towers_perrin2.doc

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Firm: Towers Perrin

Case Number: 2

Topic: Organization Effectiveness

SETUP

Your client is the upstream business of one of the major integrated oil companies. The upstream business, also called exploration and production, is the part of the company that explores for and pumps oil out of the ground.

Management has called you in because the company’s profitability has declined relative to its peer group (other major oil companies), and they would like to find ways to improve performance. Since oil is a commodity, the primary way to impact profitability is through cost reductions, either by reducing operating costs (cost per barrel produced) or by reducing “finding and developing” costs (investments per barrel of oil discovered).
A key point that is helpful to evaluating this case is to understand that performance improvement can be achieved through efficiency gains (i.e., doing the same work at a lower cost) or effectiveness gains (i.e., achieving better results for the same cost). In the oil industry, this translates into either lower actual operating costs or higher volumes over which to spread costs.

QUESTION

Your client has asked you to evaluate the viability of two different options:

1. Reorganize the company along geographic lines (i.e., focus on regional businesses), reducing headquarters overhead charges by shifting administrative responsibility to regional businesses and eliminating a layer of administration
2. Form joint ventures (i.e., subsidiaries jointly owned by your client and a partner) with competitors in each region to realize cooperative opportunities and resulting savings

Discuss the merits of each alternative.

The following information is germane to the discussion:

n There are significant regional differences in how the business works (e.g., operations in the Gulf of Mexico are very different from operations in the Rockies)
n Allowing regional control can improve performance for some business processes. For example, developing local expertise and focus can result in operational efficiency gains (reduced cost to produce oil), as well as effectiveness gains (enhanced results from exploratory activities).
n Some business processes gain considerable benefit from centralization or central coordination (e.g., R&D expenditures for cutting edge exploration technology, management of information technologies, purchasing, financial management)

Suggested Solution

There are many ways to evaluate each alternative. Two possible approaches follow:

1. Impact on business processes: Consider the key processes that make up the company’s business and managerial operations (e.g., producing oil, exploration, strategic planning, financial management, etc.) and evaluate how each is impacted by the alternatives. For example:
n Does the alternative provide an opportunity to reduce the cost of the process?
n How does each alternative impact the functionality of the process?
n What are the tradeoffs between cost reductions and improved functionality?

2. Implementation risks and challenges: Consider the potential risks and challenges associated with each solution. The above discussion focuses on what the potential benefit is; the subsequent discussion explores the likelihood of realizing that benefit. Questions to consider could include:
n How easy will implementation be (e.g., How significant are the changes? What are potential barriers to change)?
n What is the likelihood and cost of failure?
n Is the option reversible (If the solution doesn’t work, how hard will it be to undo)?

Discussion of the alternatives:

Alternative 1 – Reorganization
Alternative 2 – Joint Ventures
Key Benefits
n Cost Savings
n Local Focus
n Merger Synergies
Rationale
n Decentralizing administrative functions is intended to eliminate a layer of corporate overhead
n Additional benefits will accrue from allowing local focus and tailoring of activities (e.g., hiring, training and skills development to support local needs, regionally focused business planning, etc.)
n Forming a joint venture will create a regional company with autonomy and the concurrent benefits of local focus
n Significant savings could be achieved through merging operations (e.g., joint operation of neighboring oil fields, elimination of redundant administration, etc.)
n Additional synergistic benefits may accrue from merging complementary areas of expertise
Note: The availability of good joint venture partners (with appropriate overlap in operations) would significantly affect the potential for success.
Additional Discussion Areas
n The candidate may discuss issues around how local focus could provide effectiveness and efficiency gains, while potentially trading off benefits from economies of scale
n Ease of implementation: relatively more straightforward
n The candidate may discuss a variety of issues around merging two organizations (e.g, how to coordinate business processes and technologies, potential cultural differences)
n Ease of implementation more complex, higher risk of failure
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