The Challenge of Change in Engineering

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The Challenge of Change in Engineering

Professor Phil Hopkins Penspen Andrew Palmer1 Studio 4 Amethyst Road Newcastle Business Park Newcastle upon Tyne NE4 7YL UK (email [email protected])

1 Also Vis iting Professor, University of Newcastle, UK.

Journal of Pipeline Integrity Vol 1, No 2, 2002

P Hopkins Page 1 Final

ABSTRACT

This paper considers some of the challenges facing engineers and the pipeline industry as we experience business and social change, and we look to change some of our pipeline engineering practices.

These challenges range from maintaining our safety standards to furthering technologies to allow cost reductions. However, as an industry we will fail all our technical challenges if we do not retain our best staff, and manage them effectively.

Therefore, this paper considers some of the changes needed in the people and management side of our industry, before challenging current basic pipeline construction practices.

1. INTRODUCTION

The pipeline industry is like any other modern industry; recent years have seen massive commercial and managerial changes such as volatile oil prices, large oil and gas majors merging, and the collapse of one of our biggest companies (Enron) (1). This change will continue and we must not be surprised or alarmed; as Mario Andretti said If things are under control, then youre just not going fast enough.

This change will continue to be driven by the volatile oil price and global recession, the need to improve investment returns, industry consolidation, the pace of technological change, workforce demographics and an uncertain world order (2).

We are also faced with increased long-term demand for energy; world energy use will continue growing rapidly until at least the year 2020, particularly in developing nations. International energy outlooks estimate that overall energy consumption will rise 60% up to 2020. Faster-than-average growth is expected for developing nations (121%), world natural gas use (104%), and world net electricity consumption (76%).

Fossil fuel will continue to dominate up to 2050 (3) with natural gas the fastest-growing component of primary world energy consumption (more than doubling during 1997-2020), but oil is expected to remain the major energy source.

Meeting this demand will not be easy, as our reserves and future energy sources can be in distant and difficult environments, and there is a need for technological advances to allow economic development and transportation. Also, the current world recession means demand will be erratic and fluctuate; the International Energy Agency is predicting a low (0.8%) growth in oil and gas demand in 2002 and the World Bank concludes that mid-2002 may see a recovery in the global economy, but the risks posed to this recovery are the gravest in a decade.

Consequently, we are now an industry faced with wholesale change, uncertainty and increasing (albeit fluctuating) demands on our engineering. How can we survive this environment?

This paper considers change in all aspects of industry. It considers the challenges we are facing, starting with how we should change our engineers and management, and then it considers how to fund the innovations that will help us change our engineering practices. This is important, the key to pipeline integrity is well-trained and well-managed staff. Therefore, this paper emphasizes the importance of understanding changes in both our engineering staff and management.

Finally the paper considers some of the possible changes we could introduce into our business to reduce construction costs while maintaining safety. However, the paper starts with a reminder that we all need to change and that our primary focus in pipelines is our staff and safety.



2. ARE YOU READY FOR CHANGE?

The oil and gas business will change fundamentally in the coming years; we are already seeing the diminishing power of OPEC, as Russia (third largest oil producer after Saudi Arabia and USA, and non-OPEC) steps up its production, and the huge new reserves being found away from OPEC countries (e.g. Alberta, Canada) are likely to change both oil price and commercial power.

Change is a continuing fact of life; for example, the Victorians and those who lived through the Second World War experienced great change. Today, we are again seeing the pace of technological, political and economic change increasing. This leads to uncertainty; for example, companies that attempt to set out 10 year strategies are now viewed with humour, as we know (certainly since September 11th) that our world can change in an instance.

We experience change in all aspects of our lives, but often do not notice its true effects. Consider your home and family and what you might think is good technology:

- Central Heating. 40 years ago most homes in the Western World were small and not centrally heated, and therefore the family had to live in one room the room with the coal fire. Now, central heating allows the family unit to be dispersed all over the house; we no longer have to sit together.

- Microwave Cookers. Traditionally, a family has sat down and had meals as a group, to ensure hot, safe food. Now, microwave cookers and convenience food allow members of a family to eat whenever they want; we no longer have to sit together to eat.

- Electronic Games. We no longer have to sit together to play.

- Cell Phones. We now no longer have to be together at all!

Hence, we should not be surprised when our environment changes in business.

3. CHALLENGES FACING OUR ENGINEERS

Currently, there is a major shortage of good quality engineers in our business. This has been the case for many years. To attract young talent we must offer an attractive career, including financial reward. Reference 1 covered the changing priorities of todays workers, and how to make careers more attractive, so it is not covered here. However, there are real challenges facing our engineers ranging from continuous updates to their skills to ethical issues. This section covers several of these issues.

