For decades, major energy companies have been at the forefront of the global shipping of hydrocarbons.
However, energy company shipping assets have largely underperformed, and this has generally been accepted as a price worth paying for the strategic interests they provide — i.e. the securing of transportation for their hydrocarbons.
Given the shipping business’s capital-intensive and volatile nature, poor commercial performance can have a material financial impact, which in the long run can lead to management growing disillusioned with its shipping operation, and the consequent scaling back of legitimate strategic interests in shipping.
The case for focusing on commercial performance
Booz & Companys’ analysis reveals that the shipping divisions of international oil companies (IOCs) and national oil companies (NOCs) have comparatively low returns on capital. This is primarily because management often views shipping as a cost center. The lack of emphasis on commercial results also provides little incentive to innovate or improve efficiency from within.
Unfortunately, this approach does not take into consideration the fact that the shipping industry’s financial dynamics can be unforgiving to halfhearted participants. There are two major sources of value creation (or destruction) in any shipping operation: assets and freight. Both can be extremely volatile, and the impact of incorrect decisions, or even just the wrong timing, can be very material.
As a result, it is not an option but rather an imperative to focus on maximizing performance in the shipping arena. In doing so, energy company management must address and dispel three main concerns and misconceptions involving the shipping business.
Concern 1: The pursuit of commercial performance diverts management from its core purpose of supporting the strategic aspirations of the parent company.
This need not be the case. Any beliefs to the contrary arise from executives viewing the strategic considerations of their company not as directional aspirations, but as firm mandates. The former approach lays out the boundary conditions that the shipping division must meet, while giving the division flexibility to meet them. The latter approach, lacking in adaptability, would not be responsive to fast-moving markets, whether in oil or shipping.
Concern 2: Energy companies cannot do a good job of commercially managing their shipping interests.
Contrary to popular belief, energy companies should have an easier task and do a better job of managing their commercial performance than would an independent shipping company. The reason for this is the relative abundance of capital within the parent energy company, which affords the best-managed oil divisions the privilege of taking a much more strategic view on market trends and having the financial muscle to make bold, value-enhancing decisions; independent shipping companies, by contrast, may have their hands tied owing to capital constraints.
Two key components affect the profitability of shipping interests of energy companies. The first is capital decisions, including the timing of acquisitions and sales, decisions related to buying new or used vessels and the selection of shipyards. The second is revenue; making sound freight market decisions and maximizing vessel availability will ensure that companies realize the full revenue potential of their shipping assets.
Concern 3: The pursuit of commercial performance does not contribute to the achievement of energy companies’ primary strategic goal.
The pursuit of commercial performance can be complementary to the achievement of the strategic goal on several fronts. An energy company with shipping assets that consistently perform well in the market will feel little pressure to abandon its legitimate strategic interests in shipping — which might be the case if the parent company views shipping as a black hole in terms of its capital.
Managing performance
Management can operate shipping divisions efficiently and contribute to the parent company’s strategic goals by taking a systematic approach to addressing challenges in four major areas: strategy, operations, measurement and organization.
Analytic and dynamic strategy
The first step involves determining the explicit strategic considerations of the shipping division, which will also include institutionalizing implicit strategic considerations. Once the organization has defined its overall strategy, it should prioritize the timing, setting parameters for what needs to be accomplished and when. Finally, once these strategic goals are clearly defined and set, it is imperative that they be articulated in the mission, vision and values statements of the organization.
Clear and efficient operating model
There are two overarching objectives required to ensure clarity and efficiency of the shipping operating model. The first objective is to put the goals of the enterprise, or parent company, first; thereby driving the results of the parent company, not of the shipping arm. The second objective involves a fair recognition of the performance of the business, the transparency of costs, and returns on shipping assets.
These twin objectives manifest themselves in several operational areas, such as the commercial arrangements between the parent company and the shipping arm for the use of shipping assets, decisions on the operational and office footprint of the shipping division and their associated cost implications, and the overall ship management approach.
Accurate and effective metrics
A performance management system that is closely aligned with a company’s strategy provides leadership with the right level of detail and insight into the organization to manage its performance actively and efficiently. In turn, this drives the right balance of strategic and tactical behaviors across the organization.
A number of key principles can help management guide the business:
* Break down the strategy into measurable components.
* Identify performance indicators for each component.
* Ensure that these indicators form the basis of conversations between the leadership of the shipping division and the parent company.
* Tie the indicators to individual performance appraisals and rewards to create strong and effective consequence management.
Building blocks of the organization
The final challenge for management concerns building an organization that will achieve high performance — fusing together five discrete capabilities:
Organizational structure: The right structure will drive accountability and transparency throughout the organization.
Process efficiency: Clearly mapped processes and clarity on decision rights for individuals and groups (e.g., committees) help smooth interfaces and increase organizational efficiency.
Human capabilities: Having the right quantity and quality of people, with a focus on employee development, is a key component of organizational sustainability.
Technology: Having appropriate fit-for-purpose technology platforms to aid the execution of the business improves organizational flexibility and allows responsiveness.
Key interfaces: The shipping company should be organized in a way that provides clarity on the relationships with important constituents of the parent company, particularly those in supply and trading functions, as well as special project coordinators and corporate strategic planning departments.
For too long, shipping divisions have not played a central role in the corporate strategy of many IOCs. Energy producers need to realize that strong shipping commercial performance can enhance the pursuit of broader strategic goals.
Furthermore, with a systematic approach to managing performance, energy companies can nurture top-quartile performance from their shipping operations while reaping the benefits for the parent corporation.
Continuing to regard these operations as a corollary business is likely to result in a huge missed opportunity that can prove to be severely detrimental in the long run in terms of strategy, finance and impact on people.
IRAHIM El-HUSSEINI and JAKE MELVILLE are partners, SEAN WHEELER a principal and SATYAJEET THAKUR a senior associate at Booz & Company
