Leadership And Performance Management: The Key To Exploiting Hidden Returns

Abstract

The structure of the North Sea oil industry, with its extended supply chains and high reliance on contracted out services, has provided an ideal environment for sub-optimal performance to develop, become accepted, and form part of our culture. Partially due to a lack of clarity and agreement on performance goals, and partially due to under-developed management and leadership skills, this inefficiency now provides "hidden returns" for operators, waiting to be exploited like untapped reserves. Whether introducing new technology, or seeking to maximise the value of existing strategies, organisations are now recognising that it is the practices and behaviours of their personnel that determine whether their full potential is realised. This paper describes some of the factors that inhibit performance within the oil industry and offers a methodology for continuously improving efficiency and financial returns. Two case studies are presented, demonstrating the effectiveness of the process in practical situations. Introduction The oil industry has long been characterised by collaborative working between exploration and production (E & P) companies and groups who either own or have expertise in essential technologies. Against the backdrop of fluctuating oil prices and the need for financial returns that match stock market performance, E & P companies and lead contractors have sought to outsource more of their requirements, intensifying this collaboration. In many ways this has been beneficial to the industry. It has fostered an enterprise culture that has seen the emergence of countless small firms, each with its own innovative technology that may not have emerged from under the larger corporate umbrella. According to UKOOA, this constant innovation is a key enabler in the drive for lowering unit development costs within the UK sector. This market evolution has also however bought with it some problems. It has encouraged the polarisation of both E & P companies and principle contracting firms, leading to a situation where a decreasing number of suppliers vie for business with a declining number of buyers, diminishing the market's ability to self regulate, i.e. encourage superior performance and provide sanction against under achievement. In addition, the number of operator staff tasked with managing these contractor relationships, and those managing performance of internal departments, continues to decrease. This paper seeks to demonstrate the effect that combining leadership development with a culture of continuous improvement has on these operator/contractor relationships, and on operational and financial performance of E & P activities. The effect on performance that the buyer/supplier relationship (or internally managed relationship) can have on performance will initially be explained, prior to a brief outline of performance management and leadership theory. The outcome of two performance improvement projects will then be described, along with the a description of their implementation, in order to demonstrate how developing management technology can complement the development of hardware technology in order to exploit hidden financial returns. The Agency Problem Based on the economic concept of utilitarianism, Agency Theory, has been used to investigate the role of self-interest (of groups or individuals) within organisations and business relationships (Wright, Mukherjib, & Kroll, 2001). Agency theory is fundamentally concerned with the economic relationship between a firm's owners and the manager's of the firm appointed by those owners. With similarities to transaction cost economics (Coase, 1937), agency provides a basis for analysing the cost to the owners of delegating control of their interests to a third party, these costs arising from differences in goal orientation and risk aversion, and from self-interest. Jensen and Meckling (1976) recognised that agency relationships were "the essence of the firm... existing at every management level" as managers relied on others to perform their delegated tasks, others whose behaviours the manager could not directly control and who "will be able to appropriate...resources for their own ends".