Operational excellence

Some years ago, I read an article series about Operational Excellence from Bain & Co. published on their site. I have made extracts with key quotes from this article-series. The series was written prior to the downturn, but even if we are on the rise again, I believe the points made in the articles are still very relevant for oil and gas today. I have linked to the original articles for those who wants to read more. Enjoy!

OPERATIONAL EXCELLENCE – THE IMPERATIVE FOR OIL AND GAS COMPANIES

By John McCreery, Ethan Phillips and Francesco Cigala

Exploration, development and production costs are rising, and refining margins are under pressure. Activity levels are also increasing, causing sector inflation. The oil and gas industry is under tremendous pressure to reduce risk, even as it takes on new challenges. Industry executives are working to define and deliver OE at the frontiers, where few benchmarks exist. Complicating these challenges are the rising expectations of regulators, shareholders and communities, all of which are demanding more from oil and gas companies. More than 10% of production capacity is locked up in complexity and inefficiency—a valuable opportunity for improvement.

Operational excellence creates value through systematic and repeatable actions that are clear and addressable for everyone in the company. It relies on well-documented standard processes that over time lead to continuous improvement of operating performance. Everyone in the organization understands (or knows how to find out) how to perform their tasks and has access to the resources to do so.

Operational excellence allows oil and gas leaders to confidently say and prove that they are running their assets safely, reliably, sustainable and cost effectively. That requires success in six areas:

• World-class health, safety and environmental (HSE) performance in a culture that puts nonnegotiable emphasis on developing the highest standards of performance
• Top-quartile performance and return on capital across all assets
• Best-in-class standards and systems, standardized and adopted consistently across an entire business
• A high-performance culture that is always striving to improve
• Distinctive core capabilities carried out by a highly talented workforce
• Immaculate reputation, based on efficient operations and sustainable business practices

These achievements result from a transformational program that first defines the OE strategy, principles, expectations and processes and then translates them into repeatable actions. This transformation puts into place an operational excellence management system (OEMS).

Operational excellence requires an unremitting focus from senior management and constant communication with the front line to sustain the OE transformation journey over several years. Some companies with less experience managing communication between the top ranks and the front lines make the mistake of sending too many messages or some that are too detailed. It is far more effective to present the case for OE in crisp, clear and short language. Changing corporate culture also requires leadership from the top to reinforce new behaviors. Leaders must continuously set the tone for the transformation, keeping expectations and enthusiasm high. Motivating employees delivers only 20% of the change; ensuring compliance by reinforcing consequences, positive and negative, delivers the other 80%. In other words, accountability and transparency are more important than ever. The expectation that management will lead, be visible and be accountable is the most critical and fundamental factor for ensuring a successful transformation.

Sustaining excellence in performance requires continuous improvement and focus—so the journey is never over. Leaders at every level of the organization must continue to demonstrate their commitment and visible leadership of OE. There is no room for complacency, from the front lines all the way up to the CEO’s desk.

OPERATIONAL EXCELLENCE - MANAGING PERFORMANCE IN THE OIL AND GAS INDUSTRY

By John McCreery

Oil and gas executives may need to revisit the way they manage performance. Leading players take an approach that goes well beyond benchmarks to develop the right forums and decision-making processes that will turn metrics and insights into the right discussions, decisions and actions. They set up their reporting systems to inform strategic and operational decisions. They integrate performance management with other cross-functional processes that guide the business, such as risk management and capability development. Connecting performance to incentives ensures accountability.

Executives need to focus their analytic resources and reporting systems on the information that matters most. They can start with three straightforward and interconnected questions:

•  How do we measure our performance?
• What decisions do we need to get right to succeed?
• How can metrics help improve our decisions?

Discussions about measuring performance lead to discussions about improving performance. We believe good decisions stem from four variables: an organization’s ability to make the right decision, to make it quickly, to follow up and execute, and to make the required effort to run the process. Good decisions require accurate and pertinent data that ties closely to the organization’s strategic priorities. Key performance indicators (KPIs) should give a balanced view of the business. However, metrics are a means to an end: While they provide input for making well-informed decisions, they are not the determinants of policy. They are like gauges on the dashboard of a car—vital to help guide the journey, but incapable of telling the vehicle where it should go.

Too many organizations base their performance management programs on a somewhat blind application of benchmarking, often as part of their aspiration to reach the top quartile among their industry peers. The real value of benchmarks in this industry lies in enabling organizations to identify the areas where they should invest to improve their operations and differentiate themselves, rather than as indicators of performance compared with competitors.

Even with the best metrics, companies can improve their performance only with the right systems and tools that link performance to the desired behaviors through incentives and the correct alignment with the operating model and enables effective decision making. A performance management system must also do more than provide the right information in the right decision-making forums.

As performance management systems are put in place, managers can redefine or reaffirm roles, deciding who is accountable for performance across functions and regions. Performance metrics should be one source of information for periodic reviews and planning discussions, and they are the key to designing well-aligned incentive systems.

In many ways, oil and gas is a simple business. Much of the gain can come from focusing on a few vital metrics. These metrics can help produce consistent, high-quality forums for strategic discussions and decision making, which in turn lead to decisive action. Accountabilities for these actions must also be clear. Agreeing on the required behaviors—and the consequences of failing to follow them—is the glue that holds together successful performance management.

