McKinsey have published the second part of this highly applicable series on Joint Ventures. Our review of the first part of this McKinsey series was published in September 2010. Part 2 of this article discusses several points that are in direct support for People, Ideas & Objects. A bold statement, however, one that will be proven valid through our review of this document. Specifically the three points that are verified in this post are.
- The need to have a third party provide the software development service that People, Ideas & Objects proposes.
- The Military Command & Control Metaphor, that was developed in the Draft Specification, provides an industry wide governance model that is directly supported in this article.
- Compliance, on an automated scale, is a necessary component of the governance and third party nature of the offering noted in 1) and 2).
We begin with a quotation that summarizes the state of affairs in the oil and gas industry.
As we discussed in the first article of this series, the scale, complexity and risk associated with the execution of large scale projects frequently leads to joint venture constructs as a way to introduce expertise, diversify risk and gain access to capital. We also observed that, up until recently, the majority of these partnerships consisted of a dominant, operating partner that provided the bulk of the resources and leadership, paired with one or more relatively silent partners in the background. Interestingly, this trend has shifted dramatically over the last decade, and project JVs are increasingly becoming a “partnerships of equals”, with shared governance, staffing and execution responsibilities distributed among the participants.
McKinsey use the example of a large refinery to show the difficulty in managing a large Joint Venture today. They detail the four major risk factors that are evident in the case example, and I would note that these are the issues, to a greater or lesser extent, that are pre-eminent in all oil and gas ventures;
- Cross-cultural challenges associated with the introduction of sovereign nationals and international corporate employees
- Inter-company incentive and strategic misalignment between two (or more) principle investors
- Expertise, system and process friction between the various contractor and subcontractor teams, who may have alliances or other preferred relationships with one of the JV partners
- Normal” start-up risks associated with the scale-up and development of a project “new-co”, the on-boarding of new JV employees, integrating staff from the partners who have been seconded to the JV, and greenfield development of new systems and processes, among others.
There’s no denying these are the issues that all oil and gas projects are facing. McKinsey offer a four step solution that dovetails with the Draft Specification. If we ask first hand, “what if” there were standard systems and procedures that were used for all Joint Operating Committees across the oil and gas industry? Where the ability to assign a generic template of assignable roles and responsibilities. Where the compliance and governance of each jurisdiction is embedded within the third party vendors (People, Ideas & Objects) software's policies and procedures. Where the generic management of the Joint Operating Committee was handled through software provided by a third party that represented all producers. Software that managed each of the producers compliance for the various jurisdictions in which they operated, to the governance of the people that were pooled by the various firms represented in the Joint Operating Committee. This brief vision of what People, Ideas & Objects is proposing in the Draft Specification is being mirrored in this discussion of McKinsey’s four steps. We begin.
Step 1 Define and Align
Alignment is difficult to attain within the oil and gas industry for the many reasons cited in the subsequent McKinsey quote. We need to begin by aligning the compliance and governance frameworks of the hierarchy, moving these two frameworks into alignment with the legal, financial, operational decision making, communication, cultural and innovation frameworks of the Joint Operating Committee. Talk of alignment with out building the software that identifies and supports the alignment of these eight frameworks, first and foremost, is just more talk. One of the key benefits of doing this is the alignment of compliance with operational decision making. The net benefit of which is greater accountability. But by combining all eight of these frameworks we are making the Joint Operating Committee capable of dealing with the all aspects of the producer(s) needs.
McKinsey note:
...project JVs often begin by bringing together unlikely allies whose goals, cultures, operating models, risk appetites, and financial strengths are apt to vary widely. Identifying the disparate goals, models and strengths and weaving them into a single, aligned and broadly-communicated vision is critical for an effective JV to function effectively. This vision supported by a number of underlying organizational themes and parameters creates a common language for the JV, and is a reinforcing mechanism for maintaining alignment across all partners.
What I am asserting here is the need to have the generic business aligned around the Joint Operating Committee so that the vision of the JV can become the focus of those working within the project / property.
Step 2 Build
I want to limit the discussion to the governance related points. I will therefore note the following McKinsey quote and refer to the related discussion in Step 3 Execute, below.
The process of building the team should start with recruiting the best people from each participating partner. This can be quite a challenge, as top talent often see joining the JV as a career- limiting move, putting them “out of sight, out of mind”, for years. And, since the JV’s priorities differ (by necessity) somewhat from those of the parent organization, even the successful achievement of those objectives by secondees may not be viewed as credible or be given the same merit by those in the parent organization.