But first of all, let us start off this section by saying that all engineers are stupid. Why? We take the most difficult subject options at high school (science subjects), take one of the most difficult and intense degrees at university (engineering), work on low pay for many years to gain professional accreditation, and by the time we are 40 years of age, we hope to become a project manager on a salary that would make a 30 year old lawyer laugh. We accept poor working conditions, save money on projects that goes to support lavish corporate headquarters, attempt to train ourselves in new technology in our own time, support professional institutions that give us little in return, carry old style managers who could not manage to find a drink in a brewery, and work on projects that have high accountability and responsibilities, but little financial reward. Engineers are stupid.

Therefore, we have to change, and hopefully the sections that follow will help.



3.1 A Lifetime of Learning and Training

3.1.1 Training

Engineers are strange professionals; we are expected to be at the forefront of technology and innovation, yet most of us do not have systematic and structured training. Engineers are very computer literate, but how many have ever undergone training on the use of computers? Not needed I hear you say we learn on the job. OK, but this culture unfortunately covers many other technical areas.

Consider a study (4) conducted at the Swiss Federal Institute of Technology in Zurich. They analyzed 800 cases of structural failure in which 504 people were killed, 592 people injured, and millions of dollars of damage incurred. When engineers were at fault, the researchers classified the causes of failure as follows:

CAUSE %

Insufficient knowledge 36%

Underestimation of influence 16%

Ignorance, carelessness, negligence 14%

Forgetfulness, error 13%

Relying upon others without sufficient control 9%

Objectively unknown situation 7%

Imprecise definition of responsibilities 1%

Choice of bad quality 1%

Other 3%

Table 1. Causes of Failures, when Engineers were at Fault

It is not only engineers making these mistakes; a recent report (5) on a fatal (4 fatalities) rail crash in the UK in October 2000 concluded a major cause of the accident was an incomplete appreciation of the risks presented by cracks in the rails by the company that owned the rail infrastructure.

The above main causes are difficult to forgive training may have prevented them. Therefore, we must ensure our engineers are well trained, and have a continuous professional development, and start to turn around the recognized lack of training and development in recent years, and our dwindling numbers (see below) (2,6).

A new survey has revealed skill shortages in many areas of engineering, with a great need to educate engineers, and teach them greater flexibility multi-skilling is almost axiomatic to meet the changing demands of the industry (7). Reference 7 also highlighted the absence of structured training provision in companies, and training is still viewed as a cost rather than an investment, with companies expecting others to train their workforce.

Training also makes business sense; according to a 1998 USA survey (8) by The Gallup Organization, employer-sponsored training and education is a major attraction for young staff looking for jobs, and workers say they are more likely to remain with companies that invest in such programmes. Also, in 1999 a survey by the American Management Association showed that



investing in employees skills through training is a more effective tool for retaining staff than purely financial incentives.

3.1.2 Intellectual Capital (9,10)

Many of our newer companies have values in excess of their earnings or values shown on their balance sheet. In some cases the company value is less than 10% the stock market value. Where does the other 90% come from?

We now have a switch from physical capital to intellectual capital 2. This is because knowledge is now a major source of competitive advantage in all industries. World-class companies must operate in a continuous improvement environment - in such an environment, knowledge and brainpower are the companys greatest assets:

i. INTELLECTUAL CAPITAL - TANGIBLES - includes legally recognised intellectual property such as copyrights, patents, brand names, trademarks, etc.. They can be accounted for using historical data, but most companies exclude brand names from a balance sheet.

ii. INTELLECTUAL CAPITAL - INTANGIBLES - includes employee know-how, capability and the knowledge carried in heads (see below). For example, to make an automobile takes 40% ideas, skills and knowledge and 60% energy and raw material. To make a computer chip takes 98% ideas, skill and knowledge and 2% energy and raw material. Human capital has become crucial to the success of business (11).

iii. ORGANISATIONAL CAPITAL - includes intellectual capital but also management and organisational culture.

iv. VALUE? The market value of a person is mainly determined by a combination of the knowledge the person creates and owns. A companys worth is an accumulation of its employees knowledge. The market value of a company is determined - in large part - by the intellectual capital, as perceived by the investing public. Exxons intellectual capital has been valued at 72% of its market value. Dupont was valued at 84%. Coca Cola was valued at 96%.

Unfortunately, it is a fact that the intellectual capital of the oil and gas business continues to leak into other industries at an alarming rate (3), and we have an ageing, old workforce, giving age demographics described as disturbing (12).

Hence we have the dual problem of a workforce that is decreasing, and becoming very old! We have an average age in the offshore oil and gas industry of 49 years, with a tight distribution around this average due to minimal hiring during the downsizing era (2), with a young worker being 43 and an old worker being 55. With early retirement still popular, we could lose half of our experienced workforce by 2007.

