Living in Houston, it’s difficult to miss the impact of low oil prices but the pleasure of $1.45 gas is quickly forgotten as the negative effects are seen everywhere; job losses, headlines of bankruptcies, spending cuts and belt-tightening all over the city. With West Texas Intermediate (WTI) projected to remain below $50 through 2017, the industry is facing an extended downturn and energy companies may need to make additional changes despite any steps taken in 2015. However, a poorly planned response to the current downturn could have unintended consequences in the medium to long term.
There are obviously many factors companies have to consider while they make contingency plans but, to me, three things stand out as worth paying particular attention to: staffing, quality and distraction. By keeping these factors in mind while planning, energy companies can ensure that short-term survival measures do not damage their license to operate in the long-term.
Layoffs may not be the answer
The first step many companies take in tough times is to cut staff. While this undoubtedly saves money, badly-handled layoffs can present problems later on. Layoffs are disruptive while staff worry about receiving the ‘tap on the shoulder’ and, as a result, efficiency decreases. Talent flight and low ‘survivor’ morale can lead to a smaller, overstretched workforce and staff who resent the increased workload they have to shoulder.
In addition to enormous disruption, layoffs cause tangible losses. One corporate investigator described things at his firm recently as a ‘fire sale’ as theft skyrocketed during cuts. More dangerously, intellectual property theft also increases during mass layoffs which could cause significant damage to a company’s ability to compete. Finally, and most worryingly, layoffs often lead to instances of workplace violence.
There are factors here outside a company’s control, such as an employee’s mental state or a desire to make off with the firm’s ‘secret sauce’. However, the general disruption of layoffs can be reduced by adopting a considered, well-managed and even compassionate approach.
Before, or in addition to, layoffs, companies should consider alternate measures such as reduced workweeks or salary cuts. Although these are still painful, such steps avoid the disruption of mass layoffs and can be quickly corrected when things improve. Meanwhile, when staff cuts are made, companies have to ensure that the remaining workforce is properly trained and resourced to manage the increased workload they face. A more considered approach to staffing during the downturn will maintain the company’s reputation which will be critical if it wants to be competitive when it is time to rehire.
Quality remains paramount
The second factor is quality. A busier, overstretched workforce is less able to spot mistakes and take corrective action. This not only erodes product quality but also increases the likelihood of accidents. Companies also often replace staff with contractors which reduces institutional knowledge, further decreasing efficiency. The lower salaries often associated with contractors can also lead to lower quality, higher turnover and reduced loyalty to the firm. As a result, the initial savings can have significant long-term costs. Having been a contractor in the oil field for several years, I know this does not have to be the case. A robust contract, good oversight and thoughtful, fair KPIs can avoid most of these pitfalls.
Finally, companies must recognize how distracting a downturn can be. The attention of executives is focused on steering the company through the downturn while employees wonder if or when it will be their turn to ‘stop by’ HR. This causes enormous distraction at work and stress at home. In turn, this means people are more likely to make mistakes and less likely to notice near misses at work. During periods of stress and overstretch, risk registers can become neglected or horizon scanning is ignored so long-term threats are missed until it is too late. Even in the ‘good times’, I have seen a firm quietly taken over when they didn’t spot the warning signs.
Long term success, not short term survival
These three factors – staffing, quality and distractions – add an extra layer of operational risk for companies already facing increased market risk. This makes their response to the downturn potentially more dangerous than the downturn itself. The likelihood of an incident or issue increases while staff cuts, lower quality and distractions reduces the company’s ability to react. These are the ideal conditions for a crisis.
Tough times demand tough decisions. However, companies that do not consider the long-term effects of their actions may survive the downturn, but inadvertently sow the seeds for a future crisis. Despite the difficult decisions necessary, energy companies should ensure they don’t lose sight of the forest for the trees while they plan for the years ahead.
Kate Brader is a director at Regester Larkin by Deloitte.