A shifting landscape means energy companies need to rev up —and people and organizational topics are at the heart of firms that are successfully navigating the road ahead.
Energy companies are facing unprecedented times: crises like Russia’s invasion of Ukraine and the COVID-19 pandemic are foremost humanitarian issues, but have also highlighted the need for affordable, reliable, and secure energy. At the same time, climate-change mitigation demands a mindset reset. Although the challenges might seem daunting, energy companies can draw on the experiences of others within the sector, and beyond, who are finding solutions and scanning the horizon for new opportunities.
In this article, we explore four themes energy companies could consider over the coming year: operating models, talent, portfolio shifts, and leadership. Each issue is illustrated by a company example, followed by a set of questions organizations can ask themselves when plotting their own journey in 2023.
In it to win it: Shifting operational gears
Change can bring anxiety, but it can also bring opportunity, and 2023 offers rewards for those companies that organize to compete and win, in both their traditional core energy business and when developing and scaling new growth engines.
The traditional core
In the traditional business, companies are under pressure to provide affordable, reliable, secure, and cleaner energy to global markets in the near term. In addition, they recognize that the operating model for assets of the future will have to fundamentally transform to produce competitive hydrocarbons with lower carbon intensity.
Leading companies have started their journey toward the asset of the future by combining three elements:
Radically simplifying to align standards, processes, maintenance builds, and other crucial elements, with operating strategy tailored to the maturity of the asset.
Organizing for agility by deploying cross-functional teams built around clear business missions and implementing a rigorous quarterly prioritization of activity to create a flatter, empowered organization.
Digitizing where it makes sense, building capabilities along the way, and integrating digital solutions with new processes and ways of working.
Such changes can position businesses to succeed in the coming decade and capture necessary value in the near term. What’s more, building such an asset of the future can bring renewed purpose and transform employee engagement in the traditional core.
For example, in response to rising European gas prices, an operator altered its operating model, working on all three elements in parallel. The results were rapid: the new flexibility allowed the business to swiftly redirect and reconfigure drilling teams from plugging and abandonment activity to workovers. This reallocation of resources had not been possible in the company’s traditional model and, by rapid reprioritization, it captured $10 million in incremental value within months.
Key questions to consider:
Are you getting the productivity, resilience, and speed you need from your traditional businesses?
If not, could 2023 be the year to begin the journey to shape them to sustainably compete?
New engines of growth
Energy leaders are also wrestling with how to incubate and scale new growth businesses. Success here is a delicate balancing act between giving a new-growth business independence and autonomy, and ensuring it can take advantage of the parent company’s institutional and customer muscle. The challenge is how to get that balance right.
Our research shows that most corporate new-business builds are not a great success—from 2000–2019, just 16 percent of Fortune 100 companies went on to become blockbuster successes; the remainder were partially successful at best.1 Winning companies have found a solution: they put aside past biases and anchors and carefully consider both the optimal operating model for their own growth businesses (the best structure, processes, and people to drive success) and the right level of integration versus independence. This approach allows the new companies to thrive, independent of the historic mode in which the traditional parent company operates.
For example, various companies are evolving to models that include separating start-ups from the mothership, allowing flexible salaries and different metrics for success, establishing governance frames to allow growth engines the freedom and responsibility to make their own decisions, and identifying different KPIs to measure success in nascent businesses.
Key questions to consider:
Are you winning on growing new businesses?
If so, are you constantly nurturing them and challenging them to grow?
What would it take to grow your new businesses tenfold in the next two years?
Attracting, retaining, and retraining talent for a new era
The COVID-19 pandemic caused a wave of attrition and movement in talent, and businesses globally are struggling to find ways to keep and upskill employees—and attract new people who have very different needs to employees of the past.2 For energy companies, the talent turmoil has been compounded by a convergence of other challenges, such as an aging workforce, skill gaps in the engineering expertise needed for renewables and digitalization, and intensified competition from nontraditional peers.
Companies also need to determine what skills will be needed in ten years time. And to complicate matters further, public utilities are finding themselves in competition with big tech while oil and gas companies are shedding retirement-age workers and need to offer younger—and more idiosyncratic—workers good value propositions in a highly competitive talent market.
In this environment, the solution will differ for each company based on current talent makeup, technology changes, upskilling needs, and proximity to hiring hubs. Company culture must alter, not just to keep pace with change, but to get everyone to embrace and welcome that change. This is not just about lines on an organizational chart, but core competencies, the ability to capture, scale, and sustain value, and lasting competitive advantage. One thing is sure: the companies that act on this proactively will extend their competitive distance in the industry.
Businesses face an important consideration when dealing with this regeneration of talent: how to shift to a cohesive culture that speaks more clearly to the talent needed. How can a company foster ideas and behaviors conducive to maintaining and improving performance in the organization—especially when new generations entering the workforce have different expectations from those that came before?
The companies that most successfully pivot start with “win rooms”: fully dedicated, small teams of recruiting and technical experts that work in competitive sprints to pilot and prove out new ways of talent attraction and retention. This includes split-testing employee value propositions (such as attracting tech talent by emphasizing the company’s role in the new energy environment), building pipelines from non-traditional sources (like insurance industries), partnering with the business to scenario test strategic workforce plans, and redesigning career paths to provide technical experts with the chance of promotion outside of management.
