The Silo Effect

One of the lessons we’ve learnt from delegates over the years is the challenge of organisational complexity in the oil industry – whether it’s at a national oil co, a ministry, a service company or one of the IOCs, large or small. There are dozens of different models, as we discussed at a recent course – centralised, decentralised, regional vs global, business unit vs function etc. But once an organisation is over a certain size they all face a similar challenge – the silo effect which we discuss further in this newsletter.

Gillian Tett, an FT journalist, has written a great book (The Silo Effect, strongly recommended) on this subject, with case studies on failures and disasters (mainly banking, but with some reference to BP in the Gulf of Mexico), missed opportunities (why Sony let Apple create the iPod) as well as examples of silo-busting success.

The silo effect tends to kick in once a team or department or business unit gets above a certain size – possibly as low as 150 people, who share a common, and often unique, agenda, specialist expertise and probably have the same view (or “mental map”) of the world or the business. The result? An unwillingness to accept change from outside, a tendency to assume that this “mental map” is not only right, but the only one, and a reluctance to share information or hear ideas that challenge this world view.

This affects both strategic planning and project management. Oil industry projects involve dozens of different specialist teams and functions, probably in several different organisations in multiple locations, each with their own incentives. Efficiency often dictates that they focus on their particular responsibility, to the exclusion of others. The risk of silo mentality is high, leading to poor communication, process breakdown and even the failure of the project. This is why we stress the importance of cross-functional knowledge and experience in our courses.

On strategic planning, let’s take an example from the upstream world. All companies must have a strategy: how to deliver on the mission of the organisation. Months of discussion are usually expended in getting to the ‘right’ strategy, involving all parts of the organisation. But was the strategy process really open? Do all parts of the organisation buy into their presumed contribution to the mission, or was it dominated by one business unit – or silo?

Kerr McGee had successfully pioneered deepwater drilling in the Gulf of Mexico. This success (and the business unit that led it) dominated their strategic thinking and in the early 2000’s they went for international expansion based on their functional excellence in deepwater drilling and operations. The assumption was that what worked in the Gulf of Mexico would work everywhere else. But despite evidence to the contrary – including multiple dry holes – they went on drilling, to the tune of nearly $800m. Senior management were reluctant to accept that their “mental map” of how deepwater drilling worked wasn’t appropriate for the many different basins they tackled. Brought low by the subsequent losses, and in a low oil price world, Kerr McGee were acquired by Anadarko in 2005-a company with a proven success in international exploration. (This is a highly simplistic view of a complex business story, and there were undoubtedly other issues at play – but the silo effect was in important part of it).

How big a problem is the silo effect in the oil sector? Do functions not talk to each other? Does one function dominate the mental map of the company – how it sees the world? We’d love to hear your examples and comments on this topic, and we will be returning to it in our November newsletter when we look at organisational structures and the function vs business unit debate.

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