NEWS MANAGEMENT PERSPECTIVE

How to identify the key elements of successful industry alliances

David Reamer
Vice-president, Integrated Solutions
Halliburton Energy Services

The role of alliances in the oil and gas industry in the coming years cannot be overestimated. While the "right" form of alliance is still evolving, those in existence and presently taking shape vary widely from company to company and from project to project. Because each company has developed its own unique management style and organization, it is unrealistic to assume that alliances will ever achieve a common structure. Experiencing the evolution of a number of large and small alliances and becoming intimately familiar with the compromises and tradeoffs required to assemble different versions emphasizes the tremendous amount of time and effort required to achieve a successful alliance.

Key elements

A relatively short list of the most significant elements necessary to a successful alliance is difficult to compile. Due to the project-specific nature of many of these alliances, a general overview of the features of any one alliance provides limited direction for another type of project. Nevertheless, Halliburton's and (Halliburton unit) Brown & Root's experience with several major alliances and numerous smaller arrangements worldwide has shown that certain central issues must be addressed. Among them are:

• Complementary skills. Alliance members' skill sets must be complementary. While some overlap between members' skills and capabilities is inevitable and even useful, excessive redundancy can create conflicts of interest. Naturally, members are typically convinced that their own product is generally "better." Furthermore, overlap of proprietary information and trade secrets can lead to issues with regard to intellectual property development and allocation. However, in an atmosphere of trust and cooperation, minor skill-set overlaps can enhance the ability to identify the syntheses and opportunities that lead to an optimum solution.
• Avoidance of weak partners. An alliance should not be formed to correct a company's weakness but should consist of members desiring to leverage their unique strengths. A member with perceived weaknesses will inevitably be at a disadvantage to the other members and ultimately will not garner sufficient trust to support enough of the project. Ultimately, the alliance's ability to perform and be successful will be based on the synergy of the strengths that its members are able to provide. While world-class capabilities should be sought where appropriate, each member should be able to provide superior expertise in its core competencies at the very least. A successful alliance is not necessarily built around having the absolute best in class of every specialty, it's about being able to make the best use of the best that each member has to offer.
• Avoidance of corporate culture clash. Among the most difficult organizational qualities to quantify are personality type and corporate culture. To be successful, however, any multi-company relationship must be made up of entities with similar values, strategies, and business methodologies. An attempt to force a large, stodgy, conservative entity that is only comfortable doing its business by committee together with a lean, aggressive, brash, fast-moving, and highly decentralized organization is only asking for trouble.

  Although not quite as blatant, troubles can also arise if members' formal policies and procedures don't permit flexibility or the consideration of new ideas. For alliances with significant scope and strategic importance, the "buy-in" of senior management from the earliest stages can often permit enhanced flexibility where necessary.
• Member commitment. Members that have never experienced working as an alliance before must be willing in good faith to take the chance that working outside the conventional business model will succeed. As a first step, each participant must be willing to provide personnel empowered to make necessary decisions and commit company resources as required. Depending upon the size of the project and the financial commitment involved, officers or their direct reports may need to participate early in the pro-cess. Once the commercial structure has been approved, operational staff that have participated in the early phases of formulating the chosen structure should be empowered to go forward with coordination of design and implementation.
• Long-term dedication. Depending upon the scope and nature of the alliance's charter, the parties should be willing to dedicate quality personnel and sufficient resources throughout the life of the relationship. Since the success or failure of any project relies heavily upon the personnel, their communication, and trust relationships developed, the members and the persons they designate for participation should be willing to commit for a significant portion of the alliance's duration. While personnel changes are inevitable (parties may decide to remove undesired personnel, job changes, illness, etc.), consistency is extremely important through the early stages of alliance-building. If the alliance is established solely for the performance of a particular project, member participation may vary with the duration of the particular portion of the project over which the member is responsible but will nevertheless require some level of participation throughout imple-mentation, com- missioning, and possibly even op
• Building consensus. Strong alliance management requires building consensus. Attempts to run an alliance in an autocratic fashion often end up losing the benefit brought by the smaller members. Although clearly not a democratic organization, an alliance should utilize an integrated management team (IMT) with representatives from each member. The IMT should see to it that each member has unfettered access and the ability to provide unencumbered input to all aspects of the project from design to implementation. As in any successful distributed organization, a strong leader with the ability to make well reasoned decisions is required.
• Eliminating barriers. The pro- cess of bringing a group of dissimilar companies from a variety of related industries together to build a strong alliance is an exercise in team-building. Ingrained barriers between companies created by traditional concerns for liability and profit enhancement must be overcome. Once the parties are brought to realize that their goals and incentives are appropriately aligned, enhanced confidence and trust can be built and the members can begin working as a team. Communication and close cooperation are thus fostered from the very earliest commercial meetings that discuss the general framework of the organization through the (often laborious) negotiation of legal detail and into the project design and implementation phases.
• Structured planning. The ad- age "the devil is in the details" could not be more true than in the formulation and implementation of an allianc

  e. On very complicated projects, many of the finer details of the alliance will need to be considered by different parts of each members' organization. Commercial analysis, financial arrangements, tax issues, insurance coverage, legal requirements (both internal/organizational and external/regulatory), engineering specifications, and operational concerns all must be considered and addressed. Effective use of subcommittees or special-purpose teams to handle these issues requires appropriate delegations of authority, constant communication, and a framework for interaction between the groups and the core decision-making body (steering committee). Regularly scheduled meetings of the steering committee to vote on pertinent issues, consider reports from the teams, and designate target dates for the resolution of outstanding issues are critical for effective organization.

