The last six months have been a whirlwind for all of us, both personally and professionally.
On the personal front, I realized the other day that my one-year old son has never been to a store. How is that possible? I wonder when he’ll be able to take part in “normal” kid activities. Can we, as a family, continue to adapt to create a “new normal” for him that is as full and engaging as what came before?
My clients, upstream oil and gas companies, are asking similar questions. There’s a glut of global supply. And demand has never been weaker with COVID-19 wreaking havoc on the transportation industry. How are upstream players adapting?
Because I’ve been focused on developing “big A” Agile capabilities and insights—Scrum, Kanban, SAFe—my thoughts naturally drifted to two related questions: How agile have they been in response to the downturn? And how quickly will they be able to pivot if there’s a vaccine and an uptick in business? This gets to the focus of this article—the changes that will be needed for long-term competitive advantage.
If you’re familiar with Agile, then you know that it isn’t a framework like Scrum or SAFe. It’s more focused on values and principles. In that regard, it’s less about shifting processes and more about shifting mindsets.
Rather than focusing on “left-brained,” logical tasks, the Agile mindset zooms into the “right-brained,” emotional/social aspects of change. As my colleagues discuss in their Soar in the Face of Disruption article, adopting this mindset and inspiring employees to do the same are critical drivers of the flexibility needed in a volatile world.
So, what mindset shift(s) need to occur to enhance upstream business agility? I’ve outlined three below. Keep in mind, these shifts are perpetual works in progress. There’s really no destination in a mindset journey. Rather, there’s continuous improvement and iteration towards maturity.
Shift 1: Volume to Value
The oil and gas industry has been focused on volume growth for a century. A company could increase output by roughly 3 to 5 percent annually and be confident that global demand would keep pace. But producing towards volume targets doesn’t allow for the nimbleness needed in today’s volatile, uncertain, complex and ambiguous (VUCA) environment. As supply and demand shocks continue to roil the industry, pivoting to a value-based mindset is key.
This means that upstream companies need to shift their focus from producing to recalibrating production profiles and maximizing margins as fluctuations occur. Fluctuations can be seen in things like “take-away capacity,” where the ability to transport hydrocarbons is limited due to infrastructure and/or logistics constraints, or refinery demand for various and sundry lubricants/fuels. By focusing on which levers to pull (and when) to optimize profit, upstream companies can move closer to business agility.
Shift 2: Silos to Symbiosis
It’s no secret that functional silos are inherently independent. They were designed to be. And they’ve worked well in the Industrial Era, facilitating hierarchical organizations’ abilities to develop deep pockets of expertise.
I’m certainly not advocating the dissolution of org charts. Instead, I’m suggesting upstream companies shift their mindsets to consider the advantages of a more entrepreneurial, dual operating system. That sort of system would allow them to tap pockets of expertise that are needed company-wide. Wouldn’t that broad-based, versus silo-based, view allow them to build better products that affect more of the value chain?
By shifting their mindset from silo-focused to value-stream focused, companies can start to think about the people in their organization as symbiotic partners, all working to the same goal. I’m not just talking about support functions like HR, finance, supply chain or IT. For upstream players, specifically, it’s easy to take the value-stream mapping leap and start identifying how to break down silos:
This reflects a more tactical way of implementing a change. But it all starts with a mindset shift. Without the desire to break down silos to deliver higher-level, end-to-end value chain products, there’s no reason to carry out this exercise. Business agility can only happen if leaders push work to their people rather than people to the work.
Shift 3: Fixed to Flexible
The last item in our trifecta is all about variable OPEX spending. I’ll use a classic cloud example as an analogy for what upstream customers can do to flee from fixed and focus on flexible. Let’s set the stage. Fair warning: This will bring you back to your business schools days:
CAPEX (in general) is spent on one-time investments in the business, as well as associated maintenance fees. Project managers amortize and depreciate over time and hope to get a long useful life from their investment. CAPEX is helpful for long-term forecasting and stability.
OPEX (in general) is spent on the day-to-day running of the business. The expense is fully tax deductible and will generally increase profit margins. OPEX is helpful for flexibility and agility since it allows a point-in-time payment and then the opportunity to shift to something else if needed.
In IT, the old world saw a lot of CAPEX spending for servers, printers, cooling systems, etc. The resulting physical data centers were often under-utilized, over-staffed, and became a haven for ramping delays. Moving to the cloud and spending OPEX mitigates these risks. You pay as you go for capacity you need. You don’t directly hire folks to manage the infrastructure. And you can spin up environments in minutes.
How does this apply to upstream? Again, focusing on the mindset shift from CAPEX to OPEX and coming up with creative ways to build that flexibility into upstream spend is key. Is it possible to variabilize fixed costs? I think so. Some options could include:
- Focusing on a well with good economics, but bottle-necked on take-away capacity
- Reprioritizing contract negotiations with midstream partners
- Moving toward an activity-based allocation of infrastructure costs
- Taking margin-based operational views (artificial intelligence-forecasted variable costs) for real-time contribution margin calculation
From “O” to “A”
I know that “mindset shifts” may sound a bit…fluffy. But I believe these three shifts, with practical steps for implementation, can help upstream companies step-change their way forward during and after today’s uncertainty.
There’s only one small vowel change needed to go from internalizing these business agility concepts to seeing measurable results. Will you find the way forward from adopting to adapting?
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