1. Paper
on
Procurement
Management
Attention
Karl
Croswhite,
UW
Project
Management
Extension
Class
Date:
April
7th
2010
Author:
Philip
Corsano
Procurement
Management
Process
for
IBM
Project
Company
Sirena
3.
Background:
Sirena
3
a
special
purpose
Project
company
was
established
in
1991,
by
Aeroflot,
the
monopoly
Russian
Airline
system,
at
the
time
the
largest
airline
system
in
the
world.
My
role
was
to
substitute
the
Project
Manager
in
1998
as
the
project
had
run
into
substantial
difficulties
and
to
restructure
the
Project
so
as
to
be
able
to
deliver
the
required
service
within
budgetary
constraints.
The
objective
of
the
“Project”
company,
[Project]
was
to
provide
a
new
IATA
compatible
airline
reservation
system
to
cover
both,
domestic
[internal
to
the
Former
Soviet
Union]
and
international
flights.
The
total
project
costs
at
the
time
were
estimated
to
be
in
region
of
$450
million,
making
this
the
largest
single
investment
made
in
the
Former
Soviet
Union
in
1991.
The
Project
Sponsors
were:
 IBM
for
the
System
390
backbone;
 ATT
satellite
infrastructure
to
link
all
the
remote
areas
of
the
Soviet
Union
to
the
central
data
base
run
on
a
satellite
farm
outside
Moscow;1
 Sabre
reservation
system
software,
an
American
Airlines
Company;
 The
whole
operations
were
to
be
project
managed
by
IBM.
The
financing
for
the
procurement
of
the
equipment
and
man-­‐hours
necessary
for
the
$450
million
estimate
was
to
be
US
EXIM
bank
financed.
This
required
an
overall
project
procurement
guarantee
by
the
Government
of
the
Russian
Federation.
In
addition
the
Project
would
be
“Project
Financed”
by
means
of
a
$2.50
1
The
ATT
international
operations
were
purchases
by
GE
Spacenet
in
1997,
GE
Spacenet
became
the
supplier
of
the
satellite
infrastructure,
still
based
on
the
AT&T
architecture.

2. per
ticket
reservations
charge
which
would
flow
directly
to
the
Sirena
3
Project
company.
The
estimated
transactions
volume
of
flights
internal
to
the
Former
Soviet
Union
[FSU]
and
internationally
in
1990
were
in
the
region
of
110
million,
Change
in
the
Economic
Environment
in
FSU
1991
-­1998
In
1998
was
asked
by
the
IBM
project
manager
at
the
time
to
turn
the
project
around.
The
business
environment
in
the
FSU
had
changed
substantially
since
1991,
as
the
FSU
had
experienced
a
very
severe
contraction
in
output
as
a
result
of
the
break-­‐down
of
the
FSU
and
amongst
other
issues,
the
establishment
of
the
Central
Asian
republics
of
Kazakstan,
Uzbekistan,
Tajikstan
and
Kyrgystan,
as
well
as
the
seccesion
of
the
Caucasus
republics
of
Georgia,
Azerbajan,
Armeian,
and
several
other
smaller
republics
including
Ossetia.
The
graph
below
show
the
impact
of
the
economic
crisis
on
GDP
experienced
by
the
FSU
from
1991
to
1995.
By
1998
the
Russian
Federation
had
also
experienced
a
default
and
massive
devaluation.
Hence
many
of
the
assumptions
underlying
the
economics
of
the
ticket
reservation
charge
were
found
to
be
severely
wanting.
Most
domestic
flights
were
run
by
regional
carriers,
following
a
“balkanization”
and
deregulation
of
the
domestic
airlines.
There
was
no
“Central”
Aeroflot
purchasing
decision
maker.
Rather
there
were
at
least
20
regional
airlines,
all
which
had
their
own
ticket
reservations
plans,
and
they
had
to
be
convinced
to
buy
into
the
Sirena
3
reservation
system.
Also
by
this
stage,
most
of
the
infrastructure
for
a
150
million/ticketing
reservation
system
for
the
airlines
in
FSU
had
been
committed
to.
GDP
in
USSR
&
Former
Soviet
Union.