The effect of these age demographics is tighter intellectual capital in companies. Hence, we need to be highly integrated and collaborative organisations need to enhance their intellectual assets and competences regardless of its source or ownership (2).

We need to preserve and grow our intellectual capital, by refining business processes, exploiting technology, and cultivating an environment that promotes creation, collection and sharing of knowledge. This is partly achieved by having well trained staff, under continuous and accelerated

2 Intellectual capital is generally considered only the intangible assets of a firm, such as patents, processes, staff knowledge and goodwill, but we will consider items such as patents as having tangible value in this paper.



development programmes (2), but would also include research programmes and involvement in industry initiatives, such as code writing.

3.1.3 Downsizing3 and Corporate Knowledge

Management consultants may move into our company, and start suggesting improvements or rightsizing the work force. Reference 1 recognises the important role of management consultants and suggests the optimum way to use management consultants, but all companies should carefully check that their suggestions are not short term fixes. Consider a hypothetical situation; a management consultant coming into my home, after I have told him/her that I have problems paying all the bills.

The consultant will review my home, and first of all would suggest that my wife is a major overhead everything she does (cleaning, cooking, sex, etc.) can be outsourced. She must go. The children they need rationalizing and re-engineered. Yes, they are important for a family unit, but do you need all of them, and do you really need them for 24 hours a day? So, they all go, but I can have them for 12 hours every weekend. The house is a deficient business process why own a property when you can rent a smaller apartment, thus releasing capital to pay for further consultancy? What about Grandma and her flat over the garage? It is so difficult to let go of people youve known for a long time, but Im told that this is business, and I could probably find a younger, cheaper grandma, with better short term memory, on a lease basis bye bye grandma. Then the pet dog a waste of money, with no resale value, and its constant attention-seeking can distract me from major issues. I hesitate, but the consultant tells me to make and execute decisions quick, and be seen to be decisive by subordinates. So, I shoot the dog in the front of the kids. Grandmas cat is not even discussed. Bang in front of Grandma. In a constructive moment, and to satisfy my longings for a pet, the consultant suggests a cost-neutral solution; I should diversify and have a pet chicken it will provide eggs on a regular basis, and if times become hard, I can eat it.

Therefore, the consultants solution to my family budget problems is that I live alone, in an apartment, with a pet chicken. Beware management consultants.

In many situations, downsizing is vital for an organizations survival; if we do not make a profit we will not have a future. Similarly, redundancies are now a fact of everyday life, so we now have to live with both downsizing and redundancy.

Unfortunately, both can be badly handled:

- downsizing is now sometimes called dumbsizing; research has shown that only 12% of downsized companies subsequently increase market share and most have below average share performance (13).

- when times are good our senior executives tell us that their staff are their greatest asset, but when times are bad the same staff become their greatest liability.

It is worth noting that companies are making the same mistakes today, as they made a few years ago during their last downsizing; they are forcing staff, with critical knowledge and corporate memory, to leave, and they learn too late that such knowledge is irreplaceable (14-16).

The costs can be huge; the government enquiry following a railway crash in the UK, where 31 people were killed, heard evidence that specialists had lost their jobs in previous years leaving middle managers with little understanding of the jobs their staff did each day, and new recruits to jobs where safety was a key element, had little experience, and inadequate training (14). The same

3 See also Section on Loyalty, later.



industry has a major skills shortage exacerbated by insufficient training levels, and additionally engineers are turning their back on an industry that now has a poor image (16).

It is worth noting that staff who possess the most valuable knowledge may not be the people you think are your star performers (15). The quiet mentors, and staff who do not brag about knowledge but possess huge amounts, may be your stars. If you have to lose these staff ensure their knowledge is transferred before leaving, or hire them back as consultants.

It is an interesting thought, but in this century our limitations will not be computers and communication capabilities (they will rapidly advance), but rather learned pr inciples, experience, values and information. These will be the future performance differentiators in the oil and gas business (2).

If we need to downsize, or reorganise, we should not leave it solely to our human resource (HR) department; most people in HR have little knowledge of business, or managing corporate change (17) and they tend to be generalists, lacking technical abilities.

The old quote (Paul Goodman) "Few great men would have got past personnel" is dated; the impact of a good HR department and HR staff on the bottom line is not disputed, but they are usually poorly qualified (they have diplomas of sorts, but no truly senior qualifications), with little exposure to business (17); consequently, they cannot be compared with the likes of the Chief Financial Officer or Chief Engineer in a company who are highly qualified and experienced in their areas.

3.2 Accountability

Another new challenge facing our engineers is the increasing, and disturbing, movement of corporate responsibility onto engineering staff. Liability claims for engineering errors may well now be systematically aimed at engineers rather than corporate entities.

The Challenge of Change in Engineering

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