Regardless of whether you’re looking at producing assets in an upstream environment or downstream refining and retail supply envelopes, the need for robust approaches to tackling sustainable value improvements are becoming ever more important. Management challenges such as ever increasing pressures on wage inflation for scarce talent will require even high performing orgnaisations to use new approaches and tools to shine a light into new and alternate areas of value enhancement. In our extensive work in the sector there are common themes as to why businesses often fail to deliver on sustainable value improvement projects. In this article we explore these causes and outline the key principles of successful programmes, which apply irrespective of whether you’re looking to drive step changes in value through cost, pricing or working capital optimisation.
So where do businesses get it wrong?
From our work with multiple operators across the oil and gas value chain, businesses often significantly under deliver on initiatives, failing to achieve their expectations in terms of financial impact. Our work in the sector indicates the same issues coming up again and again:
- Use of blunt instruments and focus on short-term actions
e.g. unsustainable top-down blanket budget cuts on discretionary spend rapidly unwind once management attention is diverted
- Management ambitions are often limited by organisational and functional silos with personnel unable to take a view across the organisation, while being protective of their areas and worried about their personal careers
- A belief that continuous improvement efforts will solve it all.
Often management have ongoing continuous improvement programmes, which ‘whilst useful’ are unlikely to deliver true step change performance
- Management get tied up in analysis paralysis rather than working on 80/20 principles resulting in delays to take action
- Management decisions are based on perceptions and individual priorities rather than a robust fact-base with a clear alignment to value
- Management incentives and rewards based on idea-generation but feet are often not held to the fire in execution
- Relentless waves of initiatives effectively ‘carpet bombing’ the organisation in the hope that something sticks, resulting in duplicated efforts, organisational fatigue and an excuse to keep otherwise unrequired resources.
And when they get it right?
Our work in the sector has identified six principles of those organisations that successfully deliver on sustainable value improvement initiatives:
- Transparency: Understanding the complete picture of production, costs, headcount, margins, and working capital and establishing agreed baselines against which to measure improvements, ( For example many businesses only track and understand the payroll headcount needed to support operations and have a limited understanding of total equivalent headcount incorporating contractors, outsourced provider equivalent headcount)
- Putting a value on opportunities: Demonstrating the tangible benefits of each potential opportunity in order to dispel myths and provide a hard factual view of value and risks against which management teams can take effective decisions
- Use of comparators: Going beyond simplistic benchmarking but understanding quantitative and qualitative insights on how other companies operate to stretch management’s thinking and hold up the mirror of what the true potential opportunity could be
- Speed: The most effective programmes have real pace and momentum behind them. This ensures management attention and also drives momentum into execution of agreed opportunities
- Driving buy-in: Strong collaboration and sponsorship from the outset is critical. Involving the decision-makers early drives ownership and a higher likelihood of implementation
- Addressing sustainability: In order to assure benefits are sustainable there is often a need to address elements of the underlying DNA of the organisation such as aligning accountabilities to performance commitments and results or that the right processes and controls are in place to maintain benefits.
For many executives, the process of driving sustainable value improvement will, by necessity, begin with a careful analysis of the existing value drivers of the organisation in order to increase their understanding of where value is created and profit is generated. A task which is often much harder in larger organisations.
To do this, organisations must be prepared to look across divisions and business units, compare themselves through robust comparator insights that go beyond simplistic numerical comparisons, but also highlight alternative ways of working, and then make some tough decisions which may challenge the accepted business models and transform their internal culture.
Success will require senior management to develop and execute strategies that maintain a clear focus. In subsequent articles in this series we will bring to life practical examples of sustainable value improvements in both upstream and downstream oil and gas in areas such as cost management, pricing optimisation and working capital release.
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