The Escalating Loss of Knowledge in the Oil Industry, and 4 Steps to Prevent It
In the early 2000s, Boeing, faced with a slump in business, offered early retirement to 9,000 senior employees. Shortly after that, the company had an unexpected flood of new airplane orders and found it was critically short of skilled production workers. The knowledge lost from long-term employees, plus the inexperience of their replacements, threw assembly lines into chaos. There was a rapid ascent in overtime, and employees scrambled to finish assembly on time. Boeing’s management had to shut down production for nearly a month to fix the assembly process, which resulted in a $1.6-billion charge against earnings. This ultimately led to a change in management.
A 2012 episode of 60 Minutes interviewed several men in their late 50's and early 60's who had worked at NASA for 25 to 35 years. They had lost their jobs with the end of the space shuttle program. Today only a handful of people who worked on the program are left at NASA. If NASA wanted to send a man to the moon today, it could not do so quickly. Much of the knowledge and experience is gone. NASA has a big focus on knowledge management and even has a chief knowledge officer, but the horse has left the barn (or I guess the rocket has left the launch pad) and much of what is left are the ghosts of experts. NASA’s Johnson Space Center has a big library of videotapes and transcripts that captured some of the expertise of the retirees, but they have not been edited and organized in ways that would make it easy to find, so it has generally not been used.
Why are these stories relevant to the oil industry? According to the latest Canadian Petroleum Labour Market Information (PetroLMI) report from Enform called Falling Oil Prices and Decreased Company Spending – Employment Impacts, the Canadian oil industry supported 720,000 direct and indirect jobs in 2014. Two-thirds of those (484,000) were in Alberta.
There is a massive hidden cost to downsizing in a downturn—the loss of organizational knowledge.
This year estimates are that $31 billion will be cut from capital and operating expenses, and a quarter of those jobs will be lost. That’s 185,000 people, most of which are in Alberta. If you apply a lowball average of 15 years’ experience, that’s 2.7 million years of experience being removed—a huge number but perhaps not as useful as the unknown amount of specialized, mission-critical skills, know-how and expertise that already has and will continue to disappear from our industry. According to the June issue of The Basin (published by JuneWarren-Nickle’s Energy Group), the number of new well licenses approved in the first quarter of 2015 is down 55 per cent year over year. The updated well forecast for 2015 from the Petroleum Services Association of Canada has been lowered by a shocking 47 per cent. We also have a change in government that is increasing the corporate income tax and will review oil royalties. Have companies accommodated this further drop in activity in their layoffs so far? Or will we see thousands more employees exiting with pink slips before the year is out?
How well do we remember what happened the last time around?
Carol Howes, director of PetroLMI, reminded us recently when she said, “It is critical that companies keep sight of learnings from previous downturns. In the past, some workers who were laid off and found employment outside of the industry tended not to return. We know companies understand that when the oil price turns around, they will once again be faced with both labour and skills shortages and will need to rehire the talent lost through layoffs.”
There is a massive hidden cost to downsizing in a downturn—the loss of organizational knowledge. As Joni Mitchell sang in “Big Yellow Taxi,” “You don’t know what you’ve got till it’s gone.” In many companies, little or nothing is done to prevent this drastic decline of proficiency and insight. When a downturn hits, the corporate fire extinguisher is aimed at snuffing costs on the burning platform to salvage the bottom line. Yet the irreparable harm of losing critical company knowledge smolders dangerously in the shadows. Do expense-focused executives really know what they are losing?
Layoffs are just part of the brain drain. Let’s not forget that the oil industry workforce is aging. According to Pew Research, 10,000 baby boomers turned 65 every day in 2011 in the U.S. Despite the 2008-09 recession and the current downturn delaying retirements, the inexorable aging of the boomer generation points to an inevitable and massive loss of skills, experience, know-how and knowledge in the patch. Even though older workers are delaying retirement and staying in the workforce longer, employers are concerned and anxious about the impact of the knowledge drain—the loss of skilled intellectual or technical labor—on their organizations, according to a 2009 MetLife study. Seventy-four percent of employers said they were primarily concerned about experiencing a knowledge drain as older workers retire. In the human resources world, and in business generally, there’s a lot of hype and promise about data analytics using big data. Perhaps “big” might really stand for “boomer insights gone.”
A 2012 Alberta government report entitled Succession Planning: Retaining Skills and Knowledge in Your Workforce, described how employees can hold vast amounts of key experience, information and skills. That knowledge walks out the door when employees retire or move up or out of the company. Unprepared organizations can be left scrambling to run their day-to-day operations. The important know-how needed to run a company can exist at all levels, not just in leadership positions, and in any subject matter expert position, such as employees running legacy systems, specialized roles with no redundancy or jobs requiring specific expertise. Much of this know-how is undocumented and irreplaceable.
Some of this knowledge may be easy to recognize and explicit, such as instruction manuals, process documents and contact lists. Other knowledge is more difficult to define or communicate and includes experiences, stories, wisdom, judgment and know-how. This is tacit knowledge, and it lives in peoples’ heads. It was named “deep smarts” by Dorothy Leonard of the Harvard Business School in her 2005 book by the same name.
