A slippery business

22 June 2010
This is no time to be making an enemy out of the leader of the free world. When you are failing to stop millions of gallons of oil from polluting the Gulf of Mexico, and are putting Louisiana’s fishermen out of business, the last thing you need is condemnation from Barack Obama. The Deepwater Horizon disaster is apparently “an environmental 9/11”, according to the US President. Now that is what you call a bad PR problem. But this is how serious it has got for BP. Not even a bit of feeble flag-waving and limp British solidarity from the mayor of London, Boris Johnson, can disguise the fact that the company has screwed up, and has a lot of cleaning up to do. One of my favourite business clichés is the one about asking the question “why?” five times to find out what the true causes of a problem are. With BP you don’t need to get all the way to the fifth “why?” before realising that something went seriously wrong with the company’s negotiating of contract terms with its suppliers. True, oil is a dirty business in almost every sense. It is a tough world populated by brave, highly competent engineers and specialists who extract vital fuel from some of the most dangerous places on the planet. The industry has been transformed by new technology and the opportunity it has created to get oil out of the ground thousands of feet below sea-level. And in managerial and structural terms the oil majors are transformed too. They have outsourced many specialist engineering techniques and maintenance tasks to businesses such as Halliburton, Transocean and Schlumberger. Many of the core skills and capabilities required to get hold of oil are not to be found in-house any more. They are bought in. So services are contracted. And this is where things can go wrong. The unseemly spectacle of executives from BP, Transocean and Halliburton all trying to downplay their own responsibility for the spill to Capitol Hill was telling. It was a clear sign that in the battle over price, these different companies had not reached a proper understanding about who was really responsible for which part of the operation. The tales emerging from the (Transocean-run!) rig confirm this. There was only a handful of BP staff out of more than 200 out there on the rig. But they were in charge. The different choices made over procedures, maintenance, levels of service and so on were down to BP, the other businesses say. The lessons from all this, for any purchaser of services, are pretty clear. The time to argue about service level agreements is before the media have descended on you to investigate the latest disaster. Agreements need to be stress-tested in advance of problems, not after them, in front of TV cameras. Risk assessment should be pessimistic, and not merely realistic. Yes, this may have implications for cost. But how expensive has the Gulf of Mexico disaster been for BP? Over a third of the share price lost, and limitless clean-up expenses. And it could probably have been avoided with some slightly pricier maintenance and safety measures. As my dear old dad always says to me: “What if not?” What if your brilliant plans go wrong? Are you covered for difficult eventualities? Buyers must beware. And try not to be penny wise and millions of pounds foolish. Stefan Stern writes for the Financial Times (stefan.stern@ft.com)
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