14 Mar Are Oil and Gas Boards Failing in Digital?
It is the Board’s responsibility to hold management’s feet to the fire in addressing digital impacts on the industry, but is it working? How does the Board exercise its role?
A reviewer of my new book contacted me last week to discuss his reactions to the draft manuscript and to share some of his observations about the oil and gas industry. He’s been working as a project implementation leader for technology enablement for almost two decades, across a huge range of companies, and an equally broad range of technologies. Most recently he has been driving digital projects forward.
In his view, boards are failing to set the tone for management with respect to planning for and acting on the wave of digital innovations sweeping the industry. There is, in his telling, near zero digital vision for the industry, and too many companies are still just committing ’random acts of digital’, or playing at digital tourism. Managers think they’re doing right by shareholders to spend a little capital here and there on digital, but to not commit.
In my view, Boards are well aware of the impacts of digital. Many board members sit on multiple boards and have excellent opportunity to learn from other board members. Well structured boards will include members from other industries to provide diversity of analysis and discussion. They are likely briefed regularly on topics such as cyber security (thanks to Colonial Pipeline) drones and robotics (thanks to drone attacks on Aramco) cloud computing (thanks to Amazon’s meteoric growth) and disruption (thanks to Tesla and its effects on other automakers). So what gives?
Mostly likely is that Boards do not know how to exercise their own accountabilities, when it comes to digital. How should they best hold management accountable for the company’s activities related to digital adoption? The phrase for this is “to hold management’s feet to the fire”, which is code for making sure management sets appropriate strategies and plans, and then keep the pressure on to execute.
The first Board challenge is to make sure that management strikes the right balance of digital investments. Some investments are necessary to keep pace with the competition and regulation. Some will be important to build new capability and culture. And some will be experimental to explore new ways of working.
The Board should be alert to the possibility that management may shy away from making tough choices and hard to achieve investments. In particular is the temptation to overinvest in back office change (speedy execution, but small gains), at the expense of front office change (slower execution, but very large gains). Certain investments may well appear uninspiring (such as raising data quality standards), but are absolutely critical to digital success.
As I see it, there are three broad kinds of investments in digital that companies can make:
- Investments in signature capabilities.
- Investments in foundational capabilities.
- Investments in business capability.
Signature capabilities are company and segment specific. An example might be the use of camera sensors to capture visual data of activity at an operating site, and a machine learning solution that interprets the visual data and takes action. Not all companies have operating sites, and not all will have activities where visual information is that helpful. The visual data itself may vary wildly from upstream wells to midstream pump stations. The sensors might be specific to the infrastructure, and the machine learning algorithm might take considerable time to develop and train. Once in place, the digital signature capability may well create an advantage.
Foundational capabilities apply to all companies regardless of their field of endeavour. Cloud computing, blockchain and enterprise tools (cyber security, ERP systems, email) are examples. They’re now the minimum table stakes, and without these foundations, the other investments struggle to achieve their full impacts. Table stakes do change, but relatively slowly. Worryingly, it’s not clear what the future table stakes will be.
Finally, business capabilities, or ways of working, include agile methods, design thinking, talent models and change management. “Doing digital” means investing signature and foundational areas, but “being digital” is the ongoing shift in business capabilities to embrace digital ways of working. Being digital is much harder to achieve because it involves mindset shifts, challenges to business norms, and changes to patterned ways of thinking and working. Business capabilities are about talent acquisition, skills development, collaboration activities, performance measurements and incentive structures.
In my view, oil and gas pours too much investment into overly narrow signature capabilities, or as one industry exec likes to call it, bright shiny objects and science projects. There’s too little investment in business capabilities or changing norms and ways of working, and about the right spend on foundational areas. Boards should be mindful that management needs to invest in all three areas.
Three Digital Documents Boards Might Value
To exercise their responsibilities, Boards ask management for briefs and plans on a variety of topics, and digital should be no different. Here are 3 documents about digital that management might put in place to assist Boards, and 2 mechanisms management might use to keep on top of digital.
The Digital Strategy
Updated at least every 2 years, the digital strategy is calibrated tightly with the business strategy, and includes competitive positioning, a roadmap of investment plans, and ways of measuring performance.
The Annual Digital Plan
Produced annually, the digital plan is the portfolio of project candidates, rank ordered by value, preference for execution, capacity to execute, capability required for execution, risk, and budget. Business benefits are assigned an owner, and the plan aligns with the IT plan if separate.
