributes to the success of the organization he or she manages. Also, after the review of Turner and Müller (2005), the project management literature started to explore the role, leadership style and the competence of a PM as a project success factor. Multiple studies found that PM’s can affect the project performance.

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3. METHODOLOGY

3.1 Introduction

This section will discuss the chosen research method and explain why this research method is chosen. Also, information about the case company and the outsourcing project are given. Moreover, this chapter will deal with how the research method is applied in this study and how the study was conducted.

3.2 Research method

This study attempts to examine how the formal controls in place and the leadership of the project manager of the client organization influence the success of an outsourcing project. The aim is to describe these phenomena and to get a better understanding of the described relationship. For this reason, a single case-study approach is used. A case-study approach is “a research strategy which

focuses on understanding the dynamics present within single settings” (Eisenhardt, 1989, p. 534). A

single case-study approach is considered appropriate because of the lack of prior research on the integration of formal control mechanisms and leadership and their impact on the success of outsourcing projects. Moreover, single-case studies can describe the existence of a phenomenon comprehensively (Siggelkow, 2007). According to Meredith (1998), the strength of case studies is that the phenomenon can be studied in a natural setting, allowing for the questions why, what and how. Before studying the specific phenomenon, the research focus has to be well-defined (Mintzberg, 1979). Without a research focus, the researcher would be overloaded with data (Eisenhardt, 1989). The focus of this study has been defined through the literature review in chapter 2 and the formulated research question. Furthermore, Yin (1994) argues that; “A major step in

designing and conducting a single case is defining the unit of analysis (or the case itself)” (p. 44). The

unit of analysis of this study is the outsourcing project of the case company, more specifically the process by which formal controls and leadership influence the performance of this project. The Nederlandse Aardolie Maatschappij (NAM) has been chosen as case company since the organization is heavily involved in outsourcing projects.

3.3 About the case company

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13 September 24, 2015), NAM also has to deal with Energie Beheer Nederland (EBN), which is a Dutch Government-owned company that has a 40% stake in almost every oil and gas project of NAM. NAM has 1,700 employees and is the leading natural gas producer in the Netherlands (NAM, n.d.). The annual gas production is around 61,3 billion m3 and accounts for 75% of total Dutch demand for natural gas (NAM, n.d.). Approximately 70% of the gas production is from the Groningen gas field whereas the rest of the production comes from multiple smaller fields in the Netherlands and the North Sea (NAM, n.d.). Besides producing gas, NAM also produces around 431,000 m3 oil per year (NAM, n.d.). Since NAMs’ core business is the exploration and production of gas and oil, the company carries out all activities required for producing gas and oil and also performs the planning of these activities (Van der Meer-Kooistra and Vosselman, 2000). Almost all the other activities are being outsourced. One of the activities being outsourced is the increase of the capacity of the Underground Gas Storage (UGS) in Norg, called the Norg project.

3.3.1 Norg project

Since 1997, NAM is storing gas in the UGS in Norg (NAM, n.d.). These stocks are addressed in the winter when people are all turning up the thermostat. Although there is still enough natural gas in the Groningen gas field, the pressure of the gas is continuing to decrease in the course of time (NAM, e.d.). Therefore, NAM decided to increase the capacity of the UGS in Norg and started with the NORG UGS facility expansion project in 2011 (NAM, n.d.). NAM outsourced this project to four companies: Siemens, Jacobs, Yokogawa and Stork. These four companies formed a consortium called GLT-Plus. Siemens participated for 40% in this consortium, while the rest of the companies participated for 20% (A. Snapper, employee NAM, personal communication, September 24, 2015). With this way of contracting, NAM only had to conclude a contract with one party, instead of an individual contract with each supplier. Moreover, it is the task of the consortium to hire subcontractors to perform the activities. The companies which formed the consortium were not new to NAM, since NAM contracted these parties also for the Groningen Long Term (GLT) project. This project started in 1997 and ended in 2009 (GLT-Plus, 2015). The purpose of the project was to renovate and maintain all locations in the north-east of Groningen and the installation of compressors at these locations (GLT-Plus, 2015). Despite this investment, the pressure of the Groningen gas field continued to decrease. Therefore, the Norg project had been initiated by NAM which is outsourced to GLT-Plus.

