Apr 9, 2009

- History Structure of Shell - The New Shell Matrix -- (Part 3)


THE NEW SHELL STRUCTURE
The central feature of the reorganization plan of 1995 was the dismantling of the three-way matrix through which the operating companies had been coordinated since the 1960s. 
In its place, four business organizations were created to achieve closer integration within each business sector across all countries. It was intended that the new structure would allow more effective planning and control within each of the businesses, remove much of the top-heavy bureaucracy that had imposed a costly burden on the Group, and eliminate the power of the regional fiefdoms. The new structure would strengthen the executive authority of the Committee of Managing Directors by providing a clearer line of command to the business organizations and subsequently to the operating companies, and by splitting central staff functions into a Corporate Center and a Professional Services Organization. 
The former would support the executive role of the CMD; the latter would produce professional services to companies within the Group.

At the same time, the underlying principles of Shell’s organizational structure were
reaffirmed:
• The decentralized structure based on the autonomy of the Shell operating companies
vis-à-vis the Group was to be maintained.
 
• The new structure continued the distinction between governance and executive responsibility which was described above. Thus, the formal structure of parent companies, holding companies, operating companies, and service companies was continued without significant changes. The Boards of these companies discharged the governance functions of the Group, including exercise of shareholder rights, the fulfillment of the legal obligations of the companies, and the appointment and supervision of the managers who fulfill executive responsibilities. It was the management structure where the major changes occurred, especially within the service companies.
 
The Formal Structure
As noted, the formal corporate structure was little changed. The principal changes in the formal structure were changes involving the identities and roles of the service companies to create a closer alignment with the new management structure. Thus, the new Corporate Center and Professional Services Organization were housed within Shell International Ltd (in London) and Shell International B.V. (in The Hague). Other service companies housed the new Business Organizations.


 
The Management Structure
The new organizational structure can be described in terms of the four new organizational
elements – the Business Organizations, the Corporate Center, Professional Services, and the
Operating Units – together with the two organizational units that continued from the previous structure, the operating companies and the Committee of Managing Directors.
the business organizations The central features of the new organization structure were the new Business Organizations. The CMD was supported by four Business Organizations: E&P (“upstream”), oil products (“downstream”), chemicals, and gas and coal. The Business Organizations were headed by Business Committees made up of a number of Business Directors appointed by the CMD. 
These Business Directors included:
• Business Directors with responsibility for particular business segments. For example,
among the members of the E&P Business Committee in 1998 were J. Colligan, Regional E&P Business Director for Asia-Pacific and South America, H. Roels, Regional E&P Business Director for Middle East and Africa, and R. Sprague, Regional E&P Business Director for Europe.
 
• Certain of the operating companies were so important that their Chief Executives were
also Business Directors. For example, in 1998, the E&P Business Committee included A. Parsley, Managing Director of Shell E&P International Venture B.V., while the Oil Products Business Committee included M. Warwick, President of Shell International Trading and Shipping Co. Ltd, and P. Turberville, President of Shell Europe Oil Products B.V.
• A Business Director for Research and Technical Services.
• A Business Director for Strategy and Business Services.

The Business Committees were accountable to CMD for:
• the strategy of their business area;
• endorsing the capital expenditure and financial plans of the operating companies and
business segments within their business area;
• appraising operating company and business segment performance; and
• the availability of technical, functional, and business services to the operating companies within their business sector. Chairing each of the Business Committees was a member of the CMD. Thus, in early 1998, E&P reported to Managing Director P. B. Watts, Oil Products to Managing Director S. L. Miller, Chemicals to Vice Chairman M. Moody-Stuart, and Gas and Coal to Managing Director M. van den Bergh. the corporate center

This supported the CMD in its role in:
• setting the direction and strategy of the Group;
• growing and shaping the Group’s portfolio of investments and resources;
• enhancing the performance of Group assets;
• acting as custodian of the Group’s reputation, policies, and processes; and
• providing internal and external communication.
 
Apart from supporting the work of the CMD, the Corporate Center assisted the parent
companies and the group holding companies in managing their financial, tax, and corporate
affairs. The Corporate Center represented the other two dimensions of Shell’s former matrix organization. For example, the Director for Planning, Environment and External Affairs chaired the meetings of Shell’s Technology Council and Health, Safety and Environment Council. Also, the Corporate Advice Director undertook ad hoc country reviews.