The Digital Project Portfolio
An evergreen artefact, the digital project portfolio is the 90 day plan. Digital projects are executed in 90 sprint delivery cycles, and the Board might review 3-5 selected projects in the portfolio each quarter. The projects are collaborations with segments of the business and Board reviews help manage delivery risk and capture business insight.
Two Management Tools
To execute the digital portfolio, management may wish to put in place two additional mechanisms.
The executive team, who are subsequently briefing the Board, will obtain their own more detailed briefing on the status of the overall digital project portfolio, key achievements, the status of specific investments, lessons learned, any value captured, and the key portfolio metrics.
Digital Project Brief
To build up the digital portfolio, management will conduct a frequent review of existing digital projects, including on track, lessons learned, and most importantly, what’s not working out as planned. Management can then adjust scope, accelerate or decelerate initiatives, reprioritize as makes sense, pivot, and adjust resourcing.
By the Numbers
Business is run by numbers, and digital should be no different. Two key ways that digital metrics differ from typical business metrics are in speed measurements (digital changes quickly), and value measurements (gains driven by digital should be more dramatic than other investments).
Here are some of the performance metrics that management teams and Boards might want to have in place. I divide the metrics up into two broad buckets — those that measure the overall portfolio of digital innovation, and those that monitor the success of individual digital projects.
The health of the portfolio of digital change is measured by the ideation rate (the rate of digital idea generation), the pace of development of those ideas, and the overall quality of the ideation portfolio. Digital changes quickly and it’s unclear what exactly will work out so the health of the portfolio is key.
Ideation — measures the performance of new idea generation. Business should want a count of the ideas and what parts of the business the ideas are based (gets at whether all parts of the business are engaged), the value opportunity (revenue gain, margin improvement, cost reduction, productivity boost, carbon mitigation, variance reduction), and the likely investment required.
Development — measures the movement of the ideas from ideation into action. Business should want to know a count of the ideas moving from ideation to investment, and the time to move ideas from suggestion to development.
Quality — measures the performance of the portfolio. Business should monitor the number of digital projects underway (a measure of overall activity), the expected value of the portfolio of projects underway (measured by revenue gain, margin improvement, cost reduction, productivity boost, carbon mitigation, variance reduction), the investment value of the portfolio (in committed spend), and the concentration of spend (the balance of the portfolio across the business).
Assessing the health of individual projects in a digital portfolio is very similar to how project managers might review any project.
Project Internal Rate of Return — the planned and measured actual rate of return for the digital investment. Targets should be aggressive, and measured in quite dramatic gains. Too many small impact projects could be a warning sign that the ideation rate is not aiming high enough.
Value at Stake — Digital value could be in terms of revenue gain, margin improvement, cost reduction, productivity boost, carbon mitigation, variance reduction, or some combination. Too much concentration of value is potentially unrealistic and a sign that some parts of the business are not sufficiently engaged.
Time to Value — a measure of the number of days from ideation, to proof of concept, to pilot trial, to enterprise rollout. Time per stage should be small and trending down. Too many projects stalled out at the pilot stage is a sign that the organization does not have the right accountability structure in place for benefits capture.
Strategic Benefit — a measure of how well the project aligns to corporate strategy. A weak alignment to strategy is a sign that the digital projects lack executive support, or may be overly driven by tactical, bottom up ideas.
Success Index — a measure of how successful the organisation is in taking investable ideas and driving them to enterprise. A low success index could be a sign that the organization lacks the organizational climate to support change.
Successful board oversight of digital innovation means challenging management to achieve the right balance of investment across the business to quickly “do digital” (spin up some ideas and run some trials), and ultimately “be digital’, (creating new business capabilities). Boards should rely on key artefacts to stay on top of digital efforts (Digital Strategy, Digital Plan, and Digital Project Portfolio). Boards should be more attuned to the speed of digital innovation (faster than usual), and to the quantum of the impacts (larger than usual).
Check out my book, ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, coming soon in Russian, and available on Amazon and other on-line bookshops.
Sign up for my next book, ‘Carbon, Capital, and the Cloud: A Playbook for Digital Oil and Gas’, coming March 15, 2022.
Take Digital Oil and Gas, the one-day on-line digital oil and gas awareness course on Udemy.