It is easy to get angry at BP and its contractors for the Deepwater Horizon debacle. And we are. What is the good that comes from looking at the situation more closely? We can learn a great lesson about a common ethics question facing leaders everywhere: Financial consequences of operations failures inevitably produce bad decisions unless ethics policies are woven into the organizational fabric at every level.
In a brilliant article by Ian Urbina, the NY Times reported the many shortcuts taken by BP and its contractors to finish drilling the Deepwater Horizon well to begin collecting oil and gas riches from this generous reservoir. Urbina points out that BP was 43 days late finishing the well. BP's contractor, TransOcean, who drilled the well, charged $500,000 per day for its services. At the time of the explosion, BP already owed over $21 million in extra fees! This is enough money to make most decision makers freeze up and BP was no exception. In an effort to find the lesson, let’s look more closely at critical policy failures that contributed to BP’s disaster:
- Did the BP executive in charge have the experience and training to manage the tension created from financial pressure vs. the imminent dangers to lives and the environment? How many $21 million decisions had they made previously? Or $500,000/day decisions?
- Did the BP engineers on the well site have instructions and communication lines to make good decisions on the spot?
- Did BP's Standards of Business Conduct training address safety and environmental management and disaster avoidance?
- Did BP clearly tell executives, managers and employees how to manage financial dilemmas like Deepwater Horizon, trading off short-term financial losses to avoid long-term financial disasters?
Answers to these questions will reveal insights about how BP mismanaged the well operations, and will inform the rest of us how to manage our own operations with the right ethics and financial objectives. I suspect that as the criminal investigations continue, we will learn answers to these and many related questions.
The penalty fees of $500,000 per day is insignificant compared to the costs BP now faces: a $75 billion decline in market value, loss of life from well operators who died in the explosion, the worst environmental disaster in US history that will cost millions if not billions to clean up, and a black mark on BP’s reputation so large it may never recover. How could BP’s leadership not understand that short-term penalties could never be more severe than these potential costs? Despite the overwhelming financial incentives to not take shortcuts, why were they taken anyway?
I believe three factors swayed BP decision makers in the wrong direction, providing clear lessons for leaders everywhere:
1. Rarity: The last time a deepwater well blowout occurred was over 30 years ago. Faced with such an unlikely event, BP decision makers discounted the risks. Rarity tricks leaders to make wrong conclusions that nothing bad will happen because the odds are in their favor. This same belief that rarity “means never” led to the US real estate bubble, where investors came to believe that housing prices would always go up.
2. Inexperience: BP decision makers lacked experience and/or training to grasp the ramifications of their decisions or the magnitude of the potential disaster. Lines of communication were ineffective. Authority was dispersed between BP, its contractors and the US government, so no one was running the ship. Moreover, BP should have asked if anyone in the chain of command had previously made a $1B environmental disaster decision. Or had they previously made a $500,000 per day decision?
3. Insufficient Assessment Tools: As most innovation executives thoroughly understand, a project that is significantly and repeatedly behind schedule frequently hides fundamental flaws that require major rework by the leadership team. For example, a product that can't be manufactured in volume might have a design flaw that must be reworked by engineering. BP decision makers ignored the warning signs, failing to halt drilling and re-assess the entire project design until it was too late.
The Five Lessons for executives and leaders everywhere become clear in light of this disaster:
1. Balance operational performance incentives and penalties so decisions meet both long-term and short-term objectives.
2. Clarify lines of communication and authority so that all team members know the name of the person accountable for the project and know how to reach them.
3. Manage innovative projects closely and heed warning signs that they might be flawed in fundamental ways.
4. Challenge teams to strive for intellectual honesty in risk assessment. Don't accept easy answers like the 'rarity' argument.
5. Funnel decisions to managers and executives who possess sufficient experience and training to make the right decisions, in spite of fierce and unimaginable pressures. Ask your leaders about their experience to predict how they would manage their teams in the face of fierce adversity.
Let's hope a disaster like the one in the Gulf never occurs again. By understanding BP’s missteps, leaders everywhere can implement changes in their organizations that drive leaders to take control back from compelling financial pressures -- $500,000 a day, as serious as that is, should never force an unethical decision.
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