GDP
went
from
$1,600
billion
in
1990
to
just
over
$300
billion
in
1999.

3.
Procurement
Management
Plan
Issues.
Sirena
3
Project
Co
Russian
Govt
Guaranty
V
US
Exim
Bank
IBM
Sabre
GE
Services
Information
Spacenet
Services
Satellite
Services
The
above
chart
shows
how
the
various
suppliers
into
the
Sirena
3
project
company
sourced
the
procurement
process.
Up
to
1998
IBM
Services
[IBM]
was
in
charge
of
dealing
with
all
suppliers
of
the
Project
company,
at
least
all
suppliers
who
were
non
Russian.
IBM
then
had
to
ensure
the
delivery
of
the
procured
items,
[from
the
complete
installed
system
390,
to
the
equipment
for
the
point
to
point
satellite
network,
to
the
Sabre
data
base
that
was
the
engine
of
the
real
time
reservation
system].
The
funding
of
the
procurement
would
be
dealt
with
through
the
Sirena
3
management,
in
particular
the
funding
which
was
covered
by
US
Exim
Bank
and
the
Russian
Federation
Guarantee.

4.
How
we
dealt
with
Specific
Problems
of
the
Procurement
Process:
1. Make
or
Buy:
The
make
or
buy
decision
for
Sirena
3
was
a
dynamic
and
complex
process.
The
Project
was
established
in
1991
at
the
time
of
the
break
up
of
the
FSU.
The
technological
solution
at
that
time
was
to
deliver
a
real
time
central
data
base,
based
in
Moscow
at
the
Satellite
Farm
run
by
the
ex
military.
Hence
although
the
satellite
receivers
were
US
built,
much
of
the
infrastructure
used
was
domestic
Russian
manufacture.
This
required
a
substantial
amount
of
integration
effort
between
the
Russian
engineers
of
the
former
military
facility
and
engineers
from
GE
Spacenet.
As
the
Project
progressed,
we
witnessed
more
tension
in
terms
of
the
systems
integration
of
the
base
station
infrastructure
[in
Severni
Aziori]
and
the
regional
sites
for
linking
to
Moscow,
[Moscow
was
linked
in
real
time
to
89
regional
satellite
links
to
ensure
complete
coverage
of
all
the
main
flight
hubs
of
the
FSU].
We
also
witness
a
complete
change
in
terms
of
the
“cheapest
to
deliver
solution”.
The
internet
protocol
[IP]
revolution
in
the
travel
booking
system
was
a
very
real
alternative
to
the
central
data
base
system
envisaged
on
the
Sabre
system.
Hence
the
make
or
buy
decision
was
an
extremely
dynamic
process
that
required
substantial
intellectual
effort
to
ensure
that
the
product
lines
that
were
planned
to
be
delivered
were
in
fact
appropriate
for
the
Project.
In
particular,
once
the
IBM
system
390
was
installed
in
the
central
data
base
location
in
Severni
Aziori,
the
Project
Company
was
locked
into
the
central
data
base
mode.
There
was
no
alternative
then,
but
to
deliver
on
the
central
data-­‐base
architecture
run
on
Sabre.
The
procurement
make
or
buy
decisions
did
shift
in
terms
of
the
following
aspects,
the
choice
for
the
satellite
to
be
used:
 Astra
Geostationary,
satellite,
which
reached
mainly
European
Russian;
 Northern
Russian
Ex
military
satellite,
which
covered
most
of
Siberia,
Northern
regions
and
Russian
Far
East;
The
decision
was
made
to
use
the
Russian
Northern
satellite,
for
the
remainder
of
its
expected
useful
life,
[expected
5
years
but
these
satellites
have
shown
far
longer
expected
useful
lives].
The
decision
was
supported
both
by
the
reach
of
the
satellite
and
the
cost
of
the
satellite.
This
reduced
the
overall
Project
operating
costs
substantially,
but
required
a
major
investment
in
terms
of
the
integration
of
the
GE
Spacenet
equipment
to
ensure
continuous
service
coverage.
Russian
Northern
satellite
is
not
Geostationary.