3.4 Data collection and analysis

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14 methods can be highly synergistic. For that reason, this study has gathered data by means of interviews and documents at NAM. The documents which have been accessed are the contracts established between NAM and GLT-Plus. The contracts compiled are the Facility Day Asset Groningen (FDAG) contract, Operational Interface Manual (OIM) and Commercial Interface Manual (CIM). The interviews were semi-structured interviews which means that, beforehand, interview questions were developed. This list of questions has been established on the basis of the literature review. Therefore, the literature review is of major importance in guiding the empirical research. The interview list contains questions which needs to be covered during the conversation in a particular order. However, with semi-structured interviews, the interviewer is able to follow interesting paths in the conversation that may deviate from the interview list. The interview questions has been included in Appendix A. Interviews are held with employees of NAM, as well as employees of GLT-Plus. Table 2 gives an overview of the conducted interviews.

Table 2: Conducted interviews

The majority of the interviewees were selected by the PM of NAM, since the PM knew which people were involved in the Norg project. During the first conversations, two more employees were recommended to do an interview with by the interviewees since these two employees were more critical towards the project then other employees. By using employees from different hierarchical levels, groups and other organizations, the informant bias can be limited (Eisenhardt, 2007). With the exception of one interviewee, all the interviewees agreed with the recording of the conversation. These interviews were recorded with a voice-recorder, allowing for a detailed interview report. During the interviews, the interviewees were asked which formal control mechanisms were in place

Organization Function Duration

NAM Project Manager 60 min

NAM Finance Manager 90 min

NAM Senior Project Engineer 55 min

NAM Risk Analyst 55 min

NAM Finance Advisor 60 min

GLT-Plus Project Manager 90 min

NAM Project Engineer 90 min

GLT-Plus Manager Control & Estimating 75 min NAM Project Services Team Lead 90 min

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15 during the Norg project, how the project manager leaded the project and how successful they view the Norg project. The interviewees were shown the formal control measures (outlined in Table 1) with the purpose of setting a framework. By viewing these control measures, the interviewees could indicate which and elaborate on the measures applied during the project.

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4. RESULTS

4.1 Introduction

This chapter will provide the results from the single case study. First, the initial phase of the Norg project is discussed. Subsequently, the situation during the project is given. Lastly, the end phase of the project is described.

4.2 Initial phase Norg project

In 2010, the Facility Day Asset Groningen (FDAG) contract has been drawn up between GLT-Plus and NAM. The contract is a framework agreement and it contains information on how NAM and GLT-Plus have to deal with one another. The Commercial Interface Manual (CIM) and Operational Interface Manual (OIM) fall under the FDAG. The operational agreements are established in the OIM. It contains information on the communication and organization of the partnership, the content of the scope of work, and the work processes and procedures of the scope of work. The CIM contains commercial agreements, for instance; the price GLT-Plus receives for carrying out work, procurement procedures and incentives agreements . The FDAG, CIM and OIM are not context specific documents, they can be applied to multiple projects: “design once, built many”. GLT-Plus is responsible for carrying out the project as is allowed by the OIM and CIM. However, the commitment is in the work orders and studies that fall under the OIM and CIM. These work orders and studies contain the assignment and requirements that are specific for a particular project, in this case the Norg project. Studies are being carried out before the work orders to find out what specifically has to be done. Hence, it can be said that the FDAG, CIM and OIM created the basis for the Norg project whereas the studies and work orders are tailored to the specific requirements of the project.

In 2011, NAM went to the shareholders to apply for funding in order to carry out the project. The shareholders of NAM didn’t want to commit themselves to the whole project of 750 million, so NAM had to divide project Norg into multiple investment proposals. Therefore, the project was divided into five subprojects of 100-150 million. These subprojects had their own individual budgets and goals. However, the outsourcing goals were not very clear in the early stage of the project, because GLT-Plus received the subprojects over time. Therefore, they did not know the entire scope of the project beforehand. ‘In the beginning it was unclear for GLT-Plus what the requirements were,

when it had to be finished and what exactly had to be done’, said the Finance Advisor of NAM.

