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Protecting the
bottom line in
the downturn
and beyond
A balance of shrewd cuts
and investments can help oil
and gas companies navigate
the current commodity
price crisis and propel their
growth in the future
March 2016
In the wake of sustained low oil prices, many oil and gas companies
are turning to austerity measures to protect their bottom lines:
repeated across-the-board headcount reductions, reducing the
number of contractors, renegotiating contracts with partners, and
delaying—even abandoning—investment projects.
Although across-the-board belt
tightening can protect the bottom
line in the short term, it can cause a
company’s performance to languish
behind that of its competitors for years
into the recovery. A major 2010 Harvard
Business School study1 found that only
a fraction of companies perform well in
the three years after a major downturn.
Figure 1: Cost cutting stymies recovery1
Based on the performance of 4,700 companies three years
before and after the global recessions of 1980, 1990 and
2000, the study discovered that:
80%
of companies
failed to reach
pre-recession
profit and sales
growth rates
three years into
the recovery
40%
were unable to
hit their actual
pre-recession
profit and sales
levels within
those three
years
Companies that cut costs faster and deeper than
competitors had by far the lowest odds of beating their
rivals once conditions improved
Source; “Roaring Out of Recession”, Ranjay Gulati, et al, Harvard Business Review, March 2010
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| Protecting the bottom line in the downturn
The study also found that nine
percent of companies did flourish
during a recovery (defined as beating
competitors’ sales and profits by at least
10 percent). Their secret wasn’t cost
cutting. Nor was it bold investments
made during the downturn. Companies
that thrived in a recovery shrewdly
balanced operational efficiency with
prudent investments in the midst of
the storm.
Talent decisions made today are
central to the balance. Businesses
making across-the-board staff cuts
can easily find themselves with the
wrong talent mix and unable to
compete effectively in the recovery,
often for years. By the same token, if
companies make acquisitions without
a precise understanding of how the
combined workforces will provide
value, they can end up saddled with a
workforce albatross that significantly
hampers their ability to drive
performance and profitability.
A continuing battle for talent
2015 witnessed meaningful
responses to tumbling value of oil and
geopolitical pressures in the form of
workforce cuts. Without visibility into
an employee’s performance record,
tenure, asset experience, skill sets and
competencies, oil and gas companies
often make decisions indiscriminately.
Wholesale layoffs can push the talent
needed in the future out the door
while less critical skills remain on
the payroll. Arbitrary cuts of less
experienced crew also have ripple
effects. For example, they can bump
voluntary attrition by 31 percent.2
The 31 percent are often those able
to make moves during a downturn—
precisely the talent an organization
needs to retain.
Although HR practices can help reduce
voluntary turnover, especially when
employees feel that the process was
conducted fairly or have a strong
personal connection to the company,
businesses will still have a hard time
replacing the talent they let go today
along with those who depart in their
wake. The same talent shortages that
vexed oil and gas companies before the
drop in oil prices may be even more
pronounced once the market recovers
and employees seek opportunities in
less volatile sectors.
And bumpback or other total
compensation strategies to
preserve senior talent requires
solid understanding not only of
these experienced crews, but of the
nonperformers by asset, region,
or business line. High grading the
workforce is otherwise very difficult
to achieve—and is exactly what
is required to ensure optimized
operations during the downturn.
Looming retirement of
baby boomers
A large percentage of current workers
are approaching retirement age.
The Society of Petroleum Engineers
estimates that up to 50 percent
of skilled workers could retire in
the next decade. Often, oil and gas
companies will offer early retirement
packages to avoid making layoffs.
Although well intentioned, such
programs can exacerbate the problem by
encouraging highly experienced workers
to leave, creating a capability deficit.
To assure needed talent remains in
house, early retirement programs
should identify potential retirees whose
skills will be needed in the future
and offer them retention bonuses or
the opportunity to work as contract
employees. In addition, knowledge
transfer and succession programs
should be in place to retain knowledge
of retiring employees.
The mounting shortage
of mid-skill labor
The shortage of mid-skill labor is
equally daunting. According to a 2014
study by Manpower, businesses have
said that skilled trade workers have
been the biggest talent gap for three
years running. Mid-skill labor is central
to safe and efficient operations of oil
and gas companies. It also makes up a
significant percentage of the workforce:
32 percent of oil and gas extraction, 60
percent of petroleum and petroleum
product wholesaling, and 65 percent of
pipeline and transportation businesses.
“Halting the Exodus After a Layoff”, Harvard Business Review, May 2008
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3
The right mix of moves
Since it can take years to recruit critical
positions or onboard a new employee,
oil and gas companies making sweeping
headcount reductions may be doing so
at their own peril. A more productive
approach is to manage headcount
strategically through the right mix of
defensive and offensive moves.
Answering these questions defines what
capabilities will be needed in the future
which, in turn identifies what talent
must be in place (see Figure 2).
Figure 2: Fit for growthSM framework
The company’s strategy anchors an
organization’s ability to make balanced
talent decisions. The strategy should
address critical questions such as:
• What are the organization’s core
capabilities and what is its source of
long-term competitive advantage?
• Where in the market does the
company plan to play in the
future? For example, should an
organization focus its efforts on
off-shore instead of building a
portfolio of on-shore and off-shore
projects? Are there product lines
that are draining investments
and hampering long-term
competitiveness and thus should be
dropped? Does the company have
multiple brands in the same market
that cannibalizes profits?
