Innovation and the dynamics of capability accumulation in project-based firms.

Project based firms devote substantial resources to work acquisition. For services this is particularly challenging due to the variable demand for these services, and the potentially low probability of bidding success (Gann & Salter, 2000), combined with the non-storable nature of a service. Reputation gained from previous projects is an important factor in bid success, since projects cannot be inspected before purchase. Reputation erodes over time or can be lost through high profile failures (Gann and Salter, 2000). If contracts are won they add to the stock of projects to be started and eventually to workload. As tasks are accomplished, workload reduces; workload is therefore also a stock variable (and marked with a box in the diagrams). Managing workload is important. The lessons Wheelwright and Clark (2000) drew for new product development are also relevant here: the mix and volume of projects has to be controlled as overload results in insufficient attention to be given to individual projects, prevents making use of unexpected opportunities and, importantly, impacts on capability development (Table 2).

4.3 Project execution

Capabilities enable project execution; a higher level of capabilities will result in more rapid and more successful project completion. Project execution however is not a mechanical or entirely predictable process. Projects are often very difficult to standardize and frequently run behind schedule. A sense of crisis and 'fire-fighting' is a frequent occurrence in projects and often part of the culture of PBFs. The activities of project staff --frequently in the form of individual heroics--to deal with such crises, can exacerbate the problem. The vicious work time cycle (caused by crises and constant interruptions) identified by Perlow (1999) and the under-use of beneficial project management and process innovations due to the initial time investment required (Repenning, 2002) are examples of situations where the actions to deal with time pressures decrease productivity within the organisation. Furthermore, project modelling studies from a system dynamics perspective (Cooper, 1980; Lyneis et al., 2001) have shown how time pressures lead to quality problems in execution and increased rework. Under-resourced projects result in excess rework and project overruns; the strategies to acquire new work can, exacerbated by this mechanism, result in workload fluctuations with further consequences for resource availability (Bayer & Gann, 2006). 'No project is an island': projects are history dependent and organisationally embedded open systems whose performance is influenced by their relationship to competing activities and the norms and routines of the organisation (Engwall, 2003). Overruns in time and excess resource consumption will impact other projects carried out in the organisation and constrain the resources for innovative problem solving and the time available for less pressing (but important) activities such as knowledge management (Table 3).

4.4 Innovation and capability building

Innovative problem solving in PBFs occurs mainly in the context of actual client projects and only rarely in dedicated research projects (Gann & Salter, 2003). Opportunities for systematic problem solving are very limited. Time pressure has been identified as the main factor in limiting innovative activities within PBFs, with cost and the number of projects undertaken as further barriers (Gann & Salter, 2000). The latter barrier could be explained both by its indirect effect on the time available for innovation, and by the distracting impact of the diversity of projects. Time is also required to transform experience into explicit knowledge (Schon, 1983). Innovation can be impeded by limitations in technical knowledge (Gann & Salter, 2000). The ability to build new capabilities is based on prior knowledge and experience (Penrose, 1959).

As with manufacturing, capabilities are accumulated as an organisation gains experience. However, this experiential learning curve is supplemented by capability accumulation influenced by the 'type' of projects. More complex projects present learning opportunities which are not found in standard projects (Rockart, 2003). Due to the limited role of dedicated learning activities, the accumulation of capabilities for more complex problem solving; or for problem solving in new areas, depends crucially on learning opportunities in client projects.

A balance between routine work (exploiting the accumulated capabilities) and challenging, innovative work providing learning opportunities has to be found.

Improvisation plays an important role in many projects. Projects can be unique and therefore strategic planning in advance impossible, consequently sophisticated strategies to mange them and allow for uncertainty have to be adopted (Pitsis et al., 2003). A strategy just based on improvisation without the development of routines (at least high-level routines) would not build capabilities (Winter, 2003). Learning pays of if at least elements or practices, developed as solution in a specific case through ad hoc problem solving, can be reused. Processes for translating what has been learned initially in a specific project into a repeatable solution (in order to reap economies of repetition and recombination) become therefore important (Davies & Brady, 2000). While routinization and related efforts in learning and knowledge management are likely to be beneficial, the benefits of routinization and capability accumulation need to be seen in conjunction with the cost of building and maintaining capabilities; sometimes ad hoc problem solving will be cheaper (Winter, 2003).

Whereas there are some concerns in the literature that experience with routines might impede the ability to acquire new resources or produce other products (Nelson and Winter, 1982), other studies have found that--at least in the disk drive industry--this is not necessarily the case; managers in the disk drive industry, for example, use past experience to enter new market niches; inertia generated by static experience in the past can not be detected (King and Tucci, 2002).

While individual projects draw on central resources in project execution, the building of central resources will need to draw on the knowledge accumulated on the project level (Gann & Salter, 2000). PBFs strive to ensure that the knowledge gained in a project becomes available to subsequent projects and the organisation more widely. PBFs frequently implement knowledge management systems, in order to ensure that the knowledge gained within a project becomes available to subsequent projects (Brady et al. 2002). However, this can be fraught with difficulties (Middleton, 1967; DeFillippi, 2001; Gann & Salter, 2000). The decentralised organisational structure of a PBF can provide a disincentive for knowledge capture. Putting effort into capturing knowledge and making it available to others in the organisation might not be seen as a worthwhile activity for time-constrained project teams (Table 4).

5. ANALYSIS

The causal relationships between resources and other key variables of the PBF are described in the tables above, and can be visualised as a map (see Figure 1). This map shows the many feedback loops active in a project-based organisation.

The following discussion analyses some of the main feedback loops which influence the behaviour of the PBF in regards to capability accumulation. In this analysis, we use 'time pressure' as a focusing device to select feedback loops for detailed attention. Time pressures are not only intimately intertwined with the culture of project organisations and the mode of project execution (cf. Perlow, 1999), but also a key factor in rework generation and failures of project execution (Cooper, 1980), the factor limiting the ability to innovate (Nam & Tatum, 1997; Gann & Salter, 2000) and a factor reducing knowledge capture activities (Schon, 1983).To facilitate analysis, we examine selected feedback loops separately (keeping all other variables constant) in this section before we then discuss the consequence of their interaction for managing PBFs in the next section.

1. Excessive workload results in time pressure which harms the quality of project execution. As work gets rushed more mistakes are made and more rework is required. As a consequence of the lower quality of project execution, the rate with which projects are completed is reduced. Consequently, workload is not as much reduced as it otherwise would have been. Thus, this reinforcing feedback loop counteracts the normalisation of an excessive workload level (Figure 2).

2. Time pressure prevents innovative problem solving and therefore slows the acquisition of advanced capabilities. As the stock of capabilities available is consequently lower, it will therefore take longer to complete projects. The organisation is 'too busy to think'; too busy to develop the capabilities which would help to manage the workload better (Figure 3).

[FIGURE 2 OMITTED]

3. Under time pressure, organisations neglect the capture of knowledge from projects, resulting in a loss of capabilities as project teams disperse. This is another reinforcing loop counteracting the development of capabilities which would allow the better management of workload (Figure 4).

[FIGURE 3 OMITTED]

4. More developed capabilities allow the organisation to undertake innovative problem solving which results in further capability accumulation. This is a further reinforcing feedback loop (Figure 5).