However, the Finance Manager of NAM argues that because there was such a long history between NAM and GLT, NAM could lean on this relationship in the beginning. ‘But every project does need to

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17 NAM agreed upon an incentive structure with GLT-Plus, which is included in the CIM. For instance, if GLT-Plus was able to finish the project under the budget they agreed upon, NAM and GLT would share the gain. Also, before every work order that has been given to GLT-Plus, the key milestones or the key aspects were identified and how they get incentivised. ‘These incentives differ from

subproject to subproject, but incentives on schedule were quite high in general. If they [GLT-Plus] make it on time they get for example 2% of the work order value. And if they don’t have any punchless items, then they would get something and if it is done safely they would get some’, said the Project Services Team Lead of NAM. She also argues that the contract is quite clear about how the

aspects get measured on which the incentives are based. Also, it was very important that these incentives reflected the goals of NAM so that the project could be steered into the right direction.

Also, before the project could be carried out, the PM had to establish a project team. The project engineers (PE’s) had the lead over the five subprojects from NAM side and were involved in the day-to-day activities. These PE’s had their counterpart at the GLT-Plus side1. Every PE of NAM was working on their own subproject with their counterpart at GLT. This means that they were working as a couple. Not only the PE’s, but every employee of NAM who was part of the project team, was working as a couple with an employee of GLT-Plus responsible for the same area.

Although there were PE’s who had the lead over their subproject, the whole Norg project was the responsibility of the two PM’s. Therefore, the Senior Contract Engineer of NAM argued that teamwork was very important and a good leader was needed: ‘A leader can make a difference by

expressing calmness, creating atmosphere and having confidence in the project. However, as a leader you don’t stand alone since you are in a project team’. Therefore, it can be argued that at the start of

the project, the PM’s could already influence the project performance by selecting employees who are suited to work on the project and by forming couples who could work together.

4.3 During the Norg project

Later on in the project the outsourcing goals became clearer. The ultimate goal of the project was the generation of additional capacity. For NAM, it was very important that the project got finalized by the end of 2014. This deadline was very strict since NAM had a legal obligation to Gasterra to deliver gas on December 1, 2014. This was also known by GLT-Plus: ‘In the beginning, NAM was not

really clear about the project being a time driven project. However, later on this became more evident. The technical completion date was very clear to us, it was really specified until the day’, said

1

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18 the PM of GLT-Plus. The quality of the project was beyond dispute. It should be delivered at high quality. Also, NAM and GLT-Plus agreed upon a price for which GLT-Plus should deliver the project, namely 750 million. Another important goal was the “goal zero” policy. It was very important that the project was carried out safely. Therefore, there were stringent rules on how employees of GLT-Plus had to behave on Norg, but also outside the site. For instance, the employees of NAM urged the members of GLT-Plus to not call while driving the car. These safety precautions were also included in the contract. However, some safety rules have been watered down during the project which leaded to an accident with a truck chauffeur who went out of his cabin to help at the site. From that moment, NAM decided that the truck chauffeur had to stay in his truck. Although the contract included safety standards, it appeared that the contract did not embrace everything. Therefore, after the accident happened, the new rule has also been formally laid down in the contract to keep the project safe. The Senior Contract Engineer argued: ‘The Norg site was enormous, therefore, only

really clear rules could ensure a safe environment.’ However, the Manager Control & Estimating of

GLT-Plus made clear that these safety rules were just as important for GLT-Plus: ‘Safety comes first’. It can therefore be concluded that the implemented controls with regard to the safety rules were not too restrictive for GLT-Plus since they supported these controls fully. Furthermore, it appeared from the interviews that the safety rules also contributed to the quality of the project, since when people work safely, thought has been given to it. Overall, this has benefited the efficiency of the work. There were also other procedures that GLT-Plus had to follow, however these were not always that stringent. ‘A frame is provided and within that frame GLT-Plus is allowed to perform at its

own discretion’, said the Finance Advisor of NAM. This is also called the “eyes on, hands off”

principle. He argued that this principle may lead to an area of tension: ‘If GLT-Plus is reporting

something financially and we as NAM are not interested in these reports, then we have to find something else we can demand. Eventually, we will end somewhere in the middle. So therefore, GLT-Plus had the space to fill in the details and so had NAM’. Hence, this indicates that NAM had no total

control over GLT-Plus when it came to the reporting process, since GLT-Plus had also a say in the way particular documents got delivered. It can therefore be argued that the “eyes on, hands off” principle created some difficulty for NAM to have total control over GLT-Plus.

