Conquering Change in Oil and Gas: How To Build a Learning Organization

The drive for financial performance demands a change in leadership skills at all management levels and a new perspective on change. Managers abandon a traditional control orientation for one of involvement by becoming facilitators who delegte, maintain open doors, and lead by example.

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Former United States Secretary of State Colin Powell likes to tell the story of how Israeli Prime Minister Shimon Peres put his arm around his shoulder after the dissolution of the Soviet Union in 1991, and said, “We have lost our enemy; all we have now are problems.” Peres was certainly thinking of dangers that threaten all nations: poverty, famine, religious radicalization, desertification, drugs, proliferation of nuclear weapons, and ecological devastation.

While it is not immune from global threats, the oil and gas industry faces its own set of persistent and continuously emerging challenges that drive change in the industry. They are

  • Innovation: technology to boost output, processes that promote efficiency, new industry structures and alliances. Tim Dove, president and chief operating officer of Pioneer Natural Resources, said that hydraulic fracturing means that there are no dry holes. As a result, he believes that exploration and production firms have become similar to manufacturing companies. Their success depends on efficient operations.
  • Capital: how much oil can be produced at what cost. The amount of oil that can be recovered is no longer constrained by geology. As George King, a global technology consultant for Apache Corporation, told the Wall Street Journal, “the constraint on how much oil can be produced isn’t geological … we face technical and economic limits more than anything else.”
  • Talent: accelerated attrition of baby boomers in the senior ranks. Industry firms face the rising practice of “poaching” of high potential leaders. On the other hand, firms struggle to accelerate young professionals into the “age of accountability” as leaders. The local Dallas chapter of Young Professionals in Energy has more than 4,100 members, making it one of the largest trade organizations in Texas. Andy Long, its 26-year-old chairman, has established a mentor program to connect its members and college students with industry veterans.
  • Global: opportunities worldwide are not limited to the majors. Heyco Energy Group, an exploration company that has been active in the Permian Basin since the 1960s, today holds positions in 1.4 million acres in Spain and United Kingdom. Science and technology have turned the basin into “the hottest spot on earth,” according to Chief Executive Officer George Yates, and we “asked ourselves ‘where could we succeed given our experience and advances in technology?’ Europe was an obvious place.”

Bruce Bullock, director of Maguire Energy Institute at Southern Methodist University’s Cox School of Business, boils down the industry’s challenges to financial performance. “The industry has to find ways through technology, efficiency, science, and other strategies to really improve its financial results over the next several years.” The drive for financial performance demands change leadership skills from all levels of management, and a new perspective on change.

Business typically has used three perspectives on change, each with its own implementation method.

The automobile industry provides instructive examples. They are

  1. Transitional change: implementation of a known new state. Spurred by persistent USD 1,500 to USD 2,000 cost differentials on compact cars, US and European mass producers undertook a transition to lean manufacturing starting in the early 1980s. Their success depended on management through phases of awareness building, employee commitment and preparation, transfer to real life, and takeoff.
  2. Developmental change: improvement of what is. Once lean manufacturing was implemented, auto firms focused on continuous improvement. This involved training and tools for managers and employees to engage in an ongoing cycle of disciplined problem identification and implementation of countermeasures.
  3. Transformational change: emergence of a new state, unknown until it takes shape, out of the remains of the chaotic death of the old state. It can be argued that the US government’s support for General Motors (GM) and Chrysler during the 2008–2010 financial crisis saved these firms—and the domestic US auto industry—from a chaotic death. Meanwhile, Ford implemented transitional change to effect a transformational change without government support.

The scope and speed of change in today’s energy industry requires a fourth perspective on change. In the words of Michael Beer, Russell A. Eisenstat, and Bert Spector, who conducted a 4-year study of organizational change, “the purpose of change is to create an asset that did not exist before—a learning organization capable of adapting to a changing competitive environment.” This is the perspective that best fits the speed and scope of challenges in the energy industry.

Leading from the Periphery

What can oil and gas company leaders do to create an organization capable of adapting to change? One method is leading change from the periphery. This requires managers to create an internal market for change and use revitalized units as organizational models for the company. Top managers specify the firm’s general direction without dictating solutions to individual operations and spread lessons of revitalized units throughout the company.

Change is mobilized by a joint diagnosis of business problems. This results in a shared vision of how to organize and manage an operation. It yields consensus for the new approach, requires the development of new competence to execute it, and results in cohesion to move it along. Then the new idea can be spread to other departments. After that, formal policies, systems, and structures can institutionalize revitalization. Ongoing monitoring allows for adjustments and responses to new problems.

An example is the case of a large corporation division set up to commercialize a military navigation product. The division had been in operation for 6 years and had never been profitable. A new general manager set out to make changes. The first step was a broad review of the business with the management team. Next, he formed a task force that represented all stakeholders in the business. The task force visited several successful manufacturing firms to help identify what its own organization could do to be more effective. The members were especially impressed with a team-oriented system used by one of the companies. Seeing it in action brought a shared understanding of their problem and a potential solution. The core group drafted a model of the organization in which cross functional teams would accomplish all work. The general manager then created another task force with members drawn from all levels and functions, including union and management, which refined the new model. Because this work was grounded in the organization’s real business problems and a stakeholder-oriented solution, it had a chance to succeed.

Then the hard part ensued. The general manager made it clear that the team approach would be encouraged. Those who did not support it were offered outplacement, and those who did were offered training for their group members and internal consultants to help obtain the necessary resources to implement the change. Once the team concept was implemented in production, it was spread to other departments. Each department was allowed to implement the team concept itself. Because engineering was especially critical, it was allowed a year to implement a plan the department developed itself.

