How BP Could Have Avoided Disaster

What is the most damning criticism to be leveled at the CEO of BP and his senior team for what has happened in the Gulf of Mexico?

It’s that they committed the company to a global strategy but failed to implement global operating policies necessary to execute it effectively. It’s become abundantly clear that BP had no coherent global policy for how to conduct deep-water drilling. And when a gap opens between global strategy and local operating policies, the likely result is avoidable disaster. Variations in operating policies mean that significant failures are likely occur where the local policies (and supporting processes) are the weakest. And BP is by no means the only global corporation that has fallen into the global strategy-local policy trap; it’s just the most visible right now.

That deep-water drilling was a global strategic pillar for BP is evident in the company’s March 2010 strategy statement (PDF). On slides 29 through 32, BP’s executive team trumpets the company’s commitment to being #1 in deep-water drilling for oil and gas; it says that BP will be the best in the world at finding and exploiting reserves in the deepest recesses of the earth and under thousands of feet of water. It says that competency in deep-water drilling will be a source of sustainable competitive advantage. It would have been a good strategy, if it had been supported by outstanding global execution. In failing to do this, the senior team of BP laid the groundwork for the current disaster.

When should we hold senior executives responsible for events that happen at local operating levels in locations remote from corporate headquarters? As anyone who has spent time in large corporations knows, there are severe limits on the impact senior executives can have on what happens at the front lines. Top leaders can set direction, promote the right talent, and align incentives, but ultimately they are reliant on their teams (and their team’s teams) for implementation. Senior leaders can’t do much more than focus on a few strategic priorities and drive alignment with them down through the organization. How can we hold them culpable when things blow up somewhere in the company’s far-flung operations?

Senior executives can and should be held accountable for the execution of the few priorities that they themselves have defined to be strategic. If we can’t hold them accountable for that, then what can we hold them accountable for? In the case of BP, that means that the senior executive team should be held accountable for the execution of the global strategy for being #1 in deep-water drilling. This is where Tony Hayward and his team failed miserably. They were duty-bound to define and drive the implementation of supporting operating policies for how this critical activity would be undertaken throughout the world. Recent events in the Gulf have made it unmistakably clear this did not happen. It’s absolutely not sufficient for these operating policies to be whatever the local regulatory environments permit. But too often this is what happens when companies establish global strategies, but don’t develop and drive supporting global operating policies.

Here’s the basic issue: every global company operates in the context of a patchwork of national, state, and local regulations. While substantial progress has been made in harmonizing regulation, for example in food safety and the development of new pharmaceuticals, there is still a great deal of variation in requirements from jurisdiction to jurisdiction. In the case of deep-water drilling, for example, the requirements established by Norway for drilling in the North Sea are stricter than those imposed by the U.S. for drilling in the Gulf of Mexico.

Confronted by such regulatory variation, what is a global corporation to do? Local conformity is one easy response; simply have local operations conform to local requirements, the logic goes, and all will be well, at least from a legal point of view. When in Norway, do as the Norwegians do. When in the U.S., conform to U.S. requirements.
Some companies even engage in “regulatory bottom-feeding” by seeking to situate their operations in the laxest-available regulatory jurisdictions. Others lobby actively to prevent the tightening of regulations in relatively “loose” jurisdictions, usually in order to avoid increasing the cost of operations, as oil companies apparently did in the U.S.

As the case of BP and the Gulf so starkly illuminates, defining a global strategy and then allowing operation requirements to vary from jurisdiction to jurisdiction is a quick road to disaster. It should come as no surprise that the current oil spill happened not in Norway, but in a jurisdiction where regulatory oversight of deep-sea drilling was relatively weak.

So what should the senior executive team of BP have done? Having defined deep-water drilling as a key pillar of the company’s global strategy, the company should have defined and enforced compliance with a global operating polices for how this drilling would be conducted. The executives should have directed the appropriate risk analysis be undertaken and established a minimum set of global requirements to be applied even in lax regulatory jurisdictions. This is the essence of what “self-regulation” should have meant for BP and for every global corporation. Because there is no such thing as a “local” failure when a strategy is global.

This does not mean that companies should conform everywhere to the regulatory standards established by the strictest jurisdictions. It means that senior executive teams should establish a self-regulation “floor,” a consistent global minimum policy standard for their companies, recognizing that the local operations will still need to conform when local requirements are stricter still.

What would a global strategy leading to global policy equation have meant for BP? It would not necessarily have meant that the company (and, critically, its contractors) should have applied Norwegian drilling standards in the Gulf of Mexico. But neither would it have meant that the Deepwater Horizon would operate just in compliance with the relatively lax requirements imposed by the United States.

What’s the upshot of all this? It’s that a fundamental standard of care for senior executives is that they put in place and enforce the execution of global operating policies to support their global strategies. If they fail to do so, and their companies fall prey to disastrous local operating failures in lax jurisdictions, then they should be treated as having been negligent in fulfilling their duties and pay the price for doing so.

Read the original post here, by Michael Watkins @ Harvard Business Publishing