Seven Trillion Dollars

An especially clear and informative Special Report on Oil in last weeks Economist (subscription only)

Official American estimates suggest that over the past 30 year OPEC's machinations transferred over $7 trillion in excess profit from consumers to producers. And the cartel's coffers are still overflowing: OPEC's oil-export revenues have shot up from about $100 billion in 1998 to perhaps $340 billion last year.

Feel good about that? What's the authors take on the biggest reason we may run out of oil? Not because we'll drain the Earth's supply but rather:

That points to the most explosive criticism levelled at the oil majors: that they no longer have the capacity to innovate. A few decades ago these firms were fiercely proud of their proprietary technologies, which they believed gave them a competitive edge. But during the 1990s most majors slashed funding in this area, leaving service firms such as Schlumberger and Halliburton to pick up the slack . Ten-dollar oil killed upstream research,” says one executive. Ivo Bozon of McKinsey, a consultancy, reckons that the majors slashed upstream R&D spending from $3 billion in 1990 to below $2 billion in 2000 (both in current dollars). Over the same period, the service companies increased their investment in research from $1.1 billion to $1.7 billion. The sharpest cuts, adds Mr Bozon, were made by American companies. These guys need to explore, but they don't know how to do it any more,” complains Roice Nelson of Geokinetics, which makes reservoir visualisation software for the oil industry. Mr Nelson helped found Landmark Graphics, an industry pioneer in imaging software, so his criticism stings. He notes that the industry sacked many of its best-qualified technical staff, and that relatively few college students now are going into petroleum engineering. “We'll be working till we're past 80,” he sighs

the innovation is now taking place a smaller, more nimble risk-tolerant firms.

The majors now realise that this shift away from technology, once their core strength, was a mistake that has benefited three groups of rivals: the service companies, the “mini-majors”, and the NOCs. Mr Lesar at Halliburton is delighted: “There's been a fundamental shift in ownership and development of technology from the majors to the service companies.” The problem is that the service companies are less capable of investing for the long term, because their balance sheets tend to be weaker than the majors'. Moreover, they need their customers to adopt those technologies to make them commercially viable—but the majors have proved gun-shy. The shift in innovation has been a boon to smaller oil companies, which are not so risk-averse. Especially since the wave of mergers, the majors need mega-projects with long lives to replace reserves. That has made them wary of trying new technologies. Chevron's Mr Robertson says that taking a flier on a project with a long lead time and high investment is simply too risky for his firm. Mr Farris, Apache's chief executive, takes quite a different approach: “We go to the service companies and say, ‘What have you got?' Hell, we'll spend money to try it.”

I'll buy the first part of the concern ... the smaller innovators can only go so far until a Major buys into the idea, if not, a good idea could die. But I still think large companies are inefficient at R&D, and discourage their own entrepreneurs by score-keeping and bean counting. Read Clayton Christensen.

The Myth of the Executive Job

Just to be Fair and Balanced - I wrote here about the Myth of the Manufacturing Job. This was not an anti-manufacturing, anti-union screed per se, but I was trying to show the code-words used by politicians as well give some context to the discussion.

Now to pick on the other end of the corporate ladder: there are just plain too many Executives Positions in American business. We still have too much overhead. In this unbelievably sophisticated information age, why do we have more managers, more executives to manage (babysit) the real producers in a company?

We used to have a CEO, a CFO and, maybe a COO. Now we have all kinds of CxO's

CTO - Chief Technology Officer
CPO - Chief Procurement Officer
CPO(2) - Chief Privacy Officer
CMO - Chief Marketing Officer
CIO - Chief Information Officer
CGO - Chief Growth Officer
CQO - Chief Quality Officer
CDO - Chief Diveristy Officer

When you confer titles like that on people you are just asking for it. The first thing they do is stop doing actual work (the Chief Officer is above the fray, a strategy person) The second thing they do is work on their Org Chart and begin justifying more staff (Chief Officers need staff to tell them what's going on - and that staff growth is usually in the Corporate Office, not out in the real world as Chief Officers hate to be lonely at HQ). The last thing they ever do is get their hands dirty and drive change at the front lines of the business world, where it counts.

I evolved a personal business philosophy by working at the grassroots, working level of many different business operations, and I really believe that if you are not Selling, Designing, Making, Buying, or Fixing (service), you are an overhead cost burden to the firm that should be zero-base justified each year.

Why does your position exist?

Is it to coordinate, track, check-up-on, communicate, story-tell, or work on "process" issues? Some of these things may be necesssary evils in a modern corporation, but nevertheless, they still are evil.

Of course we need an executive staff to support the broad needs of the company. But these should be small elements, staff jobs -- not "Chief Officers." They should have a small group of support specialists serving the needs of the people actually doing business.

I think the growth in these Mythical Executive positions is a result of inexperienced senior leaders with no real depth in their market or trade. Jeff Immelt @ GE sees it this way:

Jeff, the Harvard Business School graduate, is out to banish Cordiner's ghost for good. "I absolutely loathe the notion of professional management," he told an MIT audience in September. Which is not an endorsement of unprofessional management but a statement that, for instance, the best jet engines are built by jet-engine people, not by appliance people. Rotate managers too fast, moreover, and they won't experience the fallout from their mistakes— nor will they invest in innovations that don't have an immediate payoff. "

He's right. This strange, tri-polar (US, China. India) global economy can ill afford know-nothing executives moving from job-to-job, industry-to-industry, faking their way through and escaping before disaster. Again, since they don't really know anything, they have to build a large staff to keep them informed enough to appear successful.

How do we cull the mythical executives? Well, the pendulum always swings the other way. Our system forces companies to re-trench and evaluate cost structures frequently. In time, shareholders will ask "How REAL are these executive positions? What do they actually do?"