It
has
an
elliptical
orbit
over
the
Northern
Hemisphere
that
requires
adjustment
to
the
ground
station
tracking
equipment.
The
Present
Value
of
this
investment,
when
compared
to
that
of
the
alternative
Geostationary
equipment
justified
the
“Make”
decision.
However
there
was
a
substantial
risk
of
delivery,
as
this
was
a
“new”
technical
solution
and
one
that
had
not
been
planned
for
in
the
original
project
plan.
Nevertheless,
the
solution
proved

5. be
effective
and
was
able
to
be
integrated
into
the
system
390
and
Sabre
proprietary
airline
data
base.
This
is
a
classic
case
of
the
Project
Team
exercising
expert
judgement
in
conjunction
with
technical
experts
who
were
able
to
certify
that
the
system
would
be
able
to
integrated
into
the
GE
Spacenet
infrastructure,
even
though
we
were
dealing
with
unknown
ex
military
Russian
suppliers
in
terms
past
performance
and
reputation.
2. Procurement
Statement
of
Work:
By
the
time
of
my
involvement
with
Sirena
3,
in
January
1st
2008,
the
Project
company
had
at
least
had
two
or
three
statements
of
work,
which
had
evolved
from
the
inception
of
the
Project
in
early
1991.
The
initial
statement
of
work
had
been
based
on
the
assumption
of
a
110million/passenger
year
volume.
The
Russian
Federation
guarantee
for
the
entire
foreign
procurement
of
the
Project
company
was
back-­‐stopped
by
US
EXIM
bank,
so
the
statement
of
work
and
documentation
elements
of
this
Project
were
extensive.
As
discussed
in
the
section
on
the
change
in
economic
environment
of
the
FSU,
the
economic
basis
of
the
Project
changed
substantially
from
1991
-­‐1998.
When
I
was
elected
to
become
the
Project
manager,
the
Project
was
severely
behind
in
its
payments
to
the
three
main
suppliers,
IBM,
GE
Spacenet
and
Sabre.
Many
of
the
statements
of
work
had
to
be
completely
revisited
to
be
made
congruent
with
the
new
economic
reality
the
Project
company
operated
in.
In
the
first
three
weeks
of
my
assignment,
I
had
to
read
all
the
agreements
between
the
parties,
and
it
became
clear
that
the
main
statement
of
work
that
needed
extensive
revision
was
the
Sabre
component.
This
was
in
part
because
the
IBM
System
390
had
been
delivered
and
installed
as
per
contract,
as
was
for
the
main
part
the
GE
Spacenet
equipment,
save
for
the
modifications
on
the
Satellite
tracking
system
as
described
above.
With
Sabre
the
problem
was
complex.
Without
the
Sabre
software
engine,
[a
proprietary
development
of
American
Airlines],
the
system
was
dead.
Yet
the
very
premises
upon
which
the
software
architecture
was
based
appeared
to
be
obsolete.
There
was
no
monolithic
purchaser
in
Aeroflot.
There
was
Aeroflot
international,
and
at
least
40
baby
Flots,
which
included
several
sovereign
airlines,
like
those
of
Kyrgyzstan,
Uzebekistan,
as
well
as
Sibir
Air,
Bashir
Avio
and
many
such
smaller
airlines
which
had
begun
to
operate
in
a
newly
unregulated
competitive
environment.
The
Sabre
architecture
and
software
solution
did
not
have
multiple
buyers.
Hence
I
had
to
request
Sabre
to
completely
rewrite
whole
sections
of
the
software.
The
new
solution
would
be
targeted
to
the
requirements
of
the
independent
and
competitive
airlines.
This
was
a
complex
matter
both
from
an
economic
and
negotiation
standpoint,
[Sibir
Air
competed
directly
with
some
airlines
on
routes
to
say
Khanty
Mansysk
in
Siberia]
as
well
as
from
a
contracting
and
procurement
standpoint.
The

6. Project
was
substantially
behind
schedule,
and
Sabre
had
not
been
paid
for
its
last
delivery
of
work,
because
the
Project
had
no
more
funds.
The
contracting
also
included
a
clear
“Project
Completion”2
clause,
and
Sabre
had
not
completed
its
part
of
the
work.
