MANAGEMENT PERSPECTIVE MANAGING FOR CHANGE IN TODAY'S OIL INDUSTRY

William E. Crain
Vice President
Chevron Corp.
San Francisco

Adapted from a talk before the Society of Petroleum Engineers' Middle East oil conference in Bahrain.

Chevron Corp. and the whole petroleum industry have seen a lot of changes over the years but nothing so great as the changes we face today.

What's happening is that many companies are starting to think about change in a radically different way.

We no longer view it as discrete and unpredictable events to which we must reluctantly adapt. Instead, the smartest companies view change as a friend, or at least as a never ending process that we may be able to harness for the good of our business customers, joint venture partners, and stockholders.

In other words, change may be the main avenue for opportunity.

So, we invite change. We create change.

I know about this because I'm living it every day at my own company. It isn't easy. And we have a long way to go. But it is exciting.

In companies such as mine where long lead times are necessary, to bring on a new project, change in the business environment must be recognized as early as possible, and we must be highly adaptable to those changes.

ADAPTING TO CHANGE

Our experience at Chevron reflects the more important story of change, for all of us, of how we have adapted our management system and philosophy to bring about renewed creativity.

Some of "this story goes by various names-continuous quality improvement, strategic decision analysis, asset management, delayering, benchmarking, customer focus, reengineering-just to name a few. The names aren't important. What is important is the idea behind the different terms, what they have in common.

These are names for tools that reflect a new set of attitudes, values, perceptions, and a very new way of viewing our business.

I have worked in the oil business for 37 years, and for about 33-34 of those years we thought our main job was replacing reserves. That's what it meant to be an oil company.

The goal was oil: find it, sell it. That was our unstated vision of ourselves, a definition of our mission. International oil companies looked for oil and gas and measured success by production volumes. And this idea worked very well for a long time. As long as prices kept moving up faster than costs, then increased volumes translated directly into increased profits.

INDUSTRY'S NEW GOAL

Now, however, all that has changed abruptly. Today, the goal isn't just oil. Oil and gas are viewed as a means to an end, and that end is the success of our business. The goal is sustainable development. And cost-cutting is as important as production volume in achieving acceptable profit margins.

This change in self-concept has been required by a change in reality. Oil demand is flat, prices are weak, and there's a growing awareness that the so-called oil glut is not a temporary phenomenon. That's a fact of life. Therefore, today, the challenge is to get revenues up and costs down.

The first sentence of my company's mission statement, the document that defines our company states, "Chevron is an international petroleum company (whose) mission is to achieve superior financial results for our stockholders, the owners of our business."

Notice it says nothing about producing large volumes-even though in North America we are one of the largest producers of oil and natural gas and the largest refiner. That was written only 15 months ago-that's what I mean about abrupt change.

The mission statement was distributed to all employees, highlighted in our annual report, and management at every opportunity is trying to emphasize and reinforce this new vision of who we are-and where we are going, and what we want to achieve.

CHANGE IS ACCELERATING

George Shultz, the former U.S. secretary of state, in a recent article said, "The world today is in a period of profound change, much of it driven by scientific and technological advances...computers and rapid telecommunications are making business, politics, and culture truly global."

Instant communications and the power of computers are dramatically increasing business productivity while also creating new and easier access to worldwide markets. That is creating fierce global competition, which sets off another round of change.

The cycle time between changes is speeding up, so that today the parade of individual changes has become a blur, and we see only continuous change.

Some historians have suggested the world is starting to move beyond the Industrial Age.

That may be an appropriate description-and some companies and industries will make the shift, and some won't. Just look at some of the recent economic news in the largest industrialized nation, the U.S.

There have been the well-publicized problems at some of our blue chip companies-General Motors, IBM, and Sears, just to name a few. An article in Newsweek magazine aptly referred to this as "The Fall of the Dinosaurs."

All of this is happening at the same time that the U.S. economy is expanding and productivity growth in the business sector is at its highest in more than two decades. Some companies-Chevron among them-are doing very well.

Why? What's the difference between those firms that are succeeding and those that are in trouble?

It's the ability to change-to reinvent yourself quickly.

I believe the entire petroleum industry must learn how to successfully work in this environment of accelerating change.

Tom Peters, a well known management consultant, warns that we're facing what he calls the "nanosecond nineties."

John Young, former chief executive officer at computer maker Hewlett-Packard Co., observed that just 10 years ago his company could introduce a new computer and, if successful, could continue to manufacture it for 7-8 years. Today, because of the accelerated development of hardware and software, a new computer line is good only for about 3 years. In fact, more than half of his company's orders are for products introduced in the last 3 years.

I've seen almost unbelievable change during my own career. When I joined the industry in 1957 it was considered normal to spend a day hand-picking and interpreting a seismic line a few miles long. Today, 100 times that amount can be picked and interpreted on a computer work station in a single day.

I've chosen my examples from Chevron and Hewlett-Packard for a reason: The source of this dramatically accelerated change is business.

We have to change-or go out of business.

Technology is changing the way we work and it's changing the marketplace, making the whole world one big market. Today, knowledge and speed count for more than size and market share.

REINVENTING THE ORGANIZATION

But technology and global markets are only two forces creating this post-Industrial Revolution. There is a third. In my opinion, it is the more important force.

The successful companies are encouraging change by reinventing the very idea of organization.

A new concept of the commercial organization is emerging, because it is about how we do our work, not just about the tools we use.