WHAT "GOOD" LOOKS LIKE: CREATING AN OPERATIONAL EXCELLENCE MANAGEMENT SYSTEM

By Pedro Caruso, Francesco Cigala and Juan Carlos Gay

Two decades ago, Exxon deployed the first and best known OEMS in response to the Valdez oil spill. The company has since gone on to refine and improve the approach over the years, and it has become a model for others in the industry.

Because they are so widespread, putting an OEMS in place no longer differentiates a company or ensures superior performance; it’s merely a first step. Breakthrough performance depends on how well you embed the system, from the front line to the back office, and how employees act on it day after day. In other words, this isn’t just about designing new systems; it’s about teaching people a new way of working and then continuously getting better at it.

An operational excellence management system isn’t just a manual. It’s a set of rules that describe how a company is going to operate in order to achieve operational excellence. The best examples are focused, simple and relentlessly applied. A solid system:

• sets global expectations for operations
• defines common language that everyone in the organization can use to talk about operations and their aspirations
• shares successful practices and behaviors across the organization
• maps accountabilities from the top to the front line
• promotes continuous improvement

Many companies spend too much time preparing the manual and not enough implementing it with accountability measures that ensure compliance. Successful companies focus more on implementation and compliance to get the most out of the effort. The most successful implementations start with insightful design and system principles that relate directly to strategic goals. The best designed systems are focused, simple and carefully crafted to make them easy to apply across the business.

The most effective way to roll out a major transformational effort like this is with a sponsorship spine, in which direct managers introduce it to their reports at every level of the organization. It starts at the top, where a steering committee sponsors and directs the project. Committee members work with project leaders who design the OEMS elements. These leaders talk with others across the organization, called change agents, who in turn communicate the details to the front line or back-office personnel in their area.

Ideally, most employees will learn the details of the OEMS from their own manager or someone in their group. Even so, senior leadership must continue to speak passionately and confidently about the importance of the OEMS. They should be clear about the connection between the OEMS and the way the organization creates value. In their own work, they should explicitly link their priorities to the delivery of OEMS requirements.

Keep communications as simple as possible, and describe what is changing and what isn’t. Leaders should communicate continuously, from the start of design through the implementation and beyond. As soon as the OEMS is up and running, team leaders should disband the deployment team and transfer their responsibilities to the relevant functions and the front line. The system’s goals should be measurable, with metrics linked to the performance scorecards of those accountable.

Pitfalls:

• Vague definitions.
• Unclear accountability
• A front line that doesn’t grasp the reasons for the program.
• Executives feel like they don’t own the OEMS.
• An implementation effort that runs as a parallel organization, not integrated into the business

Falling into any one of these pitfalls can reduce compliance levels, hindering the company’s progress toward operational excellence.

As organizations embark on the journey to build operational excellence into their processes, occasionally the initial enthusiasm generates such an all-encompassing project that is too overwhelming to tackle. Design a framework, and choose a few places to implement it—places where you can show a big impact in just a few months, in order to get buy-in. And while it’s important to find those quick wins, don’t declare victory too soon. Implementing an OEMS is a three- to five-year process. After that, change can be self-propelling as guidelines continue to shape behavior.

Operational excellence is no longer just a lofty aspiration; it’s becoming a necessity in this increasingly demanding market. An operational excellence management system, which guides employees toward repeatable, optimized behavior, is the tool executives can use to reach their goals.

INTEGRATED PLANNING: THE KEY TO UPSTREAM OPERATIONAL EXCELLENCE

By John McCreery and Ethan Phillips

More than ever, oil and gas companies are under tremendous pressure to improve performance and reduce labor overruns due to rising production costs, maturing assets and a talent shortage. Integrated planning—which aims to avoid the urgent jobs that make for great stories—is key to achieving operational excellence.

Leading companies take a more disciplined approach, recognizing that improving operational and maintenance planning is a critical step toward operational excellence. It is difficult work, given the many interdependencies to coordinate, but it is essential to ensure safe, reliable, sustainable and cost-effective operations.

Planned work is safer, more cost-effective and more efficient than unplanned work. Poor planning is expensive. Removing the inefficiencies from operations contributes to safe, reliable and cost-effective operations. Quality planning improves operational efficiency in significant ways. It is safer, gives optimized use of resources and is critical to successful performance management. Integrated planning requires coordination across teams and functions, and an extremely disciplined management of change. Wherever integrated planning sits within the organizational structure, it must work across functions in order to plan effectively. Strict criteria ensure that any scheduled work is thoroughly vetted before entering the plan, which allows planners to avoid surprises and spot potential problems early. The best organizations plan for the unexpected, keeping some time and resources in reserve and freeze their plans at least 30 days before execution starts, and making changes in this window of time requires approval from senior management.

Leading organizations keep their business priorities in mind as they plan, making sure their investments in people, processes and equipment support larger goals. That means integrating the business planning done at the center with the activity planning that happens at the business unit level and the scheduling that happens on site. If the company is organized along functional lines, it can develop new centralized models, but might struggle to find a balance between regional autonomy and central standardization. Executives must establish a process that empowers the functions to set global priorities while still allowing the regions to decide how to integrate them into their activity plans. Bringing everyone onto a common planning system is another important step in promoting integrated planning. A new integrated planning process helps the operator develop stable, economically viable annual activity plans based on the current pricing environment for gas and liquids. Tight feedback loops and contingency plans build in enough flexibility to allow the operator to rapidly react to new information. At the site [asset] level, the impact of better planning can be almost immediate, with ongoing, sustainable improvement.

Integrated planning creates more efficient and effective operations while reducing safety risks, maximizing uptime and making the best use of resources.