Getting Serious About Transformation: Business Unit Changes Aren’t Enough
Deloitte discusses the “great compression” of the oil and gas industry in which companies’ room to maneuver is restricted. How can the industry avoid a talent gap and stop an organizational challenge from becoming a precarious business problem?
The US crude oil, natural gas, and chemicals (OG&C) industry employs close to 1.5 million people. In the current economic downturn, about 107,000 workers were laid off between March and August, aside from mass furloughs and pay cuts. Refining and chemicals sectors also reported up to 35,000 layoffs combined. In 2014, after the shale boom triggered a drop in oil prices to $50/bbl, 200,000 people were laid off from July 2014 to June 2016, according to the Deloitte report.
This has challenged the industry’s reputation as a reliable employer, which comes as the industry tries to retain top employees and deal with an aging workforce (median age is over 44 years)..
Global risk management and advising firm Deloitte said, however, the current downturn presents an opportunity for repositioning for an industry long restricted by “great compression” where room to maneuver is restricted by low prices, unexpected demand destruction, changes in demand brought on by mass telecommuting, mounting debt, and a renewed focus on health from COVID-19.
A recent Deloitte Insights said the compression is challenging the three connected dimensions of OG&C organizations: the hydrocarbon business model itself (the work), the workforce, and the workplace.
With oil prices around $45/bbl, up to 70% of jobs lost due to the pandemic may not come back by the end of 2021 in a business-as-usual scenario. But the work, workforce, and workplace are undergoing change. COVID-19 is challenging the way work is done in the industry, including tracking of new manufacturing tasks and health and safety regulations. Many roles, schedules, inspections, and practices are also moving from people to digital remote operations centers.
Limited career mobility for specialized roles has put the OG&C workforce at a disadvantage, especially in an economy generally embracing remote working. Deloitte said that poses the question: How can the industry avoid a talent gap and stop an organizational challenge from becoming a precarious business problem?
The pandemic has forced the industry to reduce on-site staffing and move the staff to safer locations, including home. With a majority of workforce now off-field, mitigating risks (including regulatory compliance and cyber) and ensuring continuity of key tasks become challenging.
“The new trend of home-based workers shouldn’t be seen as transitory—as it impacts behavior and may become an expectation in the post-COVID-19 world,” the report said.
Deloitte identified “four levers of transformation:”
- Sustainability as a way of business
- Digitalization transforming work
- Recoded careers to build the workforce of the future
- Organizational agility for new business models
Redraft the Future Ways of Working for the Entire Organization
Deloitte suggested organizations redraft the operational vision and identify ways of working for the entire organization rather than developing piecemeal digital and automation road maps for a business unit. Costs not aligned with future ways of working—facilities, personnel, and administrative costs that don’t enable remote operations—should be driven down. In a downturn, support functions are the prime cost-cutting targets.
Deloitte’s research found that “the root cause of the talent challenge is still the ‘work’ and many companies are yet to make the ‘workforce’ a core business issue.
For example, over the past 5 years, there has been no major change in the hiring strategy or job postings of OG&C companies. Job postings are similar irrespective of the location or the skill set. About 90% of job postings are still for traditional energy cities. Fewer than 15% of postings in 2019 identified mathematical or data analytics as the primary skill.
Considering high fixed technology and personnel costs associated with support functions (about 15–20% of total personnel expense), there is opportunity for companies to make fixed costs highly variable through outsourcing intelligent process automation, and cloud-based technology solutions. But they must cut these costs deliberately as about 90% of back-office reductions return to previous levels in 3–4 years.
Moving support functions to an “as-a-service” model or moving them to the cloud also brings change in the industry’s annual selling, general and administrative expenses costs, and mitigates workforce cyclicality.
But there has been little change in the hiring strategy or job postings of OG&C companies (figure 7).
About 90% of job postings are for traditional energy cities, with less than 4% in non-energy locations like Silicon Valley. Deloitte’s research also indicates less than 15% of 2019 job postings had mathematical or data analytics as the primary skill.
Explore Flexible and Scalable Resource Models
OG&C organizations may continue with the traditional model, given that production of resources or utilization of plants will likely become more variable. But for task-based, on-demand, or transactional roles, the report said companies should consider exploiting new and off-balance sheet resource models that lower fixed cost and minimize business disruption.
Industry participants across the value chain could forge an open energy system—a multisided platform of operators, suppliers, and potential talent to reduce costs and delays through hiring, contracting, procurement, scheduling, and management of material and services. An open energy system also can be expanded to change customer interactions
Examples include online B2B marketplace platforms such as Knowde, CheMondis, and OneTwoChem, which target the $5-trillion chemicals market. The platforms provide e-commerce-like web catalogs for trading chemicals, along with technical literature products.
“The future is wide open for e-commerce platformers to predict supply and demand shifts, integrate with enterprise resource planning platforms of their customers, and reduce delays in shipment and contracting, among others,” said Deloitte. “Expecting blanket transformation across the industry or even an organization is unwise. But piecemeal transformation and solutions (tweaking the existing processes and throwing in a few cyclical solutions) could yield suboptimal results in the post-COVID-19 environment.”
Building the Organization of the Future
Deloitte concluded that the coming years are pivotal in determining the path of the OG&C industry and fundamental changes are needed across each element of the income statement and balance sheet. Ultimately, moving from a traditional oil, gas, chemical business model to a solution-driven, customer-centric energy company is expected, which must come from executive management.
This would mean extensive changes in the business foundation, and Deloitte said it is important to start aggressive efforts to bring organizational change from a long-term to a medium-term focus.
“Such continual self-assessment will go a long way in generating a resilient company,” the report said. “After all, the end goal in tackling these questions is simple: building an OG&C organization of the future by making bold choices today for the work of tomorrow, expanding job canvases of the workforce by creating redesigned, cyber-physical teams, and fungible roles, and embracing a digital workplace culture that remains open to future innovations.”
For the full Deloitte Insights article, click here.