The Passing Of `The Shell Man'

For 50 years, Royal Dutch/Shell Group has been a model multinational: a loose federation of operating companies with a well-trained cadre of mobile managers and a light touch from central offices. Those methods have been much envied and often copied.

But now, the company's 105,000 employees have gotten a strong signal that their revered way of life has to change. That's the message from Chairman Cornelius A.J. Herkstruter, who announced a radical restructuring on Mar. 29. Shell is instituting a tighter, more centralized operation, where newly appointed teams of senior executives will oversee global divisions such as exploration and production and chemicals.

"DIFFERENT WORLD." The abrupt switch shows that the structure of big companies isn't just an academic exercise but a vital line of command that can determine victory or defeat in the global economy. Shell's old system, says Herkstruter, was "designed for a different era, for a different world." This approach, dubbed the "matrix system," divvied up power and responsibilities according to an organizational chart that even management consultants found confusing. A single finance executive, for example, would report to a country or regional head, a business-sector head such as a refinery manager, and a functional head such as the chief financial officer.

The idea was to give local managers authority while encouraging a process of consensus that avoided rash action. But over the decades, the matrix has evolved into a bureaucracy resembling a large country's civil service. All these layers have slowed down decision-making, and that is costing Shell money. "They always believed they were getting the best of both worlds in a matrix structure. To admit they weren't is a very dramatic step," says Andrew Campbell, director of London's Ashridge Strategic Management Center.

What's surprising about Shell is that at first glance such a wrenching change looks unnecessary. The company just announced record 1994 earnings of $6.4 billion, a 24% increase over 1993, on sales of $134 billion. But Shell executives are worried about the future. Exploration and production earnings dropped 16%, and those from downstream refining and marketing fell 12% last year. Shell was only able to boost earnings because the chemical unit picked up the slack. Shell's performance "is not as good as it needs to be," says Herkstruter.

The pressure will just increase. Because of oversupply, most oil industry leaders accept that prices will not rise significantly for years. Yet costs for drilling in remote places and deep waters have skyrocketed, and downstream margins are under attack by new players, such as supermarkets selling unbranded gasoline. Meanwhile, other oil majors have been axing costs faster. Shell's 10.8% return on capital, says analyst Fergus Macleod of NatWest Securities in Edinburgh, is average for the oil majors. But by 1998, it will be among the lowest in the group unless the company gets costs down. An executive with a rival oil company says he doesn't like to participate in joint ventures with Shell because Shell's huge overhead drives up the final bill, which he then has to share.

HUGE CUTS? In Shell's operating companies, managers have already been furiously cutting, with Shell UK Ltd. trimming $200 million and Shell Germany $100 million in annual costs. It wasn't enough. One company insider says Herkstruter was being told constantly "that the system itself needed to change. So much bureaucracy had built up, we couldn't change it unless we got rid of it." After last month's speech, delivered on the same day at both headquarters in London and The Hague, some employees even applauded Herkstruter.

They may not be applauding once all the implications of this bold step become clear. A key issue is what will happen to the corporate culture when Shell's executives, bred for lifetime loyalty, realize they are expendable. Shell has long relied on teams of executives--mostly men--who are carefully selected from universities and turned into multilingual, globe-trotting managers steeped in Shell's ways.

Yet analysts think Shell will probably need to lose up to 30,000 jobs to catch up with competitors. And many of those let go will be managers. "This is probably the beginning of the end for the Shell man," says Alan Marshall, a Swiss Bank Corp. analyst. Shell will find out how painful it is for even a model corporation to transform itself.

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