Digging deep for organizational
innovation
Organizational
simplicity. Clear accountabilities. Nimble planning processes. All characterize
a scrappy oil and gas company you may not have heard of. Learn more from its
CEO.
Innovative organizations come in all shapes and sizes. Consider Hilcorp
Energy, a privately owned oil and gas company, founded in 1989. It has more
than 1,800 employees and operates assets producing over 300,000 barrels of oil
equivalent per day (boe/day), all located in the United States. For the last
six years, Hilcorp has been named among the top 100 best places to work
by Fortune magazine and the Great Place to Work Institute; it
is the highest ranked player in its sector on such lists.
What’s more, as CEO Greg Lalicker
describes in this interview with McKinsey’s Peter Lambert, Hilcorp began
embracing agile practices long before they were buzzwords, has put in place an
innovative compensation system emphasizing fairness and shared rewards, and is
comfortable that only half of the goals emerging from its planning process will
be met. Hilcorp’s approach to strategy and the unique culture it has built
since its founding by owner Jeff Hildebrand are thought provoking for leaders
in any industry.
The Quarterly: Before we talk about your organization, can you
give us a quick overview of your strategy, so we have that as context?
Greg Lalicker: Yes, our strategy is very simple: acquire large,
complicated assets late in their productive life and maximize their value
through the efforts of our asset teams. This strategy means we have to operate
differently from the previous owners to change the trajectory and profitability
of these assets; and we are able to do that because of both how we think and
work.
The Quarterly: Can you say something about the mind-set that
enables this different way of working?
Greg Lalicker: I like to think of the business as a dog with a
tail. The dog represents all the main sources of value creation at Hilcorp—the
actual oil and gas fields and the asset teams working them every day,
especially those people in the field who are closest to the wellhead. Everyone
else is the tail, and it’s their job to help the asset teams succeed, including
the management team. Our simple precept is that the tail should never wag the
dog.
The Quarterly: How do you make sure the tail doesn’t wag the dog?
Greg Lalicker: There are four practices that we insist on, all
wrapped in the idea that we want to build multidisciplinary asset teams that
have the necessary autonomy and the accountability for creating value from our
assets.
The Quarterly: That sounds like what we might describe as an
agile organization.
Greg Lalicker: We didn’t have agile in mind when we designed the
organization, but we did want an entrepreneurial organization with clear
accountabilities, a focus on value, and the ability to act quickly. Some of our
practices—and I will set them out for you—probably are those of agile
operations, but that wasn’t our starting point. Some may say they are unusual,
but we have proved they work. And I believe they are also widely applicable
beyond the oil and gas sector.
There are four practices: The first is our
commitment to a flat organization. We have a rule that the business will never
have more than five layers above any employee, and preferably fewer: executive,
asset leader, operations manager, foreman, operator. By limiting the number of
layers, we can get things done faster. The mantra is: every layer is
time.
Look at it this way: ExxonMobil is
probably the world’s best-run oil company, and it has an incredible track
record of executing very large, very complex new developments every year. It
creates value by making a small number of big decisions each year and then
executing to a high standard. But Hilcorp creates value in a different way: we
are trying to extract the last bits of value from a mature asset, and therefore
we need to make 10,000 little decisions well each year. To do so, we push these
decisions as close to the front line as is practical. Delegate down. The
employees who often experience the biggest change in their working life when we
acquire an asset are the foremen. Typically, their role previously has been to
execute instructions conveyed to them by someone in the office. At Hilcorp,
their job is to figure out what needs to be done and to make it happen.
The Quarterly: You mentioned reducing the layers of management.
This relates to people. So, how and where are decisions made?
Greg Lalicker: This brings me to the second of our four
practices; it’s how we think about delegation. Our asset team leaders are the
key decision makers. They are accountable for the success of the team and are
given considerable autonomy in delivering the results.
The Quarterly: How big is a Hilcorp asset team? How is it constituted?
