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March 31, 2015

The energy industry is facing a crisis, and organizations with world class human resources functions are finding ways to weather the storm and deliver strategic value to the business.  The price of oil has fallen to a five year low, and some analysts suggest that it may be months before a significant recovery materializes.  Companies in the Energy industry have already begun aggressively cutting costs to match the reduction in demand.  From a human capital perspective, the challenge facing the industry is significantly more complex than it was just six months before.  At that point, the primary talent management concern of companies was attracting, retaining, developing, and rewarding scarce talent, both technical and leadership positions.  However, the immediate focus of all support functions, including human resources, should be cost reduction.

The role of the human resource function during rapid cost cutting is typically to execute reductions in force, with over 100,000 jobs lost already this year.  However, HR can and should take this opportunity to add significant value.  Companies in all energy sectors are focused on cost optimization and liquidity management. Exploration and production companies are seeing a rapid decline in cash flows, which will adversely impact many midstream companies and all oilfield services & equipment companies. World class human resource functions are highly agile and deliberate about developing a strategic plan focused on supporting these shifting priorities which address both the near term cost pressures and the ongoing longer term issues of the business.  In particular, a strong human capital strategy in the current environment should focus on two areas:

  1. Business cost reduction – how can HR proactively deliver solutions to reduce costs in the business?
  2. HR function and program cost – how can the HR function reduce its costs to serve the business and the costs allocated from HR to the business?

Business Cost Reduction

During the initial phases of a downturn, the operational side of the business rapidly begins to analyze the forecasted reduction in activity due to the fall in demand.  This typically translates into a reduction in headcount in operations. Companies with a historically non-strategic HR function often do not include HR leaders in reduction planning, and simply provide HR a listing of positions to be eliminated.  

World Class HR functions often lead the facilitation of reduction planning and in doing so, provide far greater value to the long-term health and objectives of the organization.  Key solutions that HR can bring to the table:

  • Organization design alternatives: HR should be prepared to provide alternatives for significant organization design changes in the company.  This can include major shifts at the top of the organization such as geographic, functional, process, market/segment or product organization designs; or it could also include a mid-level review of spans of control and layers of management.  Each design alternative should have accompanying workforce cost modeling, strategic advantages/disadvantages, and implementation considerations. 
  • Support function alignment: once the revised size of the operations has been estimated, HR should proactively benchmark standard headcount and cost metrics for associated back office support functions (information technology, supply chain, finance/accounting, real estate, HR, etc.) and work with support function leaders to suggest aligned support function sizes to match anticipated business needs.
  • Strategic Hires: while the energy industry will likely reduce overall headcount in the short term, finding candidates for critical rolesis still a major issue, and will likely return to being the top human capital focus relatively soon. Passive candidates at other companies are likely facing real or perceived tightening budgets, less promotion opportunity, lower bonus payouts, and devalued long term incentives in their current roles.  HR leaders should consider targeted talent acquisitions to capitalize on this window of opportunity with previously uninterested candidates.
  • Incentive design: incentive/bonus plans which were previously designed for a growing and robust environment may no longer be relevant. HR should advise revisions to bonus/incentive plans with the proper metrics, targets, and participants to motivate behaviors leading to an effective recovery.  Metrics should be customized to each company’s needs, but greater emphasis is being placed on cost reduction, cash flow, and reduced CAPEX.
  • Salesforce effectiveness: amidst cost reductions, often neglected is the notion of preserving and enhancing revenue.  HR should review salesforce talent plans, organization designs, competencies, and sales compensation plans to ensure alignment.

HR Function and Program costs

In addition to supporting cost reduction in the business, HR must also reduce its own cost to serve the business and the cost of programs it manages and allocates to the business.  Significant savings can be achieved in some of the following areas:

  • HR Function cost: The HR function will need to reduce its size and scale to match the scope of the business it serves.  Starting points include moving toward an efficient level of HR headcount compared to the business, and overall cost of HR per employee. But the current downturn can also create the case to review processes and services offered by HR for efficiency gains, such as hiring, pre-employment administration, and employee data management. It also should initiate a business case review of what services could be performed in a shared service environment, or by an outsourcer – in addition to cost savings, this can often drive improvements in standardization and quality.
  • Vendor costs: Vendors to the HR function, whether part of the direct HR budget or allocated to the business, can represent significant costs.  This includes external recruiting partners, HR technology vendors, benefit administrators, documentation and background processors, and other external administrators.  Even if contracts are not up for renewal in the near term, HR functions are often able to work with their vendors to secure fee reductions of 10-15% or more.  Given the current environment, vendors are faced with similar demand reduction challenges as the customer, and are frequently willing to negotiate in order to preserve their customer base. 
  • Staffing mix – Energy companies often utilize significant levels of contractors and expatriates.  The current environment could drive a review of each of these.  Shifting to or from the use of contractors versus full time employees should naturally include disciplined review of costs.  However, they also should ensure that contractors are properly classified according to IRS guidelines to avoid costly penalties.  Regarding expatriates, a thorough effort to review availability of local resources in a given country should be initiated.  Expat total remuneration is often many times more expensive than comparable local talent, and the downturn may have resulted in availability of local resources which were not previously on the market.
  • Compensation and Benefits Management:  many companies in the energy industry still do not have a coordinated approach to managing fixed compensation expenses.  This includes benchmarking pay to comparable markets and establishing market-based salary structures which avoid undervaluing or over paying for any particular job.  Health and welfare benefit costs are continuing to rise.  In addition to reviewing proportions of premiums paid by employees, companies are achieving success with benefit care coordinators and consumer navigation assistance which drive smarter and more efficient use of benefits, resulting in up to a 10% reduction in benefit spend. 

A strong cost-focused strategic plan is just half of the equation. Equal emphasis needs to be placed on execution.  Best practices of companies establish a dedicated cost reduction team with direct accountably for executing the plan.  This team builds the business case for any investments needed to execute the plan, establishes/tracks measurable metrics which define success in achieving the plan, and drives execution of the strategy.  Additionally, the team is responsible for maintaining a disciplined change management approach and communication plan to drive adoption. 

Downturn brings change and with that can come opportunity.  The current energy industry landscape provides the opportunity for human resource functions to evaluate costs, to assess procedures and services, and to use these considerations as a starting point to add strategic value at a critical business juncture.