It emerged from the interviews that the PM of NAM could greatly influence the behaviours of people around him. For instance, the authority of the PM could create tensions in his team. ‘He

sometimes overruled them [PE’s]. He could have discussed some of the decisions that he made,’ said

the Project Services Team Lead of NAM. Moreover, the good relationship between the two PM’s was very important for the project. ‘How the leaders of the project interact with each other is very crucial

for the rest of the organization’, said the PM of NAM. However, the Finance Advisor of NAM pointed

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way the optimum of the project success gets lost’. He argued that perhaps a little too much is focused

on a good relationship and too little on the commercial concerns of the Norg project. Besides the PM of NAM having an important role as couple with the PM of GLT-Plus, he also is the architect of all the other couples in the project. ‘It was the responsibility of the PM that all the employees of NAM and

their counterparts at GLT-Plus were going along. This has been very important for the project’, said

the Senior Contract Engineer. If the counterparts were not working well together, the PM stepped in:

‘My motto has always been that you have to work it out with each other. There is a common interest. However, if you have to intervene, you have to intervene. How painful that is for both parties’, said

the PM of NAM. Also, during the project it has been necessary for the PM’s to influence superiors. For instance, when the PM of GLT-Plus started in 2013, there was a lot of bureaucracy on the site which delayed the project enormously. Therefore, he went to the asset manager2 and eventually this manager handed the location over to GLT-Plus. ‘From that moment on, it went better. There would

still be troubles with the delivery of the materials, but at least people could work,’ said the PM of

GLT-Plus. Hence, it can be argued that the PM influenced the performance of the project through his relationship with his project team, the relationship with the PM of GLT-Plus and by influencing superiors.

The PE’s of NAM had weekly meetings with their counterparts at GLT-Plus to discuss their subproject. A PE of NAM pointed out that it was very important for them to be actively involved in the team and to have a good feeling of the problems GLT-Plus employees were struggling with: ‘You

can show some ownership and check whether everything goes according to plan’. On a monthly basis,

the PE’s of GLT-Plus had to send a report internally, where after the PM’s discussed these reports. If the PM’s both approved the content, then it was sent to all the shareholders, including NAM. It has been established in the OIM that GLT-Plus needed to send a standard report on a monthly basis to NAM. In this report, they had to show what their progress was, what their spend was and how they were with the planning. These reports were not inconvenient for GLT-Plus employees: ‘It is very

important for NAM as well as for GLT-Plus that we made it on time. Therefore, the reports are a very important tool that tells you where you stand concerning your planning’, said the Manager Control &

Estimating of GLT-Plus. So therefore, the monthly reports not only served as a control mechanism for NAM, they were also important for GLT-Plus in carrying out the project.

Although there were very detailed specifications of the outsourcing tasks, called “project specifications”, these specifications were made by GLT-Plus under responsibility of NAM. The PM of GLT-Plus said that the wealth of detail was completely normal, since a budget for a work order couldn’t be made without these specifications: ‘The project specification is a very important

2

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document in our world’. Hence, it can be argued that the detailed specifications of the outsourcing

tasks were needed by GLT-Plus to perform the work orders at all. After a work order has been given to GLT-Plus, NAM checked during and after the carrying out of the work order if the outcomes were in line with what they asked. These outcomes needed to be evaluated, since if installations didn’t work properly, they didn’t get realized. Therefore, during the entire project there were control steps to check if everything has been carried out properly.