Greg Lalicker: Our asset model is built around cross-functional
teams. A typical asset team has reservoir engineers, geologists, a
geophysicist, operations engineers, and technicians in the office, all of them
reporting directly to the asset team leader. One of the operations engineers is
the operations manager, to whom the foremen in the field report. Reporting to
these foremen are the field employees, such as operators and mechanics. The
team is supported by a small number of operations assistants who work with the
foreman to process all the—still inevitable—paper.
A typical asset team produces anywhere
from 10,000 boe/day to 60,000 boe/day. We have a firm rule that an asset team
can’t get so big or so complicated as to require more layers of management—if
it’s so complex that it needs more layers, then we split the asset.
The Quarterly: Is there a typical profile for an asset team
leader?
Greg Lalicker: Well, fundamentally, they are strong technical
people who understand what it takes to grow both rate and reserves in oil and
gas assets. They need personal and professional drive, an ability to delegate,
good people skills, and, occasionally, a thick skin. Asset team leaders should
never be satisfied. They are the ones looking for new ways to add value to the
asset. We find that asset team leaders are usually—but not invariably—homegrown
within Hilcorp.
The Quarterly: How do these asset teams relate to the centralized
functions?
Greg Lalicker: Again, everyone not in an asset team is there to
support the teams. For example, the drilling group’s primary reason to exist is
not to drill wells, it is to help the asset teams make more money; and that is
how they are evaluated. The same philosophy holds true for all the other
centralized functions.
The Quarterly: How do you handle procurement?
Greg Lalicker: Actually, we have no procurement department—for
us, it would be antithetical to speed and to accountability. Procurement
departments can lock in a poor service provider for a small discount and then
force the whole line to use it. That would be the tail wagging the dog.
Put it this way, we have over half the
people in the company in the field making decisions. They decide whether to use
existing spare parts from the yard or to go buy new. They shop around for the
best deal they can get and decide what creates the most value for the company
in the long term. That way they secure what we need and hold the vendors
accountable.
The Quarterly: Great, so those pertain to the structure. How
about the processes and the people? How does Hilcorp achieve alignment with so
many people making decisions?
Greg Lalicker: Yes, the third practice is the way we align goals
and incentives. We want it to be in everybody’s best interest that Hilcorp
succeeds and, when we do succeed, that everybody shares in the rewards
equitably. This alignment helps motivate everyone making the 10,000 little
decisions to do the right thing.
The Quarterly: Can you explain how this works in practice?
Greg Lalicker: OK, first let me take goals and give you an
example. Hilcorp sets company-wide targets over a series of five-year periods,
with incentives for all employees if Hilcorp achieves the goals. The effect is
to ensure that everyone makes decisions in the interests of meeting those
company-wide targets. From 2006 to 2011, for example, the target was to double
the production rate from 40,000 boe/day to 80,000 boe/day, to double reserves
from 125 million boe to 250 million boe, and to double the value of the
business from $1 billion to $2 billion.
The Quarterly: And the link to incentives?
Greg Lalicker: When the 2011 goal was met, every employee got
$50,000 to spend on a car—the same amount for everyone who was here the whole
five years. Our 2011 to 2015 target was to reach 120,000 boe/day, 500 million
boe, and $6 billion value, and the reward was $100,000 cash per employee. Now
the latest target is 275,000 boe/day. The reward will be the cash equivalent of
one boe for every day a person was employed at Hilcorp during those five years.
Depending on prices, that will come out to $50,000 to $75,000 for anyone who
was employed for the entire five years. Operations people like the idea that
the first barrel they produce each day is theirs—as long as the company meets
its targets.
The Quarterly: Is that it, or are there other forms of alignment
through incentives?
Greg Lalicker: Hilcorp pays annual bonuses linked to overall
company performance—production rate, midstream income, reserves, and operating
cost. The annual bonus payout is up to 60 percent of salary and is the same
number for every employee—no team component, no individual component—one number
for the entire organization. We also have a program that ensures that employees
own a synthetic working interest in the fields: they get to effectively buy
into the assets on the same basis that Hilcorp itself bought in.
