First of all, let’s be clear about why companies exist. The goal of any organisation is to legally and safely increase profit and reduce cost, while simultaneously increasing both return on investment (ROI) and cash flow.
Cutting costs is absolutely the right action to take when a company is faced with a sudden reduction in revenue. Cutting costs are relatively quick to implement and it is easy to measure the results. In fact, measuring and finding new ways to cut operational costs should be part of everyday life for any company which strives to remain competitive and meet the goals I’ve outlined above.
There was plenty of wasted cost in the oil and gas industry in the early 2010’s, and while the oil price was high (oil price trend) some would say there was less of an incentive for management to focus on cost-cutting and more of a focus on exploring and finding new production opportunities. The reduction in oil price which ensued after 2014 and the resulting reduction in viable production opportunities has changed this point of view, and management and executives have now recognised a need to be much more cost reduction focused. This has left many companies in a better place as the oil price has once again tumbled in 2020 as a result of the “perfect storm” of reduced demand caused by the massive reduction in economic activity while much of the world when into lockdown during the Covid-19 pandemic, coupled with record levels of production feeding the supply side. It a classic case of high supply and low demand driving the price of oil down.
Direct and Indirect Costs
A key concept to understand is the difference between direct and indirect costs. Direct costs appear as a line item on the company profit and loss accounts; indirect costs don’t. However, indirect costs do indirectly affect the line items on the company profit and loss statement, hence the term indirect cost. The Iceberg Model below shows the types of costs that fall into direct and indirect maintenance costs. The relative size of the cost is also represented by the portions of the iceberg that are above and below the waterline. The majority of the costs are indirect and hidden!
Examples of direct and indirect costs and examples of improvement actions
|Direct Cost – Can be identified on the profit and loss account||Improvement Measures||Indirect Cost – Impacts P&L but isn’t listed on the P&L||Improvement Measures|
|OPEX impact –|
Staff labour cost e.g. wages, benefits and pensions costs.
|Lay off staff|
Stop wage increases
Reduce benefits i.e. pension payments.
|OPEX impact –|
Low labour utilisation (tool time). More people required to do the same work. Leads to high cost per productive hour worked. Leads indirectly to increased OPEX.
Rework due to poor workmanship. Leads to duplicate time (cost) to get work done. Leads indirectly to increased OPEX.
|Improve scheduling of work.|
Improved competency and training.
More effective work instructions.
Improved on the job supervision.
|OPEX impact –|
Spare parts cost e.g. filters, gaskets, pumps, valves etc.
|Consolidate and re-tender supplier contracts for lower cost of spare parts.||Revenue impact –|
Spare parts not available on time. Leads to increased time to repair the equipment. Leads to longer production downtime. Leads to reduced revenue.
|Identify and carry the correct critical spares at the site’s stores.|
Create a spares parts list for critical equipment.
The question is how do companies now start to focus on reducing these indirect costs in a way that is measurable, commercially viable and sustainable?
Indirect costs are far more difficult to measure as they don’t appear directly on the chart of accounts. Indirect costs are influenced far more by the day-to-day actions, behaviours and decisions that people at all levels within the organisation take.
Most people will generally attempt to do what they perceive to be the right thing to do. This right thing to do is driven by several factors but the key to this is their internal values and the experience of what has succeeded in the past for them. They will also do things that they are rewarded and recognised for doing. To add an extra layer of complexity to the situation, these values and behaviours can often be context-specific. A great example is safety. Someone wouldn’t dream of carrying out work at height on an offshore site without a harness and protective headwear, but would be happy to climb onto a roof at home to fix a broken slate without any protection.
What drives these context-specific behaviours and attitudes? What factors influence people to think and act the way they do in different situations? The answer is the company’s culture.
Why Focus on Leaders?
A question that some people may ask is “Why do you also need to focus on leaders? Isn’t the Maintenance Department responsible for maintenance and reliability?”
My answer is “Everyone is a leader!”
A quick search online will show you that there are plenty of books on the market that focus on the tools, principles and techniques of maintenance and reliability. There are plenty of passionate people who will talk about this topic in great depth and with very good authority. However, I’ve found one issue with this…they are targeted at the purely technical aspects of maintenance and reliability and they focus on educating maintenance and reliability managers, not the rest of the organisation.
Don’t get me wrong, the technical aspects of maintenance and reliability are important, and I will cover these in other posts. However, an under-optimised maintenance and reliability system has far-reaching implications on the company business performance. Poor reliability isn’t just a maintenance issue, it’s a company-wide issue. A company-wide effort to improve reliability is required if it is to be successful and sustainable in the long term in terms of improved business results. This needs everyone in the company to be a leader in their area of influence.
This requires people within the company, managers and senior leaders, to deeply understand the influence their role and their day-to-day decisions have in improving and sustaining high levels of reliability. To achieve this change requires a cultural change. It requires a culture of reliability.