• Alignment, measurement, and goals. A primary driver of a successful alliance is that interests must be "properly" align- ed and an appropriate risk allocation structure must be in place to effectively achieve the goals desired. Plus, even a well-run alliance that spawns prodigious innovation will not be deem- ed a success unless clear measurement techniques are defined that permit the alliance to reach attainable goals. Failure to establish and implement manageable assessment criteria will not only frustrate and disappoint the participants, it will ultimately lead to disputes over allocation of newly created value. Moreover, goals that inequitably benefit one party or that do not align the participants to pursue the same goals will cause the alliance to ultimately fail. By recognizing from the outset that the alliance relationship will enable the parties to achieve greater efficiencies and higher returns, the parties can include a formula to adjust the goals as a project progresses. For instance, in a proje
• Well-conceived implementation. The close interaction between organizations fostered by an alliance requires clear boundaries to be established from the beginning. Indeed, Robert Frost, in his poem "Mending Wall," put it so eloquently: "Good fences make good neighbors." In the same way, flexible yet explicit contracts provide the necessary foundation for the parties to build upon.
• Agreement details
• In addition to provisions addressing alignment and risk allocation already discussed, several significant issues that should be addressed in the alliance agreement include:
• Organizational structure. As with any partnership or joint venture, governance issues, including leadership, management, and dispute resolution must be addressed. Clarification of the members' expectations through documented procedures for certain common situations will reduce disagreement in the event difficulties are encountered (e.g., inadequate performance of a member) or critical decisions must be made quickly (e.g., emergency response). Because it is impossible to address every possibility, guidelines for alliance preferences are recommended, and a delegation of authority to an appointed alliance "executive committee" is indispensable. The executive committee should be empowered to approve general alliance expenditures, special work, cost overruns, reallocation of members' interests, and other important issues. Execution of the day-to-day work, however, should be controlled by an IMT composed of representatives from each member that is involved in a particular phase of the project. This delegation of
• Responsibilities. Definition of responsibilities and the expertise that each party is contributing to the effort should be delineated.

  Once agreed upon, each member should have wide latitude to implement its portion of the project as required. Overlapping members' expertise should be addressed and generally should be utilized only for consulting purposes. Only one member in each discipline should have an active role in the project implementation and be responsible for project results. Should additional expertise be required, the member responsible for a particular area should be free to consult as necessary.

• Intellectual property. Clear designation of confidentiality requirements and areas of expertise are essential. As the alliance's objectives are achieved, new technologies should belong to the members in accordance with predetermined guidelines. Generally, members with little or no commercial value for a new invention within their core competencies are entitled to less of the future benefit from any such development. Special consideration of equities must be given to these issues in a supplier/customer alliance where the customer arguably "sponsors" the development effort.
• Member regulation. Provision should be made for the addition of new members, and precautions must be included for member defaults. While admission merely requires obtaining designated approvals, default can be very disruptive. Default provisions often prescribe procedures for dealing with members that have declared bankruptcy, become insolvent, failed to make cash calls, performed inadequately, injured others through willful acts or omissions, and even perpetrated fraud. Neglecting to address these "ugly" issues can make removal of a member in a timely and cost-effective manner without significant delay and litigation very difficult.
• Administration. Simple, flexible guidelines that preclude elaborate procedures are best. Regularly scheduled meetings, clearly specified voting procedures, and delegations of authority remove sources of conflict and expedite performance. Similarly, changes of scope requirements, payment schedules, audit rights, assignments of interest, and subcontracting guidelines should be clearly spelled out.

Conclusions

As the easily accessible oil and gas reservoirs begin to reach the end of their productive lives, exploration for new reserves must proceed into deeper water, harsher environments, tighter formations, more remote locations, and increasingly challenging geology. Costly new technologies are required to gain access to and produce hard-to-reach reservoirs, while ever greater environmental and political risks combine to increase the need for greater financial resources, broader skill sets, and better technological solutions. Larger and more sophisticated alliances are evolving to meet these needs, and the successes generated from these experiences are being carried over to more routine production enhancement and abandonment efforts. Significantly, tighter integration between oil companies and service companies in the oil and gas industry is leading to hybrid organizations that can rapidly adjust to today's rapidly advancing technologies and ever-changing market. Instead of focusing on the narrow problems presented by each individual well, today's producers and service companies are beginning to appreciate the benefits available by leveraging each other's resources to find integrated solutions to field-wide issues. Thus, as we begin a new millennium, it is becoming apparent that the conventional model of the ruggedly independent spirit that built this industry is being augmented through interdependent, powerful, and extremely capable alliances.

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