COVER STORY PODCAST
With oil dancing close to $66 a barrel on the open market, companies are now exploring the remote spots that hold most of the world's untapped supply. After several years of record profits, the energy giants have plenty of cash to finance the dig. The main thing holding them back is a resource scarcer than crude: engineering talent. Because of layoffs in down times and opportunities in sexier fields of technology, fewer petroleum engineers are graduating from U.S. schools. A mere 1,500 are enrolled this year, down 85% since 1982 -- back when Dallas was the hit TV show.
This crisis is sparking a war for talent in the industry. Oil-field services giant Schlumberger Ltd. (SLB ), for example, recently lost a deepwater drilling expert to a client who tripled his salary. And that was before Hurricane Katrina slammed into the Gulf Coast. "The people shortage was extremely acute before Katrina and is now far worse," says Matthew R. Simmons, chairman of energy investment bank Simmons & Co., based in Houston, Tex. "The major oil companies are now poaching trained people from the service industry and no service company has better trained people than Schlumberger."
So is Stephanie Cox, Schlumberger's director of personnel for North and South America, sweating? Hardly. Through lean years and fat, her company has consistently focused on cultivating great people, and its bench is deep. Seated in the company's small outpost in Victoria, Tex., on a baking day in July -- amid rice, corn, and oil fields -- she demonstrates how easy it is for human resources executives at the company to pinpoint hot talent using an online system called PeopleMatch.
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Cox sets a formidable, if hypothetical, challenge for herself: finding a country manager for Brazil. This is an employee who must be mobile, can speak Portuguese, and be "high potential" -- meaning the candidate is judged capable of moving up two grade-level positions. (Currently, about 10% of Schlumberger staffers meet this standard.) Cox, a 36-year-old mother of two who radiates an aura of calm efficiency, enters Schlumberger's human resources intranet site and starts filling in a series of boxes, selecting those personal characteristics much as somebody might choose a hotel on an online travel site like Travelocity. Although the search may seem like a long shot, 31 names pop up within a minute.
What COX sees are not mere résumés. Through Schlumberger's intranet, she has logged on to a database that marries human resources information concerning people's past job performance and salary with each worker's own curriculum vitae. Those résumés -- which the company calls Career Networking Profiles -- are far more fun and informative than typical corporate bios. All employees write their own, generally covering their career goals, family, past assignments, professional affiliations, publications, patents granted, and hobbies. Instead of the mug shots that populate most in-house directories, people often send personal photos. One man holds up a fish caught on vacation.
This is no off-the-shelf software. Schlumberger built the system itself. And what Cox did can be done at hundreds of offices in 80 countries, from the arctic tundra of Alaska to the arid desert of Abu Dhabi. "The capacity to develop talent from anywhere in the world is one of our key strengths," says Chief Executive Officer Andrew Gould, himself a 30-year veteran of the company.
Plenty of CEOs preach the importance of talent, but Gould leads a congregation of true believers. Schlumberger is a rare company that has turned its human resources department into a strategic asset rather than an employee-irritating nuisance. Other standouts include midsize financial services firm Jefferson Wells International, IBM (IBM ), Johnson & Johnson (JNJ ), and Dell (DELL ).
Calling All Supernovas
These companies are all in different industries. They are different ages, sizes, and have their own growth strategies. But at bottom, all recognize that the secret of every high-performing company is great people -- and that there aren't enough stars to go around. Consider the 20 companies that made Hewitt Associates' 2005 list of great places for leaders. All but two have beaten the Standard & Poor's 500-stock index companies' 156% total return to shareholders over the past decade. Some, like Capital One Financial (887%) and Dell (2,859%) have surpassed it by a mile. "Talent should be a weapon and should be used as a weapon," says Marc Effron, Hewitt's longtime leadership expert, now vice-president for talent management at Avon Products. "But it's amazing how little attention companies put into this."
No kidding. Despite years of rhetoric about talent -- and stacks of annual reports insisting that people are a company's biggest asset -- most companies still don't get it. Instead of making a long-term investment in their employees, corporate chieftains during the bubble years too often went for the easier short-term payoffs to be found in accounting games. And instead of devoting their own time to talent management, CEOs have often punted to outsiders who come with marketing software systems, executive coaching, and an endless array of overhyped turnkey solutions. Who hasn't gone through some form of this torture? The 360-degree review that is never followed up, or 150 question-long employee satisfaction surveys, or emotional intelligence evaluations that lead to exactly nothing.
