The business economist at work: The Bechtel Group

Business Economics, Jan, 1994 by Robert Thomas Crow

THE WORK of every business economist is shaped by three main forces: the industry in which the economist works, the particular firm within the industry; and the individual's background, capabilities and predilections. I suspect that few economists' jobs are cut and dried by a formal description and that most of us wind up doing a lot of what we are good at and ignoring (or even being unaware of) other "economist-type" things that we could be doing -- even if we are regular readers of "The Business Economist at Work". Thus, in describing what I do and what I think I should be doing, there is a vague feeling that maybe I should be doing something else -- if I only knew what it was. After ten years, I am still learning my job, partly because the engineering-construction industry keeps changing, partly because Bechtel keeps changing, and partly because I keep changing.

THE ENGINEERING-CONSTRUCTION BUSINESS

Bechtel's business is engineering and heavy construction. Our core is complex, large, nonresidential projects, particularly energy, natural resources and infrastructure. Depending on the project, we handle any or all stages of work: project development, feasibility studies, arranging for financing, engineering design, procurement of equipment and materials, direct-hire construction or construction management, maintenance, operation and ownership. To do all of this, Bechtel has about a dozen engineering and construction business lines (the number changes from time to time depending on structural changes in the market), regional project execution offices, a procurement organization, a financing services organization, and a project development group. This wide scope of activities and the importance of the political dimension imply that Bechtel's two corporate economists must really be political economists rather than economic specialists, in spite of the fact that I happily spent most of my pre-Bechtel career as an econometrician or managing econometric studies.

Bechtel's business is split about 50-50 between U.S. and non-U.S. customers, although the split may vary widely from year to year. At any given time, we work in fifty or more countries. Our non-U.S. work is coordinated in three major regional organizations: one covering Europe, the Middle East, Africa, and South Asia; a second covering East Asia and the Pacific; and a third covering Latin America. There is also a national presence in Canada.

A fundamental trait of heavy construction, and the engineering that is associated with it, is that its output is discrete and unique, with projects commonly having total installed costs running into hundreds of millions or billions of dollars, and no two of them alike. Each project has a unique combination of basic design, construction conditions, and political/economic/financial context. Little about this market is amenable to analytic tools based on the assumption of continuously differentiable functions. A second fundamental trait of the engineering-construction business is that it is highly volatile and does not seem to follow short-run aggregate business fluctuations very closely. For example, when the U.S. economy was booming in the mid-1980s, Bechtel and other engineering-construction firms were suffering because the U.S. had excess power-generating capacity and the world had excess petroleum-production capacity. Conversely, we were booming in the 1982 recession. Moreover, more than most industries, a real distinction exists between when we sign a contract (usually the culmination of months or even years of preparation and negotiation) and when we complete our services, typically several years later. Thus, the Bechtel corporate economists' emphasis is more on growth and long-run structural change than on short-run fluctuations. WHERE WE FIT IN BECHTEL

Bechtel's formal organization is rather flexible, changing fairly often within a well-defined general framework. To the extent possible, strategy and market analysis are the responsibility of the individual business lines. The lack of a "natural" home has given the corporate economics function a rather nomadic character, historically changing its organizational home roughly every two years. We never got far from the general areas of management information or project finance and seem to have found stability in Bechtel Enterprises, which houses Bechtel's financing services and project development activities. Moreover, Bechtel's inherent organizational flexibility minimizes the importance of formal reporting relationships in any case: you work for whomever needs you, with relatively little hierarchical involvement.

We operate mostly as an overhead operation with an overhead budget. We may be called on by members of Bechtel's Executive Committee, other directors, regional organizations or business lines. Regardless of who our client is for a specific project, the output is likely to have significant externalities within Bechtel. Thus, specific charging to internal clients is likely to result in suboptimal utilization, because they would tend to pay for no more than the direct value of the service. However. if an overhead assignment is especially large, we ask to be able to charge the sponsoring organization for our services. WHAT WE DO