BUSINESS MOLDING PROVIDES FOCUS FOR UPSTREAM INTEGRATION

Steve Patterson, John Altieri
Gemini Consulting
Morristown, N.J.

In the upstream end of the oil industry, profits are being squeezed from every direction. Overcapacity, modest demand growth, growing government ownership of reserves and control of products, declining discovery size, and escalating environmental costs are among the major factors pulling on the industry's purse strings.

The need to address these issues is apparent. But how?

RETHINKING THE BUSINESS

Facing the profit squeeze, industry leaders are adopting a new approach to the upstream oil business. In interviews representing a cross section of oil company executives, industry analysts, and financial experts, we found general agreement that facing today's market requires a new, more flexible view of the business life cycle and a corresponding shift in the management style, organizational structure, and skill mix required to capitalize upon it.

In the past, finding hydrocarbons and bringing them to the surface were considered the essence of success. Applying technical skills was the central focus of the business. The business was viewed as a sequential chain of separate activities-acquire, explore, develop, produce, dispose-along which almost all assets traveled.

Now, companies are viewing their options as far more flexible, and they are moving toward applying a diversified portfolio of skills within an integrated and flexible business framework (Fig. 1).

The industry leaders of tomorrow will use cross-functional teams that combine their companies' functional capabilities, leveraging commercial skills and technology (both 'hard" technology and information technology) to allocate resources to assets that are the best sources of value creation.

Information systems will be demystified and integrated, redesigned to serve the manager in language he or she can understand. The entire business will be flexible and adaptable and will operate as an integrated unit so that its basic objectives can be achieved.

This all sounds good in principle, but how do you achieve it?

How do you convert the 'stovepipe' organization of separate functional units into an integrated organization that is flexible and adaptable to change?

How do you know for sure where your firm's core skills he, or what skills need to be developed to face the market?

How do you overcome politics, functional rivalries, frustration with information technology, and fear of change?

How can an entire business get beyond its inherited structure and be completely transformed without collapsing into chaos?

TWO APPROACHES

Two dominant approaches have emerged.

The first is the 'top-down" approach in which changes in strategy,and management style made at the executive level are intended to filter down and throughout the organization over time.

In many companies, the use of asset management teams is now standard practice. Managers from all major functions combine their knowledge, applying careful scrutiny from every critical business dimension to determine, for instance, what criteria would make a given property commercially viable.

This kind of teamwork and flexibility is a step in the right direction, to be sure, but it does little to address broader organization and information technology issues.

The second emerging approach works from the bottom up. In it, changes in information technology alone (both hardware and software) are intended to eliminate problems of knowledge transfer and communication.

Typically, the information systems in oil companies are tied to an organization's accounting system, not to its business needs, and fail to support the separate functions adequately. As a result, each function develops its own systems, which usually cannot 'taW to the other systems in the company.

By integrating the systems, the thinking goes, the communications problem is resolved and, as a result, rigid functional boundaries will soften and blur. As many companies that have tried this approach know, it most often is just not that simple.

While the best of both approaches may result in significant business improvements, the changes that occur are stepwise and incremental. Both approaches share a common flaw: Neither provides the blueprint necessary to achieve the linkage between a company's strategic direction and its organization, operations, and information systems.

BLUEPRINTING THE WORK

On one hand, executives are realizing that incremental, process-specific change programs are no longer enough. On the other hand, they know that undertaking an organization-wide change program is an enormous and complex challenge.

To be successful, a large-scale change program requires both a fundamental understanding of the business and the means to rapidly translate that understanding into specific changes in organization structures, culture, business operations and processes, and information systems. Otherwise, the effort is Eke attempting to build a 120 story skyscraper without a blueprint.

In terms of understanding the business, we have found that many firms, locked into their traditional ways, have difficulty in articulating exactly what they do (the work of the business) or why they do it (the purpose of the work).

We have also found that by modeling the what and why of an organization's work, it is possible to build a stable blueprint that can be used to redesign and align the entire business.

Working with North American-based oil companies, Gemini has had significant success using our business modeling methodology, Construct. This methodology is based on the premise that every business has one fundamental purpose and that all work performed in the organization should have a demonstrable link to that purpose.

For an upstream oil company the purpose might be: 'To maximize shareholder value through exploration, development, production, and marketing of hydrocarbons.'