Furthermore, there were a lot of problems with the delivery of the materials during the project. It became quite clear at the end of 2013 that the deadline of December 1, 2014 wouldn’t be realized if they continued working as they did. Before this deadline, there needed to be a so-called “Total Shutdown (TSD)” wherein specific work activities could only be done when the site was not in use. By means of progress reporting it became evident that the project was off schedule and that the materials would be delivered too late. ‘If you see you are behind schedule, than you have to step in

otherwise you don’t make it’, said the PM of GLT-Plus. The PM’s of GLT-Plus and NAM needed to

discuss who had to undertake action in their organization. For instance, the PM of GLT-Plus himself monitored every day the status of the critical materials and project management went after the problem every day. Moreover, the PM’s sent their PE’s to suppliers to put pressure on the suppliers of the needed materials. Therefore, one important role of the PM of NAM was to make sure that the right amount of people went out to the right area of concerns. The PM had to see what the biggest concerns were at that time and thereby, it was very important for the PM’s to know what the critical path of the project was. For the Norg project, the focus was on to make sure that the project was delivered on time, since it would become very expensive for NAM if the project was not finished on time. Thereby, the PM could use the incentives as a tool to focus on the on time delivery of the project. ‘It is up to the PM to decide how they want to split up the incentive and what the incentives

should be’, said the Project Services Team Lead of NAM. Hence, it can be said that the leadership role

of the PM and the formal control mechanisms became crucial during the period before the TSD. Another example of the PM stepping in when needed is provided by the Finance Manager of NAM. ‘Halfway the project we found out that we had to work together at one location and we needed

to communicate with each other. The subprojects needed to become more integrated. Here, the PM [of NAM] made a very good decision to put someone in place whose job was to take care that the multiple subprojects became integrated. I think this was an important step in making sure everything was working well.’ This indicates that the PM could benefited the project greatly by seeing the areas

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4.4 End phase of the Norg project

During the TSD3 the number of employees working at the site rose till 1200. Also, there were daily meetings with the important players at Norg. Eventually, NAM and GLT-Plus succeeded in finishing4 the project on December 1, 2014. Most interviewees see the Norg project as a success, as for instance the PM of NAM: ‘The project has been completed according to schedule, within budget, with

high quality and it has been safe’. However, the Finance Manager of NAM pointed out that it was not

an easy run. ‘You don’t only look at the output, you also take the road to success into account.’ There came a lot of pressure on both organizations when the project was behind schedule and the delivery of the materials was late. And although the project was within budget, there has been argued that the project could have been carried out with less money. One reason why it has not been done cheaper is because NAM was quite schedule driven. Moreover, although the project has been within budget, a part of the original scope has not been carried out because of a changing market. Also, the initial plan was that the project got delivered on October 1, 2014. However, the deadline was extended in cooperation with Gasterra. Hence, although the majority of the interviewees saw the project as successful eventually, they placed a lot of comments on this success.

Concluding, the multiple investment proposals for the different subproject resulted in unclear goals in the start-up phase of the project. GLT-Plus started off with a particular subproject, but because the capital was not approved at that point, they had to put that on hold and started to work on another part of the project. When the business proposal of the first part of the project was approved eventually, GLT-Plus had to catch up with that. So therefore, the approvals for the subprojects resulted in unclear outsourcing goals and greatly threatened the schedule of the project. However, the Finance Manager of NAM argued that the controls that were in place allowed NAM to go very controlled through the process and that despite the noise that was surrounded the project, NAM and GLT-Plus honoured the commitments that were agreed upon: ‘If there was a scope change, then we

had to go through the Management Of Change (MOC) panel, we did not rush things’. Moreover, the

Project Services Team Lead of NAM argued that the controls were very important in meeting the objectives of the project: ‘I think that if there were not that many controls then the surprise at the

end of the project would have been greater. You have to tell someone what you want and how you want it to be done, because otherwise at the end of the day it might not be what you actually thought you would get. And the way they understood it might be different.’ This indicates that the controls

3

The TSD period was from July 1, 2014 till December 1, 2014.

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22 were needed for NAM to pass on their requirements to GLT-Plus. Controls were also important in creating goal alignment since when the PM of GLT-Plus had to make decisions, it was often a choice between time and money. If the goals of NAM were not evident, the PM of GLT-Plus would make wrong decisions per definition. Also, the reporting of the proceeding status was very important in monitoring the progress in relation to the planning. In the TSD period the reports were a weekly or even daily activity. Also, by means of controls, problems or issues could be signalled.