For example, by using a win room, a Midwestern utility was able to hire more than 40 critical digital roles at a rate four times faster than prior efforts. Placement of these 40 leadership roles de-risked delivery of a $200 million annual, run-rate portfolio and allowed the utility to scale down significant reliance on external vendors.
Key questions to consider:
What skills will your company need and what will your talent makeup look like in ten years’ time—have you started shaping it?
Do you have the right talent in the right places?
How do you manage potentially divergent talent and retention needs in different parts of your portfolio?
How effective is your corporate culture at retaining and attracting the talent you need?
How are you closing the gap between your company and the competition, or widening the strategic distance?
Portfolio pivots to future-proof prosperity
The mergers and acquisitions (M&A) landscape among energy companies has evolved significantly over the last decade. Long gone is the traditional approach to M&A where companies periodically review their target list and often use low-price environments to pursue targets and make up for limited portfolio growth. Sustained high prices have allowed producers to improve their financial health by reducing debt, increasing share buybacks, and growing dividends. A renewed wave of M&A is expected in the energy sector in 2023, and it could look very different with higher prices, controlled production growth, and a renewed focus on cash flows—producers need to ensure they remain focused on delivering high total returns to shareholders.
With an increased focus on resilience and carbon intensity, the boundaries for potential acquisitions have shifted out, as many more players compete for low-carbon energy opportunities. For instance, refiners are taking an interest in upstream integration of renewable feedstock, while traditional upstream players are starting to move downstream by investing in renewable energy. In addition, many energy companies have turned their attention to divestments or carve-outs to find ways to separate carbon-intensive assets. In doing so, they balance the need to achieve net-zero targets without completely foregoing valuable cash-flow streams from carbon-intensive assets (especially at today’s prices) that help fund the transition.
All of this requires new skills and flexibility to look at both M&A and divestitures in parallel. The most successful mergers take a holistic, no-stone-unturned approach to value creation, with an increased focus on assessing how one’s capabilities can be transferred to adjacencies to create a “best-owner” advantage. This will ensure companies create value from M&A by opening the aperture beyond support services (general and administrative) to include operational synergies across revenue and production, operational costs, supply chain, technology, and capital efficiency.
From our analysis, we have seen multiple energy mergers where success has come from focusing on value capture, operating-model design, talent selection, culture transformation, and technology blueprint. For example, a European diversified energy company, that set itself ambitious sustainability targets for which it needed to transform its current portfolio of businesses, started preparing for potential acquisitions and divestments before having clarity about the ultimate transaction outcomes. The company understood that there were few unique synergies between many of its businesses and that each part would be better positioned to respond to headwinds or accelerate to capture tailwinds if given more autonomy. They embarked on a company-view, portfolio-transformation journey, making legacy businesses more standalone and establishing new businesses, each with a fit-for-purpose operating model, which was supported by a redesigned and leaner corporate center.
Key questions to consider:
Are you clear on which parts of your corporate strategy will require M&A or divestment as a lever?
Are you actively addressing biases in your resource-allocation process to make fact-based portfolio decisions based on a consistent evaluation process?
Are you clear about how you create value from M&A and the key enablers (such as talent, organizational structures, processes, and culture) needed to deliver value?
Finding a new sweet spot for the C-suite
The changing energy landscape demands a new style of leadership to secure value from existing assets, while finding and developing new value in emerging low-carbon and green markets.
Successful companies have found ways to do this, including balancing old and new business models, risk profiles, and cultures; operating with substantially greater speed and entrepreneurialism, especially in the new energy sector; achieving new forms of intensive collaboration (both internally and externally in the emerging energy ecosystems); and meeting the challenge of attracting and retaining talent through more purpose-driven and emotionally engaging leadership styles.
Leadership transformation has manifested in various ways across companies. Some have developed highly targeted leadership development programs that focus on unlocking “hard” skills (bolder strategic action, building profitable hydrogen and carbon capture, utilization, and storage value chains) and “soft” skills (fostering teamwork and collaboration, and building health and resilience into company leaders).
In the face of more serious threats from competitors, various organizations have recognized the need to substantially upgrade their top 150-plus leaders to break away from old, more bureaucratic and conservative ways of operating into new ways of thinking.
Companies that have already committed to more dramatic strategic pivots have undertaken ambitious, multi-year cultural transformation programs—usually combined with bringing in new non-traditional oil and gas talent and promoting greater empowerment and diversity throughout their organizations.
For example, a leading oil-field service and equipment company has embarked on a two-year journey with its top leaders, followed by the next 150 senior staff, focusing on the leadership shake-ups needed to thrive in the new normal.
All energy companies need to critically evaluate future leadership requirements in the light of their strategies, and then consciously implement programs to build growth-enhancing leadership assets.
Key questions to consider:
As you think forward to 2023 and beyond, what are you doing in your organization to equip all leaders with the capabilities and mindsets they need?
Do you see the top leaders of your organization aligned and equipped to succeed in the current energy landscape?
The coming years for the energy sector will not just be about technical innovation and adoption, nor scientific breakthroughs; people and organizational performance are also vital to adapting to the changing environment. Flexible models, leadership, talent strategies, and portfolio shifts are four key areas on which energy companies could focus to achieve success and be at the forefront of change, starting in 2023.
Source: mckinsey