On the other hand, we target our base
compensation at Hilcorp to be roughly average for the relevant job market. It
is only through achieving success that people can earn significantly more.
Initially, some staff might take a cut in base pay, so they have to believe
that the upside potential is real.
The Quarterly: I notice that incentives are linked to production,
reserves, and value—but not safety . . .
Greg Lalicker: That’s right. Safety is too important to be in the
incentive program. Safety is a requirement, not an upside. If people aren’t
working hard to operate safely, then they are fired.
The Quarterly: What are the challenges in this model of
incentives and compensation?
Greg Lalicker: One challenge we have to watch out for is the
“free rider” problem [employees not pulling their weight but profiting from the
company’s performance]. It is pretty simple to deal with: our people are
expected to succeed in their job, and if they don’t, then we coach them and try
to help them improve. If that doesn’t work, we look to see if they could
succeed someplace else in the company. And if they don’t succeed there, then
they are out.
The Quarterly: Does individual freedom and team autonomy come as
a shock to new arrivals? How do you imbue the Hilcorp culture in new recruits?
Greg Lalicker: It often takes about two years before new staff
fully gets how the company works. It can be a bit of a shock. It’s hard for
people to realize they have the freedom to do something until they see that
people don’t get chewed out for making reasonable mistakes. New employees
usually need to see us set the plan, create the bonus program, and actually pay
out before they fully believe in the model. Once they get it, most of them like
it—our turnover for staff who have been here more than two years is extremely
low.
The Quarterly: Is there a set of mandatory processes or rules for
Hilcorp staff?
Greg Lalicker: Like any organization, we have rules in place. But
the point here is that rules and process don’t “drive the bus”; they are there
to help, not to be restrictive.
Our core values are different from rules
and are nonnegotiable. We have five: integrity, urgency, ownership, alignment,
and innovation. We have an action attached to each, so integrity is “do the
right thing,” urgency is “act today, not tomorrow,” and so forth. Our operating
procedures are the way we apply those values, but if they ever come into
conflict, the values win out.
The Quarterly: What are the limits to this way of handling
things?
Greg Lalicker: Great question. And this is the fourth of the four
practices—just enough process and controls. Speed is essential. For example, we
start the planning cycle with the asset teams in November, by December we have
a bottom-up plan from the assets, and by end of December we will have a
top-down plan informed by what we know from the assets. Our aim is for a P50
plan: half the time we should be above plan, and half below. Goals should be
aggressive and only slightly unreasonable.
Any more detailed planning is a waste of
time, because we know it will change. The plan is to provide inputs to annual
targets for rate, reserves, and costs. This is where the asset team leaders are
held to account for rate, reserves, and cost targets. But we aren’t strict
about individual line items; if they generate better ideas over the course of
the year, they should pursue them.
The Quarterly: In other organizations, we have seen a tendency
for management to intervene as soon as something goes wrong or deviates from a
plan. How have you managed to maintain the culture and principles as Hilcorp
has grown?
Greg Lalicker: Maintaining our entrepreneurial culture requires
lots of personal energy, discipline, and tact at the top. It’s easy to deal
with an event via a rule or a standard, but then you end up killing
entrepreneurship and accountability. The harder way is to develop good leaders
and hold them accountable.
You have to leave the asset team leaders
in control. If any of them brings a proposed drill well to me for approval, I
will ask some tough questions to make sure they have done their homework. If I
don’t like it, I may say, “I wouldn’t drill the well,” and explain why, but it
is the asset manager’s decision. If I am convinced that they have done all the
necessary work to properly evaluate the investment, I won’t override their
judgment.
Likewise, when an asset is off track, I
expect the asset team leader to understand what is wrong and what they are
going to do to make things better. I only want 20 percent of the conversation
to be about what went wron
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