This
was
not
entirely
attributable
to
a
Sabre
failure
as
has
been
discussed.
Hence
I
had
to
call
a
Sponsor
meeting
in
which
we
agreed
the
following:
 That
Sabre
would
run
a
pilot
for
one
of
the
domestic
Baby
Flot
airlines,
[Bashkir
Avio],
with
the
objective
of
proving
the
system’s
effectiveness;
 That
the
debts
that
had
been
incurred
with
all
suppliers
would
be
pro-­‐rated
and
extended,
such
that
each
of
the
three
suppliers
would
share
in
the
economic
pain
resulting
from
extending
the
time
horizon
of
their
payments.
The
meeting
was
highly
contentious
as
can
be
imagined.
The
two
suppliers
who
had
completed
their
project
requirements
were
understandably
reluctant
to
take
any
further
risk
and
delay.
Especially
because
Sabre
was
the
only
supplier
to
be
in
substantial
delay
relative
to
the
Project
schedule.
However,
given
the
Project
Completion
clause,
all
suppliers
were
jointly
and
severally
liable
for
non
completion.
Hence
the
alternative
was
either
walk
away,
litigate
and
bankrupt
the
Project,
or
accept
the
extension
of
payment
terms,
until
the
Sabre
delivery
of
the
Bashkir
Avio
pilot.
In
the
end
we
reached
agreement,
and
I
was
not
the
most
popular
person
for
a
while.
The
project
was
safe
for
a
few
more
months
and
extensive
and
expensive
litigation
was
averted.
3. Procurement
Documents:
These
included
amongst
others
anti-­‐bribery
clauses
in
compliance
with
the
WTO
directives
on
anti
corruption
in
public
procurement,
as
well
as
the
usual
technical
statements
of
need,
in
Russian
and
English.
There
was
a
substantial
intellectual
property
element
in
all
the
procurement
documents
which
covered
among
other
things,
the
Sabre
software
license,
the
IBM
System
390
operating
system
license,
the
GE
Spacenet
proprietary
technology
for
the
Satellite
uplink,
as
well
as
the
Russian
satellite
procurement
contracts
with
the
Russian
military
regarding
use
of
bandwith
in
the
FSU.
All
these
documents
required
substantial
updating
and
revisions
as
a
result
of
what
is
described
in
2
above.
2
Project
completion
is
a
legal
term
in
Project
Finance
Management.
It
states
that
the
risk
of
the
project,
if
not
complete
and
tested
in
accordance
with
requirements
of
the
Project
Manager,
rests
with
the
suppliers.
This
is
a
very
effective
discipline
for
managing
complex
procurement
processes
in
large
projects
like
Sirena
3.

7. PROJECT
PROCUREMENT
DIAGRAM
FOR
SIRENA
3.
Project
Scope
Satcom
Integration
Definitions
Communic
Russian
1998
Revised
ations
Suppliers
IBM
Quality
Sirena
3
Human
Control
Resouces
Schedule
Project
Risk
Cost
Management
Management
4. Source
Selection
Criteria:
The
source
selection
for
the
Sirena
3
Project
was
determined
for
the
main
part
when
the
three
main
suppliers
and
Sponsors
of
the
Project,
[IBM.
GE
Spacenet,
and
Sabre]
underwrote
the
project
and
the
assumption
behind
the
Project,
which
at
the
time
[1991]
was
the
largest
single
direct
investment
in
the
infrastructure
of
the
FSU.
There
was
substantial
work
though
in
the
selection
and
sourcing
of
Russian
suppliers.
We
had
to
establish
a
system
for
performance
reporting
for
these
suppliers,
together
with
inspections
and
audits
of
the
work
performed,
and
compliance
with
IATA
standards.
There
was
also
a
procurement
closure
process
which
was
common
to
all
suppliers.
One
of
the
main
problems
we
had
was
the
anti-­‐bribery
clauses
in
our
contracts
which
were
required
under
US
Statute,
because
of
US
Exim
bank
involvement.
We
had
to
obtain
special
VAT
exemptions
for
the
equipment
imported,
given
the
that
Russian
Federation
was
ultimate
guarantor.