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Published: November 22, 2011
 / Winter 2011 / Issue 65

 
 

Resetting the Cost Structure at Shell

Often, when there is a special project, you go around the organization and ask, “Who is available to work on it?” But we felt that this effort was so critical to our success that we needed the best talent in the organization to oversee it and drive it to completion. This sent a message to everyone in the company that we were serious.

The teams initially explored a series of cost-control frameworks, but the most powerful was a strategic approach known as zero-based cost management. This unique, holistic approach involves a fundamental reassessment of the entire business to answer these questions: Which activities and assets still fit with the company’s future goals and strategy, and which should be improved or eliminated? How much funding is required to support each necessary activity or asset at peak performance? And finally, which budgets must we alter to reach cost management targets? Simply put, in zero-based cost management, the budgets for assets, operations, functions, and departments are rewound to nil as a starting point so a fresh argument can be made for every funding and portfolio decision.

The results of this focused cost management and reduction analysis were presented to the company’s leadership. After approval, a commitment session was held with the managers of each of upstream Europe’s functional groups that could challenge the findings. If those groups did question the budget levels, a discussion ensued so they could reach a consensus. Ultimately, we obtained a commitment from these functional managers to meet the proposed cost limits, which were subsequently embedded in the business plan.

A Three-Step Implementation

A zero-based cost management implementation can be broken down into three steps.

Step 1. Reexamine the company’s goals and strategies. This sounds dramatic and disruptive, but in fact it isn’t. We simply needed to have a series of pragmatic discussions among members of management, both upper level and midlevel, throughout the organization about where we thought the business was going in the next few years. The goal is to define a common reference point for everyone, a set of outcomes against which we can evaluate costs. Done well, this creates an environment for innovation and change by aligning people to a common goal.

We didn’t conduct a wholesale reexamination of strategy. We simply asked, What are we trying to do as a company and which activities are needed to execute our plan? Stacked next to this was our new budget expectation or target of reducing costs by 30 percent.

Also at this stage, we explored competitive repositioning of the portfolio. We ranked each of our assets by how well they were able to compete for capital and resource allocation within Shell at their current level of performance. This wasn’t an overly detailed exercise, but instead an effort to get an idea of where our best cost management opportunities would be found.

Step 2. Zero-base the activities. In this stage, we dove in deeply, stripping all business areas down to zero and then going through the exercise of building them back up. To do this, we asked, What is the minimum resource required to run each part of our business — that is, to cover the cost of those activities necessary to comply with legal, corporate, and regulatory rules as well as to achieve production targets? These are the “must-haves”; all other activities are essentially discretionary and optional, or in the zero-based framework, “nice to have.” Given the risks and dangers of our business, HSE is always a “must-have.” Much of what organizations do, however, involves an implicit choice about what to do above and beyond these “must-have” activities.

 
 
 
 
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