We need to view our organizations not as a thing or a place or a product line or a balance sheet or a group of assets but as a process.

If we are a process, then we are always seeking internal change. And we're less likely to be caught unprepared by external change.

EMPLOYEES CRITICAL

The first step toward improving the process of managing change begins where it has to begin-with people.

We recognize that our employees at all levels are the locomotive powering the company toward greater progress. That's where the ideas come from. That's where costs are controlled. That's where the work gets done.

Employees are critical because they are the point of contact with our customers. Why? Because the people who are buying or selling your product or service can be the first to recognize the need for innovation and change.

We define customer as anyone for whom we are producing products or services, whether that is an explorationist finding oil for the producing department or a producing company providing a service to a joint-venture partner or to a host government.

Improvements in efficiency must pass a touch test: They must be beneficial to us to our partners, and to the host government. We realize our success depends on our being the partner of choice.

And that means we have to manage people as an investment, not as a cost to be controlled.

NEED FOR EMPOWERMENT

For that reason, we are modifying the power structure of the company away from a top-down hierarchy as found in a 19th century army. We're replacing it with a model that looks more like a soccer team: Flexible, fast, and, above all, coordinated in its effort.

Today, a Chevron operating company has many times more authority than it had just a few years ago. And the operating company, in turn, delegates most of that authority all the way down to the smallest business unit where the work is actually done.

We're doing this for one simple reason: Employees have the detailed information, and they know the work process better than management. Therefore, employees need the freedom and responsibility to act quickly. This sometimes goes by the name "empowerment."

In farming areas in the U.S there is an expression that captures this idea: "The early bird gets the worm."

In my company, to accelerate the decision-making process, we have reduced the layers of middle managers. This is sometimes called "delayering." Instead of seven or eight layers between the chairman and a decision, there is now sometimes only four or five layers between the chairman and the working level supervisor. We gain flexibility and speed.

For instance, in my area of responsibility we've seen some dramatic changes. On large scale 3D seismic surveys, where survey, processing, and interpretation have historically taken as much as 2 years to complete, in some cases they are now being completed in fewer than 9 months-from designing to seismic interpretation.

We did this with new shipboard technology and greater coordination between different groups of employees within our company and with service companies. We call these "cross-functional teams." And we are using them to rethink hundreds of work processes within and outside the company. Teams are formed across the usual reporting boundaries.

The people who have the skills of leasing, permitting, seismic data acquisition, information processing, and data interpretation are all brought together early to accelerate the total work process.

In the same way, in research and production, all disciplines that have a stake in the final product are brought together to bring about better and quicker solutions.

VALUE OF TEAMWORK

We first saw the value of such teams during Chevron's acquisition of Gulf Oil Corp. It was at the time the largest industrial merger in the history of the U. S., with a price tag of $13.3 billion, and consolidating these two giants was a massive job.

A key part was the formation of a number of teams of Gulf and Chevron employees who worked together to define the new organization.

And it was then that we saw the power of employee involvement and cross-functional problem solving teams.

Then, because oil and gas prices fell and remained low, we were forced to shift from emphasizing growth and expansion to aggressively cutting back and rethinking our business. Again, we used teams.

Today we use all kinds of teams: departmental teams, multi-departmental teams and cross-functional teams. There's a new saying I'm starting to hear around the company that describes this attitude: "The right people at the right time in the right place will generate the right decision."

This has meant opening up communication between employees and their supervisors-and between functions. As a consequence, people are encouraged to get involved in making decisions about how they personally contribute to the company's overall goals.

It's helped to delegate authority and empower employees with more responsibility. It puts decisions closer to those people with the most up-to-date knowledge.

This is also the reason that smart companies value diversity among their employees and encourage people with different backgrounds to work together. That's a never-fail formula for creativity and fresh ideas.

Teamwork is central to quality management, of course. It's the idea that the most value gets added, not up and down the organization chart, but horizontally, across the organization.

Quality improvement requires work on the system. The biggest opportunities to improve our company's effectiveness lie in improving the way work flows within an organization from one group to another.

MEASURING PROGRESS

The last change process I'll mention is what we call "metrics," or measurements of progress. We "benchmark" against competitors, and we benchmark against ourselves.

We examine and analyze the best practices of the most successful companies, we adapt and adopt those that best fit our needs, and then we try to set new standards for quality.

Our goal is to become "better than the best."

What gets measured gets changed and improved. Metrics ensures total commitment by management and employees to making the company and their individual jobs an ongoing process. Last year Chevron's U.S. production operations reduced its operating cost more than $1/bbl. We're anxious to compare that with our competitors because our goal is to become the lowest cost producer, and we don't think we are there yet.

CHANGE BEGINS AT THE TOP

However, none of what I've mentioned today will work without demonstrated leadership at the top.

By leadership I don't mean just supervising people in the day to day implementation of specific procedures. I mean inspiring others to work for a common goal.

Employees at every level know that customer-focused change is real. It's a critical part of their jobs and their company's future.

If they thought it was just a fad before, they knew it wasn't when last year we created a new corporate position: vice-president for strategic planning and quality improvement. This is an officer level post.

It may take a decade or longer to change a corporate culture toward a more change and customer oriented bent, especially one as large and established as Chevron's.

We're trying to do it in a few years.

So we have adopted an unusual twist on an old saying. You may know the expression: "If it isn't broken, don't fix it." Today our saying is: "If it isn't broken, make it better."