Step 3 Execute
The
Draft Specification developed the
Military Command & Control Metaphor to replace the Governance of the hierarchy with a usable model within the Joint Operating Committee. A governance model that worked similar in fashion to that which the NATO forces use. One that has the various countries military forces used to deploy troops from various countries in many different theatres of war and other technically difficult operations. Looked at from both the micro and macro level, the oil and gas producer can attain the ability to deploy and redeploy resources as required across the various JOC’s they participate in. The ability to have the partnerships pool their resources, and these resources have a deemed chain of command that is recognized on an industry wide basis, with a defined roles and responsibilities that are agreed to, can provide a strong governance model to the issues that McKinsey ably addresses in the industry.
In addition to meeting these technical deliverables, team members must also
- effectively scale the organization quickly
- establish a culture of self performance, and
- continuously adapt and evolve.
These are very different types of work, requiring a loose – tight governance model which provides the JV and project team with sufficient flexibility to grow while at the same time maintaining a rigid link to the parent companies’ governance and control mechanisms.
As the project team moves into execution, it must define a model for itself that allows it to be independent while continuing to deliver on parent companies’ needs. During execution, the leadership team also needs to think proactively about how to implement its newly constructed culture, processes and systems. Frequently complicated by a fragmented and globally disperse geographic footprint, the introduction of multiple new contractors and sub-contractors, and the fast pace at which the project evolves, it is easy to let the execution of these systems slip and to allow their effectiveness to wane. The JV leadership must establish a disciplined steering committee with direct accountability to the CEO to oversee successful implementation.
Step 4 Renew
I know I share with most people that have worked in oil and gas a feeling of frustration at the value that is occasionally lost in various Joint Operating Committees after phase changes or other transitions where people, teams, systems and procedures that were build up are left behind, dropped, shredded or forgotten. Very wasteful in the big scheme of things. Or how about the other situation that creates waste. That being the work done to manage the Joint Operating Committee, that was put together and was built as a one off installation of software and systems. Much of this work was done in recreating the wheel and as such it was “rebuilt” in order to address the unique characteristics of the property. McKinsey notes.
Perhaps the most overlooked success factor in constructing a successful project JV is to create clear opportunities for renewal. This renewal is both personal, for the individuals in the project team, as well as technical, for the systems and processes that we mentioned previously. While any project professional will readily acknowledge the dynamic and evolutionary nature of a project as it moves through its lifecycle, many frequently fail to recognize that people and systems need to evolve correspondingly. World class project JVs, on the other hand, establish clear breakpoints and formal evaluation steps, during which the leadership team evaluates the effectiveness of its people, tools and processes, and takes steps to inject fresh energy, capabilities and structure into the team where needed.
The purpose of People, Ideas & Objects is to provide a third party software development capability based on the Draft Specification. Using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. This provides a means for all producers to mitigate these losses of value. One in which the use of a third party software vendor providing the software to run the JOC is available to all the producers of the venture. Where the software vendor is independent of each producer. Where what is learned and developed is able to be used in the future, in not just the JOC but potentially elsewhere. And what is learned elsewhere could potentially benefit the JOC.
Compliance as a potential fifth step.
Lastly I want to comment about compliance which is not directly addressed in this McKinsey article, it is a related topic that falls in with the discussion of governance. And when we are talking about compliance we are talking about the compliance of the Joint Operating Committee and its operations in whatever jurisdictions that it may be operating within. This therefore also involves the partners compliance for these operations as well.
People, Ideas & Objects as software developers could assure thousands of producers who might provide us with the financial resources to develop a software development capability that is focused on maintaining the compliance of thousands of producers with the thousands of regulatory bodies those producers have, or may have, operations in. What plans do each of these individual producers have to ensure their operations will be in compliance with these jurisdictions where the compliance requirements continue to expand? The movement of the compliance framework to the Joint Operating Committee should be seen as an opportunity to address the automation of compliance and an opportunity to integrate compliance within the other frameworks of the JOC.
To what extent can this type of automation be implemented is the question that needs to be answered. With each piece of legislation that is contemplated these days, potentially totalling several thousand pages, where the ability for people to manually keep up with the demands of the regulatory process of governments and regulators being potentially past, full automation of the compliance framework is a necessity, in my opinion.
McKinsey note toward the end of the document these possibilities exist, if only.
While JVs and projects are both uniquely challenging to execute well, there are similarities that enable world-class project managers to effectively build world-class JVs, and vice versa.
It is now time for producers to act. Review of our
Revenue Model will inform producers how they can participate in the development of People, Ideas & Objects
Preliminary Specification. Producers can
contact me here for further information, or to begin the process of their participation.