Furthermore, eventually it is about the control response: ‘When your materials do not arrive,

you can say that you sue the contractor if the materials are not there by next week. However, this does not mean that your materials will be there next week. You need someone who sees there is a risk and steps in before it escalates’, said the Finance Advisor of NAM. Therefore, the leadership of PM’s

was very important during the Norg project. ‘The PM can make it or break it. And it all depends on

either the way the PM threats people or the way he handles difficult situations. I think the PM did a great job in delivering the project on time. However, I think that there was a lot under his control that he could have done better. He could have listened to his people better’, said the Project Services

Team Lead. It has been argued that his lack of communication with his own people did not do good to the project success. If the PM had worked together better with his PE’s, the project might have been carried out for less and the quality of the work could have been better. Hence, it can be argued that the PM indirectly influenced the project success through the cooperation and communication with his project team.

However, controls are not seen by everyone as that effective: ‘I believe a control is only

effective if you can signal something and can correct when needed’, said the Finance Advisor of NAM.

However, he argued that GLT-Plus only had to remain within the established frameworks. This means that GLT-Plus had a lot to say in how things were being done, as long as the project got delivered as asked by NAM. Moreover, the Finance Advisor of NAM questioned if NAM could properly control GLT-Plus when NAM didn’t really understand the process by which GLT-Plus developed a working plan. ‘How can NAM measure the progress with regard to the original plan when the planning has been adjusted multiple times?’ Also, the monthly meetings tell you were you stand with the project approximately. That part is clear to us. However, how much can you correct if the progress is not enough?’ He argued that because the framework was set so broad financially, it was easy to stay

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5. DISCUSSION AND CONCLUSION

5.1 Introduction

This chapter will discuss and summarize the findings presented in the previous chapter. Also, it will present the conclusion and the implications of the study. Furthermore, the limitations and recommendations for further research are given.

5.2 Discussion

This paper sought to examine how the formal controls and the PM’s leadership role influenced the success of an outsourcing project. Hence, the formal control mechanisms implemented during the outsourcing project were identified, the leadership roles which were important for the PM were examined and the success of the project was determined by means of interviews and documents. The partners involved in the Norg project were not merely interested in the final outcome of the outsourcing arrangement, but they also desire satisfaction with the process, as also argued by Schwarz (2014). Eventually most people saw the project as a success, since the project was within time, within budget, with high quality and it was done safely. However, because the road to success was not without difficulties, most people were circumspect about the success of the project. Müller and Turner (2007) argued that people can judge the success of projects differently depending on their personal objectives. Some people definitely saw the Norg project as a success, whereas others take into account other issues. For instance, some people saw the project as a success since it was within budget, whereas others take into account the scope that was not carried out entirely. This could be due to different positions in the project team and because of personal objectives.

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25 the outcomes of the outsourcing tasks has also been an important control mechanism, since it guaranteed the quality of the project. During the entire project there were multiple control steps to make sure that the quality of the project in the end is in line with the request. Also, by means of incentives the behaviour of GLT-Plus could be steered into the right direction. The incentives were mostly based on the on time finalization of the project. As for the procedures and rules, these were very important in keeping the project safe. Moreover, the rules also contributed to a high quality of the project. Furthermore, reporting the proceeding status has been very important in signalling the progress of the project.

Choudbury and Sabherwal (2003) found that outsourced projects were dominated by outcome controls, especially in the beginning of the project, whereas behavioural controls were often added later to the project. This finding is not consistent with findings from this study, since outcome as well as behavioural controls were present during the Norg project. Reason for this is that the FDAG contract has been drawn up between NAM and GLT-Plus before the Norg project was carried out. However, this contract can be applied to multiple projects and is therefore not specifically focused on the Norg project. Therefore, more (sub)project specific controls were added later on in the project. Also, the results of this study showed that the formal controls were not used solely to prevent opportunistic behaviour of GLT-Plus, but also to provide information and guidance to GLT-Plus so they can run the project properly. This finding is in line with argumentation of Dekker (2004) who argues that controls as a means to prevent opportunistic behaviour is not the sole or even the main purpose of control in IORs. Hereby, the long-term-relationship of GLT and NAM and the accompanied trust played an important role in the use of formal controls. Moreover, the results showed that, although there were controls present, it might be difficult for NAM to correct when needed. Therefore, goal alignment between the organizations became extremely important.

