A relic of the 1980’s to avoid

ByFrank Lloyd, Associate Dean, Executive Education, SMU

Oil and gas firms are implementing operational efficiencies in many forms.

At the depths of the Great Depression in the 1930’s, noted American humorist Will Rogers remarked that “I don’t understand what’s going on any more than an economist!” His quip was good for a laugh 80 years ago, and I was reminded of it again on a recent morning when my newspaper contained reports of differing, even contradictory, outlooks on oil prices from a London brokerage firm, the Iranian oil minister, a Dubai-based consulting firm, the IEA, OPEC, and the newspaper’s technical analyst. When the stakes are high and there is no consensus, what is the prudent course for oil and gas firms? Two words—efficiency and flexibility.

Oil and gas firms are implementing operational efficiencies in many forms. Some are tried and true. Mergers and acquisitions, for instance, give firms the opportunity to take advantage of scale, pick up bargain-priced operations that cannot survive in a low-price environment, and spread risk. Some are more innovative and peculiar to the current shale boom. Pioneer Natural Resources President and COO Tim Dove, often remarks, “with fracking there are no dry holes.” Therefore, firms can focus on their best producing properties, divert resources away from exploration, concentrate on taking waste out of their extraction and distribution processes, and form alliances with companies in the service sector.

Developing organizational flexibility is more challenging. It requires leadership skills in change management and human capital effectiveness. While many analysts look to the downturn of oil prices in the 1980’s for insight into what the future holds in the current price cycle, there is one relic of the 1980s that will inhibit the achievement of organizational flexibility: “survivor syndrome.”

Survivor syndrome results from downsizing processes that leave those who survive with increased span of control, the need to work longer with fewer resources to accomplish the same amount of work, and an environment of stress, uncertainty, and loss of community. An expected contrast between the outlooks of those who are let go and those who stay fails to materialize. The actual portraits of those who leave and those who stay are remarkably similar.

Portrait of those who leave. When people are separated, voluntarily or involuntarily, they feel that a psychological contract has been broken. Their loyalty seems misplaced, and their sense of security is lost. As a result, they react with shock, anger, disbelief, distrust, grief, confusion, anxiety and depression.
Portrait of those who stay. Survivors of layoffs also react with anger, distrust, guilt, apathy, stress, and insecurity. Why? Survivors, seeing their co-workers let go, also feel that their psychological contract is frayed, and their loyalty and security are shaken. When they learn that those who have been let go find interesting new opportunities, they raise the question: “who is actually better off?”

Survivor syndrome leads to a number of negative business impacts:

Reduced ability to implement new strategies
Decreased productivity and quality when the company can least afford it
Damaged corporate image
Second wave turnover and poaching
Increased union activities and lawsuits
Subtle sabotage
Increased absenteeism

Research from the early 1990s illustrate these negative impacts. Firms that downsized in the 1980’s expected lower overhead, less bureaucracy, faster decision-making, smoother communications, a greater sense of entrepreneurship, and productivity gains. In reality, study after study showed that downsized firms fell short of expected results in:

Reduced expenses
Increased profits
Gains in shareholder ROI
Stock price performance in relation to the market and firms in their industries
Employee productivity

Numerous downsized firms reported that they were ill prepared for the dismantling, had not anticipated problems, and had no policies to minimize the negative effects of cutting back. Employees who stayed became narrow minded, self-absorbed, and risk averse.

Why did anticipated efficiencies fail to materialize? Ten to twenty percent of employees let go had to be replaced, often by consultants, and frequently by the same employees that were let go, brought back as consultants. Business units felt the need to recreate expertise that had been stripped from headquarters staffs because line managers did not have the training or the broad perspective to see beyond their own units. Top executives found that they lacked important information and honest communication needed to make enterprise level decisions about strategy and resource allocation. Does any of this resonate today?

The 1980’s cost-cutting efforts underestimated the value of employees and the need to train and coach them in the tools and techniques of working leaner, smarter and more flexibly. As a result, cultures of anorexia took root. They starved organizations of the ability to innovate and respond to rapid change. This can and must be avoided as oil and gas firms engage in staff reductions today.

Today’s business leaders should pay attention to these results because the current generation of managers has had little opportunity to learn the lessons of past reductions in force. In the twenty-five years from 1982 to 2007 the US economy was in recession for only sixteen months. This contrasts with the previous 100 years when the US economy was in recession forty percent of the time: forty years!

Today’s workforce may be less loyal to their employers than those of the 1980’s. They are more used to working as contractors in an on-demand economy. They may even prefer to operate as members of a contingent workforce. Nevertheless, companies that want to retain their most valuable human capital as they pursue operational efficiencies should include best practice support for workers who stay—as well as for those who go—in their change management process.

To obtain the intended benefits of downsizing firms should prepare the surviving workforce to deal with trauma and uncertainty, rebuild loyalty and commitment, and provide resources to support streamlined operational processes. A three phase process can facilitate psychological transition from denial, anxiety, anger, confusion, and frustration to:

1. Reconciliation: resignation to the reality
2. Reorientation: adaptation to the new reality
3. Recommitment: new priorities, alliances, goals

Leaders must recognize that operational employees, middle management, and senior management move through these three phases at different speeds. Top management progresses fairly quickly, middle managers less so, and operational employees the slowest. Therefore, leaders must persistently and consistently follow behaviors such as these to facilitate transition through the three phases:

Reconciliation:

Management by walking around demonstrates empathy and acknowledges the value of the old while reinforcing the need to change

Reorientation:

Consistent messages repeated frequently acknowledge a sense of loss, focus on redistribution of work, and emphasize that going back is not an option

Recommitment:

Provide choices and options that give employees a measure of control
Challenge people to set personal objectives, provide support, and celebrate small wins
Enable connecting to others through teams and networks
Listen

Tools like this allow oil and gas firms to avoid the “survivor syndrome,” a major pitfall of staff reductions. Attention to the psychological transition of employees who survive staff cuts will enable firms to develop the operational efficiencies and organizational flexibility intended from staff reductions—the fundamental organizational capabilities needed to compete in today’s environment of uncertainty and rapid change.

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