• What are the company’s strengths
and weaknesses today and are
they in sync with the strategy
going forward?
• How efficient are the company’s
processes? Will there be different
talent needs in order for delivery
services to remain competitive?
4
| Protecting the bottom line in the downturn
Company’s
strategy/“way
to play”
Clear articulation
of the capabilities
that really matter
to strategy and
ability to win in
the market
Assess and make
portfolio decisions
based on your
chosen “way
to play”
Develop a clear
cross-organizational
cost agenda,
making deliberate
choices from the
front line to the
back office
Optimize
asset
portfolio
Customize
cost
structure
Create short
and long term
plan for assets
Enable and
sustain
Build industry
leading
capabilities
Reorganize
for growth
Invest in
sustainable and
differentiated
capabilities
funded by
improvements in
the cost structure
Implement an
organization
model, processes
and systems that
unlock potential
and enable agility
for growth
Enable change
and cultural
evolution
Create an
environment and
culture that
embeds change in
the DNA and
enables a
sustainable future
Source: http://www.strategyand.pwc.com/global/home/what-we-think/fitforgrowth
With respect to workforce and talent management,
strategies around this framework can sustain in lean
times and potentially lead to increased profitability
during a rebound.
Customize cost structure. A cost
agenda embraced across the business
requires pervasive organizational
alignment. Establishing discipline
around managing workforce costs
contemplates foundational elements
like programmatic controls preventing
overspend in contingent labor,
benefits, absence, and compensation.
Automation of manual activity as well
can reduce administrative overhead as
a percent of revenues. Finally, offering
real-time competency and cost visibility
to field managers allows for improved
decisions to optimize asset crews and
therefore, profitability to the business.
Reorganize for growth. Agility,
efficiencies, and compliance are
no more important than when
reconsidering scaling operations
down or up. Flexible systems capable
of reacting to dynamic market
conditions, supporting complex
processes to preserve global workforce
compliance, and predictive analytics
accelerate these decisions to institute
rapid organizational changes.
Optimization through programs and
enabling systems can perpetuate
a strong foundation for a high
performing workforce.
Optimize asset portfolio
and build industry leading
capabilities. Workforce planning
is growing increasingly sophisticated
within oil and gas companies to counter
low oil prices and manage cost. In
a depressed market, companies are
seeking to model complex scenarios
combining for example, price per barrel
of oil, assets, profitability by asset,
workforce nationality mix, and crew
assignments to consider impending
gaps or conversely, where to cut labor
costs. Those costs must account for the
specific competencies, experience, and
nationalities needed in the future.
“At our investor conference in June 2014, we highlighted
how the E&P industry must transform to deliver
increased performance at a time of range-bound
commodity prices. With oil prices now at lower levels,
oilfield services companies that deliver innovative
technology and greater integration while improving
efficiency, which our customers increasingly demand, will
outperform the market.”
—Paal Kibsgaard, chairman and CEO of Schlumberger
The oil and gas sector is already making
forward-looking talent investments or
pursuing M&A activities to strengthen
their portfolios and talent with over
$3.2 trillion in deal volume globally,
on pace to match 2007’s record of
$4.3 trillion. Several large Oil Field
Services (“OFS”) companies are
boldly pursuing acquisitions while
eliminating a meaningful percentage
of their legacy workforce. The desired
outcome is capitalization on new
talent, expansion into new markets,
additional portfolio breadth, and
accretive earnings.
Build industry leading
capabilities. Global market
differentiation requires
development and retention of
key talent to advance company
strategies. Human capital assets can
create a competitive edge in project
performance, safety performance,
and innovations in technologies.
Therefore understanding the level
of talent and their contribution to
the business is critical. Additionally,
engaging employees and
developing key skills generates a
higher quality workforce to deliver
improved service.
5
Getting started
While across-the-board staff cuts can
easily eliminate organizational costs
in the face of sustained economic
challenges, the same talent eliminated
today will be the talent needed
tomorrow—and harder and more
expensive to acquire. To assure that
they are making workforce planning
decisions that won’t backfire, company
leaders need to address these questions:
Capital markets are watching.
Investors are scrutinizing signals of a
rebound such as cash position, debtto-equity ratios and earnings per
share. Companies with tepid or low
performance on these metrics may find
their ability to raise capital severely
constrained even though the market
is healthy.
Are we using data to cut fat instead of muscle?
Are we being as transparent with reductions
in force as possible to make sure our efforts
have a clear sense of “procedural justice?”
Do we know who in the company has the
critical knowledgeand skills needed to remain
competitive and are we thoroughly protecting
our competitive advantage?
Can we demonstrate the discipline to
prevent needless overspend so we can invest
appropriately in retaining employees with the
highest performance and potential?
Do we know how engaged our employees are
and can we intervene in time with employees
most likely to leave?
If we lose critical employees during a
reduction in force, where are they most likely
to go and how much will it cost us to win
them back?
6
| Protecting the bottom line in the downturn
A key defense is effective workforce planning to
assure cost optimization while ensuring an organizations’
talent is up to the challenge and clearly supports the
company’s strategy going forward.
Section |
7
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To have a deeper conversation about this subject,
please contact:
Steve Lancaster
Director
PwC
[email protected]
Holly Reneau
Regional Sales Director
Workday
[email protected]
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Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 147796-2016 br