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26 subprojects. During the project, his leadership style influenced the project performance through his project team. This study showed that it was very important for the PM to communicate with his own project team, since a lack of communication had created some tensions within his team. This finding is similar to the findings of Yang et al. (2011). The results of Yang et al. showed that PM’s can affect the project performance by means of influencing teamwork, specifically team communication, team collaboration and team cohesiveness. However, project Norg has been outsourced and therefore involved a second project team at GLT-Plus. Hence, the PM of NAM was also responsible for the working together and the communication of the couples involved in the project. Hereby, the PM of NAM had to act together with the PM of GLT Plus to see who had to step in when there were problems. This indicates that the PM of NAM acted as a so called boundary spanner, which is someone who is more deeply involved in the inter-organizational relationship than other employees and tend to communicate with his/her counterpart to a larger extent (Friedman and Podolny, 1992). As also argued by Williams (2002), in the role of boundary spanner, it was important for the PM of NAM to find solutions for problems and he needed to mobilize resources and effort in finding successful outcomes.

Secondly, the PM effected the project performance by influencing superiors. Sometimes it appeared necessary to influence superiors in order to get things done and to ensure that the project runs smoothly. Also, the relationship between the PM’s was very important during the project. This has also been argued by Feeny et al. (2012), who found that the personnel relationship between the PM’s could have an important effect on the wider relationship between the client and vendor relationship. This also appeared true for the Norg project. However, there appeared to be an optimum point for the personnel relationship between the PM’s. Although it is important for the PM of the client organization to be on good terms with the PM of the vendor organization, he must not lose sight of the commercial concerns of the project.

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27 important for the project. Moreover, he could adjust the rules if these rules didn’t cover everything. Also, controls helped the PM in signalling the biggest concerns of the project. For instance, the reports of the proceeding status of the project showed that the project was behind schedule where after the PM could act upon this.

5.3 Conclusion

This study focused on a case study of an outsourced project and examined how formal controls and the leadership role of the PM of the client organization influenced the performance of the project. The results of this study suggest that controls and leadership are both important in outsourcing projects. Formal controls influence the performance mainly by providing clarity of the demands of the client organization to the vendor organization, by monitoring the progress of the project and thereby signalling the threats to the critical path of the project, by providing stringent rules and procedures on how to behave and by setting incentives on important milestones. For the client organization, these controls were necessary to align the goals of the vendor to their goals and to make sure they receive what they require. However, the controls were also needed for the vendor organization to perform the tasks properly. Furthermore, the results showed that these formal controls can’t be considered in isolation. The PM could use the controls to signal risks and to steer the project into the right direction. The main theoretical contribution of this study is the examination of the leadership role of PM’s in outsourcing projects. The PM influenced the performance mainly through his project team, through the relationship with the PM of the vendor organization, by influencing superiors and by making decisions by paying attention to the critical path of the project. Therefore, this study contributes to the IOR literature by arguing that leadership of PM’s is important for the success of outsourcing arrangements. More specifically, the leadership role of the PM is more complicated in outsourcing projects compared to internal projects since the PM had to take into account the relationship with the vendor organization, as well as the commercial concerns of the project. Moreover, this study contributes to the project management literature by combining formal controls and the users of these controls. Therefore, although the right controls are in place, someone is needed who can act upon these controls, steer the project in the right direction when needed and makes decisions based on these controls.

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28 can greatly benefit from these controls when the PM has to make making decisions based on these controls.

5.4 Limitations and further research

The findings of this research needs to be interpreted with the limitations in mind. The first limitation lies in the generalizability of this case study. The generalizability is low since only one case has been examined. Besides, the uniqueness of the project lies in the contracts being drawn up between the vendor organization and client organization before execution of the project and the long history together. Therefore, the organizations were already familiar with each other and their way of working. Second, only two employees from the vendor organization have been interviewed. Therefore, this paper’s primarily focus was on the client perspective. Third, most of the interviewees were selected by the PM of the client organizations, which could have biased the answers.

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Project managers’ leadership role and formal controls in the success of outsourcing projects