Cost cutting: the case for
strategic alliances
By Bede Boyle , corporate and business strategist to the coal industry* Increased mining costs are a strong incentive to examine innovative strategic alliances, not just to contain these costs but to deliver added value.
Recent studies provide ample evidence of how much costs are escalating across a number of fronts.
Leading Australian coal industry analyst Dr Don Barnett , Managing Director of MINEC Pty Ltd, recently studied five listed Australian coal companies.
His analysis showed FOB cash costs increased between 12.4% and 52.7% over three years from July 2003 to June 2006. The cumulative effect is average cost increases of 20% over the last twelve months of the study.
Peter Coates, CEO of Xstrata Coal has identified increases of 100% in diesel, 95% in royalties, 60% in explosives, 25% in contractors, 20% in roof bolts, 10% in distribution, 8% tyres and 4% in both electricity, and labour impacting mining costs over three years.
The risk is that the cost increases become embedded costs.
Companies have begun to focus on the potential of contract mining and, most recently, innovative strategic alliance arrangements to contain costs and maintain productivity especially in complex large mining projects with high levels of uncertainty.
Central tenet
Strategic alliances are now a central tenet of many mining companies’ growth strategy.
They represent a strategic shift from contractual based relationships to collaborative relationships. The adversarial nature of contractual relationships leads to non-added value activities. Successful alliances eradicate non-added value activities.
Strategic alliances had their genesis in the partnership sourcing approaches developed within the Japanese company families – the keiretsu – in the 1960s and 1970s, which tried and tested many of the tools now used by major industries the world over. In fact many commentators place their partnership approaches as the single greatest factor which gave the Japanese their unprecedented success in the 1980s and early 1990s.
Key to the Japanese success was eradication of non-value adding activities that can result in the destruction of value in the adversarial interface between firms.
Alliances can deliver superior value for the participants. Alliances between oil and gas producers (BG and BP), major contractors (Halliburton Brown and Root, Global Marine Integrated Services, Kvaerner and Schlumberger) and SMEs (including Bywater plc) were credited with achieving step changes in sustainable performance for the North Sea oil industry.
The best way to think about contracting as opposed to alliancing is to consider their core roles:
Contracted mining services tend to be tactical in nature, of low complexity, with a clear scope of works, for which there are many competitive suppliers. With alliances, the supplier has a direct impact on the strategic priorities of the principals’ business, and adds value with mutual trust and knowledge that cannot easily be replaced.
Critical success factors
Experience in the North Sea oil industry suggests that successful alliances begin with a clear business need for all parties, that a set of shared goals and shared values must be agreed on, that an integrated planning process is employed, all of which are underpinned by a common measures model.
A clear business need answers the question “why am I doing this?” For example, the need to:
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dramatically reduce cost
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effectively manage risk
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effectively manage uncertainty
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maximise return on investment
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access scarce resources
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access technical expertise
The other question to ask is, “Am I ready, and are they?” by examining essential prerequisites for alliances to succeed.
Alliancing essential prerequisites
| Similar values | Common maturity |
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openness of information -
honesty and integrity -
trust -
continuous Improvement -
stakeholder Balance
| -
management approach -
skills and competencies -
problem solving -
planning
|
| Mutuality | Style compatibility |
| ( not convenience) | accountabilities/authorities (eg: team working) -
staff development -
deployment of objectives
|
Bywater plc Research 1998
If these prerequisites are met you can say with conviction, “Yes I understand why I am doing this, and yes, I know what I am taking on.”
Shared Goals and Shared Values must be agreed on at the outset. The single most important test is that they fully align back to the goals of the individual organisation.
Shared values is a topic that all too often go into the ‘too hard basket’ and yet a cultural mismatch is probably the greatest reason why alliances do not deliver the value they should. Alliancing is about shared pain to deliver shared gain. So before the pain starts, a foundation of shared values is needed.
The difficulty of marrying two corporate cultures should not be under-estimated. After all, if an entrepreneurial firm is trying to Tango with a hierarchical firm doing the Foxtrot, it is good to know that up front.
Integrated planning is the task of saying how you will reach the shared goals and has two key elements:
Unconstrained opportunities can be where R&D of the two firms is merged together, or where both parties collaborate on a feasibility study and jointly address business risk and opportunity management for a complex project, or where both parties form a dedicated project office with a one-team culture.
What is important about the planning process is that it is done openly, jointly, and that known problems are discussed separately from unconstrained opportunities. If not, the debate quickly reverts to the known, rather than searching for the greater potential which is the unknown.
The common measures model measures progress towards the shared goals.
Consider a topside alliance in the oil industry. Its shared goal is maximum production (topside efficiency) for minimum operating cost. That’s it. The operator of the platform may have many other considerations. And they have the whole asset to think about, not just topside. But for the alliance it is those two strategic measures that matter.
Strong case
There is a strong case for strategic alliances in the mining industry. Strategic alliances can span from the pre-feasibility phase into realisation of major mining projects, which unlock significant value for both participants. Successful alliances must be driven by business leaders from each organisation.
*Bede Boyle is Convenor of the AustCoal Consulting Alliance of 10 leading consulting firms. He is a former chairman of Bywater McLean Pty Ltd and has drawn on Bywater plc’s experience in the North Sea oilfield to develop his strategic thinking for this article.
He will be addressing the Contract Mining 2007 conference in Brisbane on 23-24 April. Download Bede's Presentation on Advanced Coal Technology Solutions
