In Part I, we discussed the need for a systemic approach to Operational Excellence and the need for Strong Bond Governance in today’s complex critical system ecosystems. This piece will focus on a practical strategy using a documented and successful Best Practice.
Before undertaking any organizational initiative, it is important to develop an understanding of the economic value that can not only be attained but sustained from said strategy. Value will be different among industry sectors and can be very diverse with individual organizations.
Benchmark data can vary; however, two studies suggest that for many, the value derived is not just significant but can be game changing. In one case, a Bain & Company study showed that for an upstream oil and gas operator, “actual operations and maintenance hours” were approximately 233% over planned hours.
That same study indicated that “poor planning” accounted for drilling rig inactivity for approximately two-thirds of an unconventional oil well development project. Conversely, another operator attained over 50% increase in efficiency over a 12-month period with better planning and greater accountability.[i]
McKinsey also reported that over US$ 4.2 billion is available to the global oil and gas sector from operating cost and production improvements.[ii] According to this firm, these “rollup” numbers were developed from detailed assessment and recommendation across the firms’ portfolios at the asset level.
These cases represent significant value that can be unlocked from operational excellence business models. It is important to note that, as the McKinsey study suggests, value is attained in smaller increments at the individual asset level. Details are important: well below the three bullet PowerPoint presentation to management!
Operational Excellence focuses on organizational leadership and how it deploys methodologies and enabling tools to sustain top quartile, measurable performance. This is a fairly broad, yet demanding requirement on management and the Board of Directors.
Additionally, there are several definitions for “Best Practices,” most of which are industry dependent. Generically, Wikipedia defines these practices along the lines of a set of processes that are generally accepted to be superior to others. Usually, they are based on appropriate industry/non-industry standards such as AMA, API, ISO, IEEE or others.
To meet the criteria necessary to create the significant value available from OE, firms must use a Best Practice model that has a major focus at the individual asset and it role/function within its portfolio. Such a model is depicted in the following graphic.
The focal point of this model is Strong Bond Governance and its risk governance component. This archetypal recognizes that to attain and sustain Operational Excellence, the role of the firm’s ecosystem is key to its systemic success.
All industries have a significant risk exposure from operations. Case studies of failure and stakeholder exposures are readily available. Sadly, incidents continue despite years of effort and major expenditures to try to limit these incidents.
Normal Incident Theory (NAT) purports that highly complex systems such as those found in sectors with Critical Infrastructures are subject to levels of uncertainty that makes occasional failure likely. Another perspective, High Reliability Organizing (HRO) suggests that uncertainties can be managed more aggressively and incidents are not foretold.[iii]
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The Strong Bond Governance approach to Operational Excellence incorporates the HRO risk governance approach. As mentioned, this is a stronger OE model than others may provide.
There is significant value available to those firms that invest the time and energy to attain and sustain Operational Excellence. This value is not simply monetary but can take the form of equity (higher P/E ratio) as well as reputational.
This Best Practice is available with reasonable implementation costs. The final question, “If my competitors create an OE grounded ecosystem and I don’t what will be the impact on my firm?”
Additional information on this Best Practice model and other terms and information discussed herein are available from the accompanying White Paper, Attaining & Sustaining Operational Excellence: A Best Practice Implementation Model.
[i] http://www.bain.com/publications/articles/integrated-planning-the-key-to-upstream-operational-excellence.aspx
[ii] https://www.mckinseyenergyinsights.com/services/performance-improvement/benchmarking-diagnostics/global-operations-benchmark/
[iii] http://www.high-reliability.org/Normal-Accident-Theory
Scott M. Shemwell, D.B.A.
Dr. Shemwell, Managing Director of The Rapid Response Institute is an authority and thought leader in field operations and risk management with over 30 years in the energy sector leading turnaround and transformation processes for global S&P 500 organizations as well as start-up and professional service firms. He had been directly involved in over $5 billion acquisition and divestitures as well as the management of significant projects and business units.
For more than a decade he has been directly involved with Fortune 100 firms, Government Agencies, and a large number of mid-size as well as start-up firms addressing a number of business and technology implementation problems. For example, his Economic Value Proposition Matrix® model was developed with and for the energy sector and has been used extensively in CAPEX and Risk assessments.
[i] https://www.projectmanager.com/?utm_source=google&utm_medium=cpc&utm_campaign=pm-brand-us&utm_term=projectmanager.com-exact&gclid=EAIaIQobChMIocGJhJzc1gIVVJ7ACh33jghsEAAYAiAAEgJK-vD_BwE
[ii] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3565747/
[iii] http://www.pennenergy.com/articles/pennenergy/2014/11/high-reliability-management-in-process-industries-sustained-by-human-factors.html