An Integrated Planning and Performance Management Approach: The Key to Success for the Middle East’s National Oil Companies
In light of the oil industry's increasingly challenging business environment, Booz & Company assess the pivotal need for NOCs in the region to link and align all planning disciplines.
Today, the Middle East’s NOCs are no longer simply energy producers, they serve as geographically dispersed corporations with global interests. The stakes for these organizations are especially high given that new sources of energy are becoming significantly important and that success for the oil sector strongly impacts the overall economy. In recent years, NOCs have responded to these shifting circumstances by raising their level of professionalism in major competencies. However, they still tend to approach planning and performance management in a disaggregated fashion. With this lack of integration negatively affecting business, Management consulting firm Booz & Company has found that an integrated strategy to planning and performance management is imperative for NOCs to reap clear and tangible benefits.
A Performance and Planning Capability Gap
In this day and age, NOCs in the Middle East are navigating through a series of challenges. After all, the region’s governments – the main beneficiaries of the NOCs’ success – are asking for greater fiscal contributions to fund vital social and educational programs and to diversify their economic base. As a result, NOCs have established intensive programs of capital investment, better planning, and improved performance management.
“During this decade we expect the main Arab oil producers to invest over US$800 billion in capital projects,” explained Sean Wheeler, a Partner with Booz & Company. “So, most NOCs have installed Enterprise Resource Planning (ERP) systems to make a broad range of management information available to executives and senior managers. They have also introduced detailed, multiyear strategic plans as standard, along with balanced scorecards, KPIs, and other best-practice planning and performance management approaches.”
Although these advances are important, what is still missing is the capability to undertake integrated planning and performance management – as the scale and complexity of NOCs’ activities grow. “Best practices are often used, but the positive effects are mitigated because plans and performance, along with reports and recommendations, are not fully aligned,” said Alain Masuy, a Principal with Booz & Company. “This can cause systemic underperformance, a failure to achieve targets, and potentially serious problems in terms of health, safety, and environmental compliance. NOCs need to manage performance in a more intelligent and intuitive manner, to bring all their sophisticated management and other planning tools together in a coherent whole.”
The Need for a Continuous Integrated Planning Cycle
The most effective means of addressing these performances and planning weaknesses is to fully align planning with performance management activities in a continuous, integrated planning cycle. This method works for the oil and gas sector because of its long-term horizons and near-term operational complexity.
This continuous cycle of integrated planning and performance management comprises five steps.
- Strategic Planning and Portfolio Management – Developing Linkages
Strategic plans in the energy sector generally begin with a processing capacity target. All aspects of the strategic plan flow from this fundamental determinant of effective capacity which clearly articulates the future vision and positioning of the company. In effect, the company needs to give careful consideration to its current internal capabilities and future objectives to specify the capacity target.
These capabilities and objectives are what will distinguish the company in whichever market it aims to serve; the key elements of the strategic plan are then developed to reach this capacity target. It is precisely at this point that the first link in the planning and performance cycle has to be made as the company must ensure that the strategy itself is grounded in the reality of the current state of the business.
There are four aspects to marrying the strategic plan to reality. First, the capacity profile identifies precisely where the business stands today. Second, any changes in the capacity profile are planned on a realistic time frame from inception to delivery. Third, the capacity profile should reflect ongoing work and project commitments, as well as potential expansion. Fourth, all projects relating to the strategic capacity profile or supporting functions should be defined with terms of reference, including clear objectives, activities, and time lines.
“In truth, this approach involves a mix of cross-functional expertise brought together through interactive working sessions,” added Wheeler. “These utilize the knowledge and experience of the wider organization early and actively in the planning process. The result is that appropriate consideration is given to the business functions’ capabilities and options, providing them with ownership of their part of the plan and a sense of loyalty to the overall strategy.”
- Operational Planning and Budgeting – Translating Strategic Thinking into Operational Reality
The operational planning and budgeting step achieves the simple task of aligning strategic planning with operational realities and targets. This is the most involved step in the planning and performance cycle – and the phase where plans can start to come apart. The capacity profile should show very clearly when production increments are due and when activities must begin for projects to deliver on time.
“The operational plan should be a short and influential communication of the company’s intent, accompanied by data that describes deliverables and needs,” said Masuy. “To achieve this, the operational planning process must be a cycle in itself; it must cascade strategic mandates sequentially, top-down through the organization.”
The mandates should start with the all-important strategic capacity profile. The cascade reinforces the “customer-to-service provider” relationships that will deliver the desired strategic outcomes. The operational plan then incorporates any constraints in the system. This, in turn, forces the planners to prioritize until a final document can emerge that is aligned with the strategy and that is explicit about its risks and resource limitations.
- Target Setting – The Reality Check
The planning function becomes responsible for reflecting the outcome of the operational planning process in the targets that drive activities during the year. The purpose of annual targets is to motivate an organization to move toward a long-term goal by breaking it down into viable steps. Yet, it is precisely at this stage of the cycle that failure to integrate strategic and operational planning disciplines most often occurs.
In actuality, the problem is the failure to integrate the process, which leads to the wrong information being used to set targets. NOCs can use one of three performance mechanisms to set targets in a manner that integrates the planning process:
Absolute performance sets a specific number as the target.
Relative performance sets targets in relation to the previous track record.
Comparative performance involves targets relative to benchmarked peers.
In addition to the target setting mechanism, the NOC should also establish a range for each KPI.
- Performance Conversations – Leveraging Management Information
The remaining components of the cycle relate to performance management and ensuring the delivery of the mandates that cascaded to business functions during the process. Acquiring management information is easy. What is more challenging – and critical – is explaining facts and giving them value.
In line with this, NOCs’ planning functions should dig deeper for explanations; they need to excavate the root causes of the facts, which will lead to performance insights, in turn prompting recommendations.
The Art of Performance Conversations: The next step in the integrated cycle is turning good quality management information into meaningful performance conversations. Performance reviews of any kind fall within this phase of the integrated cycle.
There are three good-practice principles that reviews should share:
Be fact-based, but insight-driven.
Be focused, be forward-looking.
Be challenging, yet collaborative.
Organizations that use these principles find that the entire dynamic of performance management changes.
- Incentives and Rewards – Differentiated Outcomes for Differentiated Inputs
The final step in delivering a strategic plan is getting the incentives and rewards mechanisms right. The correct mechanism employs a mixture of financial and non-financial rewards; and, although financial incentives are popular, non-financial mechanisms equally provide an effective and long-lasting means of rewarding an employee’s contribution.
Of course, the annual employee appraisal process will remain the most important forum for dispensing incentives and rewards. There are two levels to these assessments, the personal and the corporate. On the personal level, those who have earned rewards should receive them; and those who haven’t, shouldn’t. On the corporate level, if the NOC as a whole is meeting its strategic targets, then the whole staff should share in that success. If the NOC as a whole is falling short, then all employees should understand that they must increase or redirect their efforts.To conclude, by bringing their planning and performance disciplines together, NOCs will achieve clarity and broad alignment on a new set of strategic objectives. They will be able to better direct their business functions’ activities and targets to reflect these strategic objectives. Moreover, they will have more effective management meetings, thanks to focused and informed performance conversations. Most importantly, they will have a workforce that focuses on meeting its targets and that is incentivized to take responsibility for its future.