The Corporate Center comprised six directorates:
• Planning, Environment and External Affairs
• Corporate Advice (supporting each of the Managing Directors in their regional roles as
well as responsibility for IT, security, contracting and procurement)
• Group Treasurer
• Group Controller
• Human Resources
• Legal
 
In addition to these directorates, the Corporate Center also included the Head of Group
Taxation, the Chief Information Officer, the Head of Intellectual Property, the Head of
Contracting and Procurement, the Head of Group Security, the Head of Learning, and the
Secretary to the CMD. professional services These new units provided functional support for the operating companies and service companies within the Group. They offered their services on an arm’s-length basis and competed with external service providers for the business of the operating companies.  They were also able to provide services to third-party customers outside the Group. 

The services provided included:
• Finance (e.g., treasury services, accounting, tax advice)
• HR (e.g., recruitment, training)
• Legal
• Intellectual property (intellectual property protection, licensing)
• Contracting and procurement
• Group Security (security advice)
• Shell Aircraft Ltd (corporate jets)
• Office services (e.g., accommodation, personnel services)
• Health (medical services, environmental and occupational health advice)
 
Each Professional Services unit was headed by the relevant director from the Corporate Center. For example, HR was headed by the HR Director; legal and intellectual property services were headed by the Legal Director. the operating companies In the new organizational structure, the operating companies retained their role as the primary
business entities within Shell. Each operating company was managed by a Board of Directors and a Chief Executive. The Chief Executive of an operating company was responsible to his/her Board and to his/her Business Director for the effective management of the operating company.

The Chief Executive’s responsibilities included the following:
• setting the company’s strategic aims against the backdrop of any guidelines established
by the Business Committee;
• providing leadership to put the strategic aims into effect and instill an entrepreneurial
company culture;
• setting internal financial and operating targets and overseeing their achievement;
• supervising the management of the business and setting priorities;
• effective reporting on the company’s activities and results to the Group operating units
The superimposition of the Business Organizations on top of the operating companies created a problem for Shell because the operating companies were defined by country rather than by business sector and included activities which crossed business sectors. 
Hence, to achieve alignment between the new Business Organizations and the operational activities of the Group, Operating Units were created:
 

In the context of the Group organizational structure, Operating Unit refers to the activities in one of the Group Businesses which are operated as a single economic entity. 
An Operating Unit can coincide with an Operating Company, be a part of an Operating Company or straddle part or all of several Operating Companies.

Thus, where an operating company was in one business only, the operating company was the relevant Operating Unit. However, multi-business operating companies, such as Shell UK and Shell Australia, which included upstream, downstream, chemical, and gas businesses, were divided into separate Operating Units in order to align operating activities with the new Business Organizations. Each of these Operating Units was headed by a manager with executive responsibilities who reported to the relevant Business Director. Where several Operating Units operated in a country under different Chief Executives, the Managing Director with responsibilities for that particular region appointed one of them as a “country chairman” to fulfill country-level responsibilities (with regard to matters of taxation, conformity with national legislation, national government relations, and the like).
In addition, some Operating Units spanned several operating countries. In order to achieve
more effective integration across countries and to save on administrative and operating costs, the trend was to form Operating Units which combined businesses in several countries. Thus, in Europe there was a desire to run chemicals and oil products as single business entities.

Changing Culture and Behavior
Changes to the formal organizational structure were only one dimension of the organizational changes of this period. If Shell was to improve its operational and financial performance and improve its responsiveness to the multitude of external forces that impacted its many businesses, then change needed to go beyond formal structures. The criticisms leveled at Shell for being bureaucratic, inward looking, slow, and unresponsive were not about organizational structure, they were about behavior and attitudes. In any organizational change, a new structure may provide the right context, but ultimately it is the effects on individual and group behavior that are critical.

During 1996 and 1997, the Shell management development function moved into a higher
gear. Organizational development and change consultants included Noel Tichy from Michigan Business School, Larry Selden from Columbia, McKinsey & Company, Boston Consulting Group, and Coopers & Lybrand. These were in addition to Shell’s internal change management team, known as LEAP (Leadership and Performance Operations). The result was a substantial increase in Shell’s management development and organizational development activities. 

