Verplichte opgaven - “Eurotunnel: Eyes Wide Shut” PDF

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Vrije Universiteit Brussel Project Management Case: “Eurotunnel: Eyes Wide Shut” Questions and Answers: Question 1: What are the technical uncertainties that became a challenge for this project? Ground Conditions were more difficult than anticipated. Overall system was very complex with equipment and trains amongst the most heavily used in the world. Complexity of rolling stock was underestimated. The equipment for boring on the UK side required modification due to wet ground that held up tunnel drives. Ground conditions are part of the standard risk and could have been planned for in contingency. Machines on the French side were overdesigned, which caused start up delays and later proved to be unnecessary. Question 2: What are the market uncertainties this project had to cope with? At the start of the Eurotunnel operations the channel ferry operators merged and started much more aggressive pricing. Low fare airlines started operations during the 90’s. High speed link from Dover to London did not open until November 2007. The market consultants had estimated revenues of 642 million Pound Sterling by 2003. However, reality showed that, readjusted for price inflation, their estimates were wrong by 27%. There was no fundamental market uncertainty included in the project, moreover some of the partners new upfront that some of the data was inflated in order to obtain political approval for the project. Question 3: How did the excessive debt load on the project prevented Eurotunnel from being profitable? The financial figures identify the source of Eurotunnel’s inability to become profitable, namely its excessive debt load. In order to cover this debt load and still break even, Eurotunnel would need an operating margin of 318 Million Pound Sterling, or 54,5% of revenues, or to grow revenues to 1,029 Million Pounds Sterling at a constant margin. Margins earned of 50% and more are typically earned by the best software companies, but not in the transport sector. The 1987 forecast certainly did not predict growth to rise beyond one Billion, even not for the year 2013. The original bidders on the contract didn’t have the ultimate success of the operator (Eurotunnel) in mind when structuring the bid.

The project was characterized by conflicts of interest and a lack of cooperation between the different parties. This became apparent right from the beginning and continued throughout the project. The fundamental problem was rooted in contract structures that compelled the players to work against one another, instead of with one another. Question 4: Would it have made sense to stop the project? Give 4 reasons why it was difficult to stop this project. To stop the project at the moment that they recognized that it was never to become a profitable enterprise, did not made sense. The project had strong political objectives and for different reasons, neither government would accept the loss of face from pulling the plug on it. It was difficult to stop also due to the fact that a “seductive appeal of common belief” had become widespread. Many believe that it was good to have the tunnel and didn’t look back on the economics of it any longer. It just needed to be there. The project also was difficult to stop due to its low salvage value and high cost of closing. Also it is hard for Project leaders with a good track record to recognize that a project runs an unacceptable level of risk. Experience tells them that they are supposed to handle this risk. Accepting failure might compromise one’s job or status. Moreover the pressure was on both sides. Both the British and French managers were mutually driven to keep up an image of professionalism and competence to handle the project. A final reason why projects keep on going is that organisations may suffer from administrative inertia. They believe their image might be shattered by giving up a project. Again, the image of the Eurotunnel project was such that governments and companies could not afford to give it up. Question 5: What could have been done in relation to the multitude of contracts and what is needed in large scale projects to embed them in a more robust partner management process? A contract should not be seen as a legal document but as a specification of a business deal. If contracts are used legalistically in order to pass the buck, management problems are bound to arise. Hence, contracts should be used in a way that both sides benefit from the deal. Specifying the business deal, as reflected in the business plan, would ensure focus on value creation for the client. This should be realistically appraised and the budget and schedule should reflect realistic project needs. Similarly, payment terms should be such that the deal is good business for both sides. Inevitably, changes will occur over time when you have long term projects, but if the initial deal is unfair and one-sided there is no chance of successful negotiation and constructive collaboration. Only if the original specifications make good business sense is there at least a chance of successfully working through changes.

The need for a win-win deal and the ability to work through unexpected changes in long term projects requires that the contracts be embedded in an overarching description of a business approach and relationship supported by transparency and fair process in managing the changes that will inevitably occur in a large scale project....