Other knowledge is more difficult to define or communicate and includes experiences, stories, wisdom, judgment and know-how.
Retaining both explicit and tacit knowledge is an important issue for companies, but it’s especially important for small and medium-sized organizations because they have critical knowledge concentrated in fewer employees. A big challenge for all companies is how to convert less accessible tacit knowledge into more accessible explicit knowledge.
Why aren’t companies focusing on knowledge capture? In 2008, ninety per cent of respondents in an online public consultation by the Government of Alberta said the effects of Alberta’s aging workforce should be a high priority for the private sector and government. Less than twenty five per cent of employers had strategies to address thoseeffects. A 2009 study by the Institute for Corporate Productivity found that only two in 10 organizations were doing well when it came to knowledge retention. As the Alberta government report said, “These numbers suggest that the time to begin transferring knowledge is now.” Alarm bells have been ringing for several years in studies from Boston Consulting Group to Manpower to the Alberta government, yet they have fallen on deaf ears in most organizations.
In her new book Critical Knowledge Transfer: Tools for Managing Your Company’s Deep Smarts, Leonard and co-authors Walter Swap and Gavin Barton surveyed about 70 large firms and asked about knowledge transfer. Ninety-seven per cent said they needed to transfer business-critical expertise, but over half were not at all or only somewhat addressing the need to get it done. Also, nearly eighty per cent said that the threat of losing such expertise was greater than it was five years ago.
Both risk and reward for knowledge retention seem intuitively obvious when considered. What is the cost of bad decisions made from inexperience? What is the cost of a delayed or cancelled project? What is the true cost of lost productivity when experience leaves and a replacement takes more than six months to get up to speed? What is the cost of a consultant to replace lost knowledge? What is the cost of the myriad of other invisible hits to the bottom line? Conversely, the benefits reduce all these costs and have also been shown to maximize competitive advantage by making fewer mistakes, incurring less downtime solving problems, increasing productivity and reducing the cost of turnover. Knowledge management has also proven to increase stock valuation, assist in growth through acquisition and lead to better developed products.
What’s our track record of knowledge management in the oil industry? Well, the good news is that oil and gas exploration and service companies have been leaders in developing knowledge capture and transfer solutions since the 1990s. These include best-practice leaders such as Chevron, BP, Royal Dutch Shell, ExxonMobil, Halliburton and Schlumberger. The bad news? Well, you might have already guessed. Knowledge capture and transfer has remained accessible only to the largest global companies with big budgets. A 2013 report by Robert Grant of the Bocconi School of Management in Milan entitled The Development of Knowledge Management in the Oil and Gas Industry describes the challenges, the various approaches these global majors have taken over several years, the costs, the financial returns and the lessons learned. He describes an overabundance of sophisticated technology tools that were generally underused. However, cost savings have been reported in the hundreds of millions of dollars. The most effective knowledge transfer has been achieved by linking people to people rather than people to information.
So where does that leave the small to moderately large Canadian firms that want to retain their operational knowledge but don’t have the budget or resources of a supermajor? We suggest the following four steps as a starting point.
Step one: Identify your risk areas
Identify mission-critical roles and knowledge that exist anywhere within your organization. Next, identify where there is little or no redundancy for that knowledge. This will give you the scale and scope of your knowledge-retention challenge. Then identify those at risk of departure (retiring, downsizing candidate, etc.). Find that 61-year-old control panel operator who is the only person who knows his complex job. Then focus on the highest risk areas first before it’s too late.
Step two: Review existing best practices
Read Retaining Today’s Knowledge for Tomorrow’s Work Force. It lists the 26 best practices identified by the American Productivity and Quality Center benchmarking study in 2007.
Step three: Incorporate knowledge retention into your succession planning
If you have a succession planning process, build in knowledge capture and transfer as an integral part of the process. The development of a succession candidate should allow for the conveying of knowledge critical to the role. Dial up the mentoring component of this process to be more intentional about transferring best practices and wisdom from the incumbent to the replacement.
Step four: Move to action with some quick wins
Canadian company Transition-Path, which is described in Leonard’s Critical Knowledge Transfer, could be a starting point for the huge challenge of knowledge retention. The company has developed a starting point solution for knowledge capture and transfer called a Broadscope™. It only takes an interactive webinar interview with a coach-analyst to build out a comprehensive and visual role map for any subject matter expert sitting in his or her office. Strategic priorities are flagged along with mission-critical tasks, key relationships and key areas of tacit knowledge. The Broadscope™, and these flags in particular, illustrate the key areas for knowledge transfer, which become the catalyst for knowledge-sharing meetings between the expert and supervisor, the replacement and other individuals or groups. A Broadscope focuses on two of the most successful aspects of knowledge capture and transfer: beginning the process of converting tacit to explicit knowledge and invoking the individual and group conversations required to pass on the expertise and wisdom from one person to another.
As industry weathers this latest downturn, many of us are reminded of the “Please God, let there be another oil boom” bumper sticker from the 1980s. We could use an updated version—perhaps one that reads: “Please God, let there be another oil boom. I promise not to kiss my knowledge goodbye this time.”
This article first appeared in Oilweek's on-line magazine July 7, 2015.