Once the business purpose is defined, the modeling of the work is approached first at the middle levels of the business by asking what work is done and why it is done, independently of existing people, processes, volumes, technology, and other business specifics.

Only work that supports the fundamental business purpose is included in the model.

The work is described in work-performing statements (i.e., Obtain Cost), and each statement appears only once.

From the middle level, the analysis is driven in both directions-upward, to get higher levels of work (i.e., Acquire Rights), and downward, to lower levels (i.e., Get Address).

The result is a detailed blueprint of the essential work required to achieve the business purpose and of the information required to accomplish the work.

ALIGNING THE BUSINESS

The business model serves two crucial purpose.

First, it allows easy identification of nonessential and/or duplicate work.

Second, and more important, it serves as a reference against which to compare the existing organization and work processes and as the basic architecture for the new organization, work process, and information system designs.

Knowing exactly what work is necessary to achieve the business purpose makes it easier, for example, to identify where value is actually created and what core capabilities are required to do so.

This, in turn, gives executives the means to evaluate whether existing capabilities are sufficient or need to be developed, whether resources are allocated to the best sources of value creation, whether certain functions and work processes are even necessary, and so forth.

A large integrated firm may find that it should be devoting more resources to technology research and development.

A mid-sized firm might find it should be focusing more on "dealmaking" - structuring deals, arranging financing, managing taxes, managing the business, making explore vs. buy decisions, and managing risk.

Another firm may discover it should be focusing more on developing trading skills.

While the basic models derived by two different companies may be similar, the discoveries and changes made as a result of modeling differ significantly.

Based on the model and the unique core capabilities within the company, the specifics of people, processes, organization, and information systems can be refitted accordingly, ensuring that the resulting organization is integrated and in complete alignment, from top management strategy to the data in the information system.

BUSINESS LANGUAGE

One of the most powerful integrating components of this modeling methodology is defining the language of the business.

As the essential work of the business is described in the work-performing statements, each term is defined and entered into a corporate 'glossary." The result is a common corporate vocabulary - the natural language of the business - that transcends organizational and functional boundaries.

For example, without clear definition, the word "lease" takes on many different meanings to different people-a legal agreement, a piece of property, or subsurface mineral rights. As these different definitions find their way into corporate documents and especially into the information systems, they create a tangled web of confusion.

By clearly defining the words used in the business, accurate and noncontradictory communication is assured throughout the organization.

Beyond achieving semantic precision, which creates benefits in its own right, developing the natural language of the business also provides a consistent source reference for use in prototyping and implementing information systems that fully support the fundamental purpose of the business.

The words are actually captured in software and translated into code in the prototypes, meaning that systems designed around the prototypes will provide information in language that managers and executives can understand.

LEVELING THE FIELD

Because all of this work is carried out by cross-functional teams, a common objective and smooth line of communication is established between the different functional groups of the organization. Top executives, operations managers, information systems managers-all understand and help design the integration and alignment of the business. Thus, modeling helps level the playing field by breaking down functional barriers, including the often long-established barrier between the operations and information systems groups.

The team maps out the actual work flows, comparing them to the work defined in the completed model, which serves as the zero base.

Inevitably, because team members are now analyzing the business from the standpoint of actual work requirements, not functional assignments, they are able to see that individuals from different functional units are contributing to the same essential work.

Based on this understanding, it becomes apparent that using cross-functional teams is by far the most productive and efficient way to accomplish the work of the business, and the teams are quickly formed and put to work.

In other cases, again because the model serves as the objective zero base, it becomes apparent that some work processes are redundant or completely unnecessary, and they can be completely eliminated.

Using the model as the basic framework, the old "stove-pipe" organization can be converted into an integrated organization in which cross functional teams focus entirely on work that supports the objectives of the business.

By comparing the existing work processed to the model, it is possible to identify both existing core skills and those that need to be developed.

Moreover, everyone involved gains, not just his or her functional area. This new understanding, combined with the fact that team members share a common business objective, effectively eliminates most political disputes, functional rivalries, and fear of change.

The final result is a new, seamless organization that is flexible and adaptable to change, one that can quickly move the focus of its work anywhere within the business life cycle to maximize value creation in an ever-changing marketplace.

Copyright 1993 Oil & Gas Journal. All Rights Reserved.