Where NOT to cut expenses

DRAWING BACK ON OPERATIONAL EXCELLENCE IS THE WRONG MOVE

FRANCESCO CIGALA, BAIN & COMPANY, KUALA LUMPUR
JOHN MCCREERY AND JOHN NORTON, BAIN & COMPANY, HOUSTON

Even before crude's steep price drop, oil and gas companies around the world were committed to profitability and growth targets that would have been difficult to hit. Cost inflation had driven down margins per barrel, public companies had promised dividend growth and share buybacks, and national oil companies had made major commitments to fund their national budgets.

The crash in the price of crude has made things much tougher, leading oil and gas companies to follow a well-worn path to familiar cost-cutting moves such as asking suppliers to lower rates, tightening discretionary spending and deferring capital projects. Some are also eyeing their operational excellence (OE) programs, but cutting those would be penny wise and pound foolish, since the benefits of these programs are more important than ever in a price environment that is likely to remain weak for some time.

Short-term cost cuts may deliver immediate relief, but the wrong ones can threaten the balance of safety, reliability, and cost leadership that OE programs put in place. In previous downturns, companies that reduced costs by cutting corners on maintenance or by releasing valuable talent paid for it later. Industry-wide efforts to reduce costs often do as much harm as good-as with, for example, those in the North Sea in the 1990s.

On the other hand, oil and gas companies that have invested in improving performance through OE programs have raised their efficiency and now see the benefits in leaner operations, lower costs and higher productivity-all tremendously beneficial with crude prices so low.

Now more than ever, companies have to focus their improvement efforts where they will have the most effect: on business outcomes. The corporate center may provide the management systems and incentives, but it's the on-site managers who deliver results. This is where the action is, where managers customize OE programs for local needs. It's where safety, operational performance and cost performance meet.

To make sure they are squeezing the most value out of their investment in excellence, leading companies concentrate on a handful of principles that are especially important in lean times.

• Focus on process and outcomes. Striking the right balance between setting up the structure of an OE program and ensuring results is key. Successful programs distribute their efforts across the system, deployment, compliance and results.
• Ensure transparency and accountability. Complexity obscures financial lines, and often it's not clear who is paying for what. With margins this tight, financial accountability is more important than ever. Clear budget ownership and cost transparency allow effective monitoring, and the consequences of cost-cutting-or overspending-become apparent immediately.
• Remove organizational complexity and overhead. Activity has dropped and producers have reduced staff in the field, but most have yet to make corresponding cuts at headquarters. Many companies remain bloated with too many layers and short spans of control. They need to find ways to retain key technical and business talent while reducing complexity so that they make better and faster decisions.
• Lead from the top. Senior executives should reinforce their commitment to excellence to encourage the next wave of improvements and make sure that OE programs don't slip down the organizational agenda.
• Adapt and modify. Tap the expertise of frontline employees as well as management to help define the right objectives and find appropriate solutions. Adaptation is vital as the industry adopts standard solutions to unique operating environments.
• Connect with frontline workers. No OE program can succeed without a successful rollout that includes road shows in which senior managers explain the rationale for the program. This helps ensure buy-in from frontline workers who must adopt new behaviors, shed old habits and actively make a difference in the safety and performance of the organization.

Senior executives should also remember that OE doesn't always require a massive and costly program. For example, in recent years the unconventional producers in the US and Canada have demonstrated ways to build programs iteratively. These companies work with fast feedback loops: An improvement in one area-for example, a modified drilling procedure, a better understanding of the causes of downtime or a streamlined support process-becomes applicable across the business. This rapid permeation of insights is a valuable way to boost performance and is demonstrably more important than the central upfront thinking that went into the program's design.

Times are tough in the energy industry, and low crude prices may endure for years. Oil and gas producers will have to continue to plan and perform under great volatility and uncertainty-and they will find themselves better prepared to do that if they hold the line with OE programs.

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