Managing knowledge retention

With continued activity in mergers and acquisitions, companies need to consolidate assets to survive or retain their influence in the market.

Ian Peirson

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Article Summary

The considerable drop in oil prices since 2014 has continued to affect the industry. Whilst many thought that the surplus of crude would be absorbed by a concurrent increase in demand, this did not happen. As a result, and with the Organisation of Petroleum Exporting Countries’ (OPEC) decision at the time to sustain production at near full capacity, the continued stagnation of oil prices means many companies felt the pressure. Overall, the global oil and gas industry is forecast to cut $1 trillion from planned spending on exploration and development until 2020.

Despite an OPEC decision in September 2016 to reduce production, and recent geopolitical events in Saudi Arabia that have helped to raise the price, many analysts continue to predict oil will remain at sub-$70 per barrel until 2020. With lower prices becoming the new norm, interest in mergers and acquisitions (M&A) keeps growing as companies are forced to consolidate assets to survive or retain their influence in the market. In the first half of 2016, overall M&A deal volumes were depressed. However, deal values for the sector were supported by the announcement of large transactions in mid- and upstream (see Figure 1). Historically, the extended uncertainty around the depth and extent of the oil price drop led to a lack of consensus on transaction valuations between buyers and sellers, which constrained M&A activity. Yet the current economic environment appears to be forcing companies to push through this barrier, with more than 70% of senior oil and gas professionals expecting increased M&A activity in the sector, as demonstrated by numerous industry surveys.

Under this challenging setting, an oil and gas sector survey by DNV GL reveals the industry’s top priorities continue to be focused on capex budget approval, applying pressure on the supply chain to drive efficiencies whilst minimising exposure to riskier projects that may prove costly in the long run. When considering that staff costs are a major contributor to the overheads of any organisation, it is unsurprising there is a 6% increase in companies seeking to further reduce head count. It is arguably inevitable that consolidation (and economies of scale) are therefore integral to survival.

M&As are not without their challenges. There is a rising demand for due diligence in financial standing and evaluating technical responsibility. Increased regulatory compliance, combined with a higher level of scrutiny in capital and operational expenditures, adds to the overall transaction period and the opportunity cost.

The industry is looking to move away from bespoke equipment and processes, hence the operational performance of facilities including the maturity of safety management systems. These factors need to be considered against how the facility conforms to industry standards. Legacy factors, such as decommissioning and environmental liabilities, are also important considerations in the valuation process, especially as the financial implications can be vast.

Impact on the organisation
Following a thorough financial assessment of an organisation, a sum of assets that look good on paper will not necessarily be the winning factors once the contracts are signed. The real success of any M&A deal is measured not at the price at which it is acquired, but by the success of the post-merger cultural integration, the consolidation of business systems, and the quality of human (and intellectual) capital retained.

Arguably, the organisational culture and process knowledge that leads to intellectual property are invaluable and hard to quantify financially. They both take years to foster and develop, and become ingrained in the mind set and behaviours of staff. In the post-M&A state, organisational differences can seem insurmountable, and the successful consolidation will prove critical in retaining remaining staff and developing different business areas. This may require the organisation to enforce a softer integration by allowing regional departments to function semi-autonomously, with their own individual targets and strategies.

To ensure better integration, strategically reviewing crucial projects can help. This includes finding commonalities between each organisation, as well as identifying key employees who can be used to mitigate bottlenecks in the integration process. At the end of the assessment, the physical assets will likely remain unaffected. But what about the value of the intellectual capital and intangible knowledge of the organisation? These can remain difficult to retain, and harder to rebuild as compared to their pre-merger state.

Any merger invariably involves a reduction in head count, and this motive becomes even more important when you consider the low price of oil. Take the $28 billion merger between Baker Hughes and Halliburton, which caused a loss of 3000 Baker Hughes staff, even though the merger eventually fell through.

This issue of retention is further compounded by the oil and gas industry’s ageing workforce. This means that some key employees may be inclined to choose early retirement over adjustment to new conditions, which may be perceived as undesirable from a business perspective. Equally, even when a favourable offer is made to retain staff, they may be unwilling to relocate to a new city (as when Exxon relocated its Fairfax operations to Houston, for example). The most valuable employees to an organisation might not always be the ones that stay, as their motivation to remain within a company is not one taken solely of economic necessity, but rather satisfaction gained from employment.

When leaving an organisation, employees not only take subject matter expertise with them, but also the memory of events from past projects, and knowledge of key decisions made, which may have never been captured on record. The loss of such tacit knowledge immediately translates into a loss of intellectual capital that is impossible to replace with outsiders. More concerning, the full impact of this loss may not be felt for months, if not years.

Departing employees also leave with important information about who they know, both internally and externally to the business. Workplace relationships form valuable ‘go to’ sources of information. Replacing a person with someone of a similar skill set will not guarantee a seamless transition, as it takes time to establish a level of trust and engagement. As a result, the departure of key people can significantly affect the relationship structure and the underlying functional efficiency in an organisation. This issue of losing internal knowledge becomes more serious when forecasting for the future. It is well recognised that approximately one-third of research is repeated every 10-12 years because of a lack of visibility to prior work.

Any research project conducted with an amalgamated team – with fewer staff or company insiders – is likely to cost more than a similar project researched in two separate companies, and it can undermine profits made from the merger. Forward-thinking organisations have taken significant steps to guard against this risk, principally by implementing knowledge management systems. These effectively capture and store what an existing company insider knows in a digital format, thus mitigating the loss of individual knowledge when combining companies and systems.

While seemingly a simple process, the ability to store files and reports within a digital archive so they can be searched is a significant improvement on paper based processes. These records are not a panacea by themselves; it is essential that such records should be supplemented with best practices and valued insights. But, despite the benefit of reports being stored in a database, it does not necessarily guarantee that they will be interpreted in the correct way. Misinterpretation may damage the credibility of a record and ultimately prevent it from being reused, meaning information can be duplicated down the line. Quality processes should hence be implemented to ensure that users do not just capture the quantitative essentials of what makes a process successful, but also the methodology of best practice behind it.

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