2008 Annual Report - SBM Offshore

60 SBM Offshore Annual Report 2008 / Report of the Board of ManagementThirdly, the Risk Management process is reinforced withdedicated Legal, Quality Assurance, and HSSE (Health,Safety, Security and Environment) departments.the Company in identifying the reasons for the significantlosses incurred in the Frade FPSO project. The principallessons learned were:ControlsTo ensure good Corporate Governance, the Companymaintains a documented system of key processes andcontrols. The Company recognises the need for ongoingdevelopment in this area and attention is being devoted toassess the effectiveness of those processes and key controlsas well as the implementation of a continual improvementprocess. Consultants have been employed and projectteams appointed with the objective of completing thedocumentation to substantiate the approach and improvemanagement control. A manager of the Group ManagementSystem has been newly appointed.CommunicationThe Company maintains a relatively flat organisationstructure with short lines of communication. Informationflows upwards to the appropriate department managersand decision making is made in consultation with otherdepartment managers where necessary.MonitoringCompliance monitoring is performed by the InternalAudit and Quality Assurance functions, both of which areindependent from the business line functions and reportdirectly to the Management Board and the Audit Committee.As noted previously, Internal Audit is being strengthenedcommensurate with the organisational growth.Risk ProfileThe nature of the risks inherent to the Company’s businesshave not substantially changed although the economic crisishas amplified certain risks and the results of some specificprojects have highlighted the need to focus on specificrisks identified in the proposals and project executionactivities. Independent consultants were engaged to assist• the estimated sales price and delivery schedulebid in 2005 to the client was not backed up by asufficient level of firm bids from qualified suppliers/subcontractors and was not compatible withcontractual requirements. In the context of theoverheated market where all input prices were risingrapidly, major budget overruns were experienced onmany external cost packages;• the estimated schedule for the project was basedupon previous experience and did not anticipatelengthening delivery times from vendors and yards.The Company was therefore faced with a situationwhere its original execution plan could not be metand work had to be performed out of sequence,sometimes re-performed, and without an accurateestimate of remaining activities to achieve projectcompletion. Furthermore, in an attempt to maintaina reasonable delivery schedule for the FPSO,acceleration costs were incurred in the latter stagesof the project execution which proved to be difficult toforecast.The origin of the project execution issues encountered canlargely be attributed therefore to the proposals phase of theproject, and although the relevant controls were alreadyenhanced in 2006, the consequences and full extent of thefinancial impact were not apparent until much later, leadingto the Company’s profit warning in July 2008.Specific corrective actions continue to be implementedand the Risk Management function has been expandedto ensure identification and the proper management ofthose risks.