Fortune magazine reported:
This army has been putting Shell managers through a slew of workshops. In early February, teams from the gasoline retailing business in Thailand, China, Scandinavia and France spent six hours in a bitter Dutch downpour building rope bridges, dragging one another through spider webs of rope, and helping one another climb over 20-foot walls.
The Shell managers especially liked Larry Selden. He teaches people to track their time and
figure out whether what they’re doing contributes directly to growth of both returns and gross margins. Selden calls this “dot movement,” a phrase he has trademarked and which means moving the dot on a graph of growth and returns to the north-east. “The model is very powerful,” says Luc Minguet, Shell’s retail manager in France. “It’s the first time I’ve seen such a link between the conceptual and the practical. And I realized I was using my time very poorly.”
In a particularly revealing exercise, the top 100 Shell executives in May took the Myers–Briggs personality test, a widely-used management tool that classifies people according to 16 psychological types. Interestingly, of its top 100 managers, 86% are “thinkers,” people who make decisions based on logic and objective analysis. Of the six-man CMD, 60% are on the opposite scale. They are “feelers” who make decisions based on values and subjective evaluation. No wonder all those “thinkers” had such a hard time understanding the emotion behind Nigeria and Brent Spar. And no wonder the CMD gets frustrated with the inability of the lower ranks to grasp the need for change.

 

FURTHER DEVELOPMENTS, 1996–9
Cost Cutting and Restructuring
 
The most evident short-tem impact of the reorganization was a substantial reduction in Service Company staffs. Towards the end of 1995, Shell began shrinking its head offices in London and The Hague in anticipation of the introduction of the new organizational structure at the beginning of 1996. During 1996, the downsizing of central services and administrative functions within the Service Companies accelerated. During 1996, one of the two towers at the London Shell Centre was sold and was converted into residential apartments.
 
The quest for cost reductions did not stop at the Service Companies but extended to the
operating companies as well. Between 1995 and 1997, unit costs were reduced by 17 percent in real terms, and between 1994 and 1997, savings in procurement costs amounted to $600 million each year. A priority for the Group was rationalization of capacity and reductions in operating costs in its downstream business. 

To facilitate this, Shell embarked upon three major joint ventures:
• The amalgamation of Shell Oil’s downstream assets in the western US with those of Texaco
• The amalgamation of Shell’s European downstream businesses with those of Texaco
• The merging of Shell’s Australian downstream business with that of Mobil.
 
Restructuring in Shell’s other businesses included a swap of oil and gas properties with
Occidental and the creation of a single global chemicals business. The chemicals business has demonstrated particularly clearly the benefits of global integration. In addition to cost savings of around 7 percent each year, investment decisions became better coordinated. “The Center’s full control over chemicals, for instance, led Shell to put a new polymer plant closer to customers in Geismar, Louisiana, instead of near the existing plant in Britain. Two years ago that plant automatically would have been added to the UK fiefdom.”

Further Organizational Changes under Moody-Stuart
In June 1998, Mark Moody-Stuart succeeded Cor Herkstroter as Chairman of the CMD against a background of declining oil and gas prices and weakening margins in refining and chemicals. With Shell’s operating profit and ROCE falling well below the projections for 1998, it was clear that further organizational change and cost reduction would be essential. In September he announced a series of restructuring measures aimed at reducing Shell’s cost base while reaffirming Shell’s commitment to the target of 15 percent ROACE (return on average capital employed) by 2001. Refinery cutbacks included the closure of Shellhaven refinery and partial closure of Berre refinery in France. The national head offices in the UK, Netherlands, Germany, and France would be closed.
 
A key element of the organizational changes pushed by Moody-Stuart was the desire to
replace Shell’s traditional consensus-based decision making with greater individual leadership and individual accountability. To this end, the Business Committees that had been set up to manage the new business sectors were replaced by Chief Executives:
From today we have CEO’s and executive committees running each of our businesses. We have entered a new period where executive decisions have to be made rapidly and business accountability must be absolutely clear. So we have changed our structures.
The major change we announced is establishing executive structures, with CEO’s, in Oil
Products and Exploration and Production. CEO’s already run our other businesses: Gas and Coal, Chemicals and Renewables, as well as Shell Services International. Now we are structured to make rapid progress to our objective in each of our businesses.
Business Committees served us in good stead in a period of transition but as from today they are a thing of the past. We will still have discussion, but we will make business decisions rapidly.

The trend towards executive power and personal accountability was also apparent in the
Committee of Managing Directors. In place of the traditional “committee of equals,” Moody-Stuart reformed the CMD more as an executive committee where individual members had clearly defined executive responsibilities.
Moody-Stuart also accelerated the integration of Shell’s US subsidiary, Shell Oil Inc., into its
global structure. By the end of 1998, the chemicals sector was a truly global division and by
early 1999 upstream operations in the US had been integrated into the global exploration and production sector. During 1999, the historically separate Shell Oil corporate office in Houston became integrated within Shell’s Corporate Center and Professional Services organization.
 
