Apr 9, 2009

- History Structure of Shell - The New Shell Matrix -- (Part 2)

The Change Process
Within Shell, proponents of organizational change, including the heads of several of the operating companies, the finance function, and Group Planning, had had little success in persuading the Committee of Managing Directors of the need for large-scale change. In May 1993, Cor Herkstroter took over as Chairman of the CMD. A Dutch accountant, who had spent his entire career at Shell, Herkstroter was an unlikely pioneer of change. Fellow executives described him as a private, Old World personality without much charisma, and with a preference for written communication. Nevertheless, Herkstroter was widely respected for his intelligence and courage. “He’s Shell’s Gorbachev,” said Philip Mirvis, a consultant working with Noel Tichy at Shell. 
Faced with growing evidence of suboptimal financial performance and an over-complex, inward-looking organizational structure, Herkstroter called a meeting of Shell’s 50 top managers at Hartwell House, an English country manor, in May 1994. The meeting was a shock for the CMD. The request for frank discussions of the reasons for Shell’s lagging return on capital provided a series of barbed attacks on top management and sharp criticism of the service company organization. The corporate center was castigated for taking months to approve operating company budgets and for the general laxness of financial controls. E&P coordinator Robert Sprague tossed a blank transparency onto the overhead projector and commented, “I don’t know what to report, this issue is really a mess.” The meeting had a powerful impact on the CMD: “We were bureaucratic, inward looking, complacent, self-satisfied, arrogant,” observed then-Vice Chairman John Jennings. “We tolerated our own underperformance. We were technocratic and insufficiently entrepreneurial.” The outcome was the appointment of a high-level team to study Shell’s internal organization and come up with options for redesign.

The team, set up in July 1994, was headed by Ernst van Mourik-Broekman, the head of HR, together with Basil South from Group Planning, Group Treasurer Stephen Hodge, an executive from Shell France, and the head of Shell’s gas business in the Netherlands. The internal team was joined by three senior consultants from McKinsey & Company: two from the Amsterdam office and one from the London office.

The starting point for the internal team was a program of interviews with 40–50 managers at different levels within the company. This provided a basis both for assessing the existing structure and for generating ideas for change. The role of the McKinsey consultants was to provide perspective, to challenge the ideas of the Shell team, to introduce the experiences of other large multinationals (ABB for instance), to provide the backup research needed to refine and test out ideas and concepts, and to organize the program of work and consultation.
By October 1994, the group had prepared a diagnosis of the existing Shell structure together with a suite of options for reorganization. During October and November, a series of workshops were conducted, mainly in London, to explore in greater detail the specific dimensions of change and to clarify and evaluate the available options. Each workshop team provided input on a specific area of change. The results of this exercise were written up towards the end of November, and a report was submitted to CMD which identified the areas for change and the options.
During December 1994, the team spent two “away days” with the CMD to identify the objects of change and how the different options related to these. The result was a blueprint which the team wrote up mid-December. After six or seven drafts, the report was approved by CMD during the weekend of Christmas. At the beginning of January, the report was circulated to the chief executives of the main opcos and the coordinators within the service companies with a request for reactions by the end of January. In the meantime, Chairman Herkstroter gave a speech, directed to all company employees, to prepare them for change by indicating the need for change and the likelihood of job losses, but without any specifics as to the organizational changes that were likely to occur.

The driving force behind the redesign was the desire to have a simpler structure in which the reporting relationships would be clearer and thus to allow the corporate center to exert more effective influence and control over the operating companies. A simpler structure would help eliminate some of the cost and inertia of the head office bureaucracies that had built up around Shell’s elaborate committee system. There was also a need to improve coordination between the operating companies. This coordination, it was felt, should be based upon the business sectors rather than geographical regions. Globalization of the world economy and the breakdown of vertical integration within the oil majors had meant that most of the majors had reorganized around worldwide business divisions. As was noted above, most of the majors formed upstream, downstream, and chemicals divisions with worldwide responsibility. For Shell, achieving integration between the different businesses within a country or within a region was less important than achieving integration within a business across different countries and regions.

For example, in exploration and production, critical issues related to the development and application of new technologies and sharing of best practices. In downstream, the critical issues related to the rationalization of capacity, the pursuit of operational efficiency, and the promotion of the Shell brand.

By the end of January, a broad endorsement had been received. In February a two-day meeting was held with the same group of Shell’s 50 senior managers that had initiated the whole process some ten months earlier. The result was a high level of support and surprisingly little dissent. The final approval came from the two parent company Boards. On March 29, 1995, Cor Herkstroter, Chairman of the Committee of Managing Directors, gave a speech to Shell employees worldwide outlining the principal aspects of a radical reorganization of the Group, which were to be implemented at the beginning of 1996.

In the meantime, two totally unexpected events only increased the internal momentum for change. While Shell faulted itself on its ability to produce a return on capital to meet the levels of its most efficient competitors, in managing health, safety, and the environment and in responding to the broader expectations of society, it considered itself the leader of the pack. Then came the Brent Spar incident. A carefully evaluated plan to dispose of a giant North Sea oil platform in the depths of the Atlantic produced outcry from environmental groups, including Greenpeace. Consumer boycotts of Shell products resulted in massive sales losses, especially in Germany. Within a few months, Shell was forced into an embarrassing reversal of its decision.
A few months later the Nigerian military regime executed Ken Saro-Wiwa, a prominent Nigerian author who had protested Shell’s poor environmental record in his country. Again, Shell was found to be flat-footed and inept at managing its public relations over the incident.

The handling of the Brent Spar and Nigerian incidents convinced many that Shell’s top management was both unresponsive and out of touch. “We had to take a good look at ourselves and say, ‘Have we got it right?’” said Mark Moody-Stuart, then a Managing Director.
“Previously if you went to your golf club or church and said, ‘I work for Shell,’ you’d get a
warm glow. In some parts of the world that changed a bit.”

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