Once all departments had adopted the team concept, the organization could institutionalize it in the form of policies, systems, and structures. By eliciting renewal without imposing the concept, the division experienced a dramatic improvement in value added per employee, scrap reduction, quality, customer service, gross inventory per employee, and profits. As a result, it stood as an organizational model for the company.

See-Feel-Change

There are times when a large-scale change is in order. How can business leaders promote a successful large-scale change? John Kotter, perhaps the best-known academically based change management expert, said that “highly successful organizations know how to overcome antibodies that reject anything new.” These firms know that “changing behavior is less a matter of giving people analysis to influence their thought than helping them to see a truth to influence their feelings.”

Kotter advocates an eight-step flow to promote a “see-feel-change” that sticks. A large-scale change effected by GM Europe illustrates the method. In the late ’80s, GM established a pan-European organization that stitched together legacy producers, such as Adam Opel in Germany and Vauxhall in the UK, along with assembly and components plants in Belgium, Spain, Austria, UK, Germany, and elsewhere.

By the mid-1990s, GM’s European organization transformed itself from one of its least efficient operations to the most efficient European mass producer. How? By following Kotter’s eight steps as follows:

  1. Increase urgency. Top management communicated the threat of Asian auto makers poised to enter the Europe market upon the collapse of trade barriers in 1992. Fortuitously, at that time the Massachusetts Institute of Technology (MIT) published a study, The Machine that Changed the World, which assessed global auto production efficiency, assembly plant by assembly plant. Unsurprisingly, the study documented the superiority of Asian lean production methods. GM plants shuttered in the US because Japanese competitors were more efficient, by MIT’s measures, than all of GM Europe’s plants.
  2. Build the guiding team. GM Europe’s management committee established a steering committee to lead the transition to lean production. It consisted of senior executives in strategic, manufacturing, and engineering, with emphasis on those who had experience with Toyota, Isuzu, and Suzuki joint ventures. As the head of management and organization development with experience at GM’s joint venture with Toyota, I was part of the team.
  3. Get the vision right. GM Europe implemented an organization-wide process to establish and communicate a consistent statement of the mission, vision, and values, focused on working together to serve the customer with high-quality and low-cost vehicles.
  4. Communicate for buy-in. GM Europe cascaded the business case for lean production throughout the organization down to the shop floor in all facilities. Workshops were delivered by top executives and managers to communicate commitment and to establish public accountability to uphold the new production system and the associated leadership behaviors, lean production, and the organization’s mission, vision, and values.
  5. Empower action. Modeled after GE’s famous “work out” process, GM Europe encouraged employee teams to investigate production and administrative processes, identify waste, and make changes based on measurable improvements.
  6. Create short-term wins. GM Europe identified specific assembly areas as lean production demonstration sites. One of these was seat assembly. The president of GM Europe himself worked a portion of a shift in this area to publicly showcase the site and to demonstrate his hands-on commitment to the change and supporting leadership behaviors.
  7. Do not let up. Executives held one another accountable for lean production implementation through a series of ongoing workshops hosted by individual operations. Executives received a second round of 360° feedback data on their leadership behaviors. Visiting executive teams assessed the state of lean production implementation in the host plants.
  8. Make change stick. Based on the “see-feel-change” process, the ground had been prepared to transfer learning and extend lean production in Europe throughout the early and mid-1990s. Based on its success, GM extended lean production globally and by 2002, GM surpassed Ford in the Harbour Report’s study of North American productivity.

New Management Skills

The methods for leading change have produced a model that oil and gas industry leaders can look to as they seek operational efficiency and improved financial performance. Both methods require new management skills. The fundamental role of management in lean production is to encourage problems to surface and resolve them at the lowest possible level. This is an essential skill in today’s energy industry based on the need for speed, innovation, and safety, as well as efficiency. Managers must abandon a traditional control orientation for one of involvement. They must become facilitators rather than “bosses.” They delegate, they maintain open doors, and they lead by example. To further support the speed and quality of decision making and innovation needed in the energy industry today, we must add skills in networking, trust building, and transparency of communication.

In order to develop these skills, energy firms have an impressive array of tools. The most widely used methods for management development are available in the workplace: challenging new assignments focused on cross-functional growth, multicultural experience, and business opportunities in growth, new ventures, or turn arounds, plus informal and formal mentoring relationships.

Today’s action-oriented classroom provides additional means to support acquisition and application of new tools, knowledge, and behavior. These include assessment instruments, simulations, exercises, team projects, case studies, executives who serve as classroom advisers, and instructors who are skilled in facilitating experienced managers to learn from their past experiences and those of others. Finally, the most progressive learning organizations are using the community as a learning resource to develop critical leadership skills among their managers. They encourage leaders at all levels to seek out opportunities to serve on boards and to take on other civic, church, and nonprofit leadership roles to hone their skills in influencing, consensus building, and enterprise thinking, and develop their ability to adopt a multiple stakeholder perspective.

Growth and volatility are driving global demand for capital, innovation, and talent in the energy industry. These forces are persistent and accelerating. They create a mission-critical need for managers at all levels with skill to lead change. As the industry moves toward a manufacturing orientation to achieve efficient processes and uses of capital, examples from the manufacturing industry show the way. And there are learning resources in the workplace, in today’s action-oriented classroom, and in the community from which they can readily draw.