Thus, Shell Oil’s Human Resource function staff became part of a new global Shell People
Services organization, while Finance, Tax, Legal, and Corporate Affairs also integrated with their counterparts in London. The President and CEO of Shell Oil, Inc. became a de facto member of the CMD.

TOWARDS A SECOND CENTURY
As Royal Dutch/Shell approached the second century of its corporate life, there was a clear
consensus within the company that the organizational changes made during 1995–9 had created a structure that was much better able to respond to the uncertainties and discontinuous changes that affected the oil industry. Outside the company, Shell-watchers both in the investment community and in other oil companies had little doubt that the 1996 reorganization had contributed substantially to the efficient and effective management of the Group. The stripping away of much of the administrative structure in the Group head offices in London and The Hague, the elimination of the regional coordinating staffs, and the closure of some of Shell’s biggest national headquarters not only reduced cost, but seemed to be moving Shell towards a swifter, more direct style of management. The restructuring of chemicals and downstream businesses revealed both a tough-mindedness and a decisiveness that few had associated with the Shell-of-old.
 
The former Vice-Chairman of the CMD outlined the way in which the changes in
organization had impacted Shell’s business portfolio and its strategic management:
We used to have a complex regional matrix system – with multiple reporting lines. In compensation relatively modest annual raises were awarded – and more often than not expected – without being strictly tied to performance. Our businesses were tightly linked to national markets and then to regions. Accountability was, through the matrix system, diffuse. It wasn’t a bad system. When it was launched – in 1958 – it was an excellent system. But, by the early 90s, it had definitely reached its ‘use by’ date. Hurdle rates were used – good guides – but they allowed unbridled investment growth, which tended to exacerbate portfolio weaknesses. Jobs were for life in the old Shell and virtually all recruitment was internal.

By the early 90s we had a problem. There was no crisis – which in some ways was part of the problem. But ROACE was not good enough and it was obvious that something needed to be done. In the middle of the 90s we instituted something we called ‘transformation’. As you can see here there were results, things were improving, but not really as quickly as they should have been. Then, in 1999 we had a particularly difficult environment, which galvanized us to rapidly complete the transformation process. Tough decisions were made, write-downs taken and the whole process accelerated.
 

As a consequence, today we have global businesses, headed by personally accountable CEOs.
 

Reporting lines are direct, uncomplicated. Incentive pay and stock options are the norm. Every project has to compete globally for capital. Everyone in the organization can compete for any job – and we also actively hire from outside.

This has resulted in a significantly improved profile. Earnings are up on basically stable net
revenues. Oil production is up, as are gas, chemical and oil product sales. The number of employees required has declined.
Capital has moved away from the poor performers and declining areas to new opportunities.

The new organization had permitted far-reaching restructuring of Shell’s downstream and
chemicals businesses:
 

In the early 1990’s we operated refineries in all parts of the world and our refining cover was over 80%. We have been closing or selling refineries...Our goal in this effort is two-fold – one is to reduce our refinery cover to a range of 65%–70% by 2001. The other is to achieve a return on average capital employed of 15% by 2001...
At the beginning of the nineties we had [chemical] plants scattered across the globe with 30 plants in Europe, 7 in Asia Pacific, and 17 in America. The plants produced products that were sold through some 22 different product groups, each having profit and loss responsibility. Today we are concentrating on a few, world-scale plants and a much more limited product line. We will have 7 plants in Europe, 6 in Asia Pacific and 4 in America and products will be sold through 12 product groups.
 
The question in most people’s minds was whether Shell was moving ahead of the pack or
playing catch up. For all Shell’s pride in being a pioneer of modern management ideas – from scenario analysis to organization learning – Shell had created by Year 2000 a business-sectorbased organization of a kind that most other diversified multinationals had created decades before. Moreover, some of Shell’s leading competitors were moving away from such structures.
BP – hailed by many to be the most dynamic and responsive of any of the petroleum majors – had abandoned its traditional divisional structure in favor of a flatter structure in which
individual business units reported directly to the corporate center.
 
Moreover, Shell still retained some relics of the old structure that could compromise the new philosophy of responsiveness and single-point accountability. For example, Shell was still a joint venture rather than a single corporation. Its Committee of Managing Directors was still composed of board members from its dual parent companies. The principle of rotating leadership between the two parents with fixed single terms of office for the CMD Chairman was still intact. While Shell had been consumed with its internal restructuring, other companies had been transforming themselves through mergers and acquisitions. 
Had Shell missed out on the Great Oil Patch M&A Boom? Probably, but if Royal Dutch/Shell was to get serious about mergers, its first priority should be to merge with itself, noted the Financial Times’ Lex column.


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