Add it all up, and companies will probably spend $50 billion on talent development this year, according to Jay Conger, a professor at Claremont McKenna College and London Business School. Nevertheless, says Avon Products' Effron, "you tend to see people glomming on to the latest fad or thing they heard about in a conference. But the more you rely on consultants, the more likely you are to fail."
Nowhere is talent mismanagement more starkly in evidence than in the corner office. Hewitt found that 85% of its good companies promoted their current chief executive from within company ranks, but only 68% of the rest did. The worst-off have to go outside over and over. Dial, for example, has looked outside for each of its past three CEOs, all while competing against the renowned talent experts at Colgate-Palmolive (CL ) and Procter & Gamble. (PG ) Kasper Rorsted, vice-president of HR for Henkel Corporation, which bought Dial in 2004 and gets 95% of its leaders internally, says, "I would be very disappointed if the next CEO [of Dial] came from outside the company." Meanwhile, Coca-Cola Co. has screwed up in a completely different way -- by picking the wrong insiders. In the past seven years, the company has had three different CEOs, and each of those Coke veterans has struggled and failed to renew the company's marketing zest. In the past decade, Coke has returned only 58% to shareholders, while rival PepsiCo Inc. (PEP ), a model of management consistency, has delivered close to four times that.
So failure is costly. And it is only going to become more so -- because talent is growing far scarcer. According to consultant RHR International Co., the country's 500 biggest companies anticipate losing half their senior management in the next five to six years. There are too few bodies to replace them. As the 77 million U.S. baby boomers begin to retire, Generation X, now 24 to 40 years old, makes a paltry successor, with 46 million people. That demographic gulch has been dug deeper by the efficiency purges of the early 1990s, which wiped out middle management and taught laid-off workers that there was little reward for loyalty. The result? "There are very few companies that feel they have an excess of talent," says Paul Rogers, a partner at consulting firm Bain & Co.
At the same time, business has gotten tougher, and companies are counting on their people to be flexible enough to move at today's accelerated pace, yet creative enough to excite consumers around the world -- a tall order for a group that is already doing more than ever. Increasingly, profits come from overseas, with the global economy growing at twice the pace of the U.S. And growth in developed markets is often in people-intensive industries such as technology, information, and communications. Last year this segment, although making up only 4% of the U.S. economy, accounted for 13% of its growth, according to the Bureau of Economic Analysis. In today's world, "the judgment of the employee has value," says Marcus Buckingham, a longtime Gallup consultant on HR.
So what is a company to do? Is there a magic formula? The truth is that there is no template that works across all companies in all industries. But the standouts do have some traits in common. They all customize their own solutions with modest help from the outside. They put good people in human resources -- in fact, it can be a fast route to the top at companies that care about talent. They focus on their best performers. And their commitment comes straight from the corner office.
For a close look at how all these themes weave together, there's hardly a better model than Schlumberger. The company, which had net sales in 2004 of $11.5 billion and net income of $1.2 billion, gets a premium for good management. T. Rowe Price analyst Tim Parker says good people and technology have traditionally garnered the company a value 20% to 25% above peers such as Baker Hughes. (T. Rowe Price is a major shareholder of both companies.) Those skills have helped the company overcome missteps, including large investments in technology outside the oil patch, to return 241% to shareholders over the past decade, well above the S&P 500's 156% climb and that of most rivals.
Gould has spent almost all of his tenure as CEO focused on building up the company's already strong human resources department, a dedication to talent that extends all the way to field managers. When a high-performance person is lost, it warrants the same full-blown investigation as a technical mistake causing hours of expensive down time on an oil rig. The probe includes an exit interview, the results of which are put online, retrievable by managers throughout the corporate hierarchy. "We essentially treat attrition, especially if someone has a high potential, as a catastrophic incident," says S. Eric Bartz, 33, who manages the Victoria facility's crew of a dozen trucks and more than 70 people. Schlumberger's people "are a big investment," he says. "Huge."
To make sure that it gets first dibs on the best available talent and to help schools prepare students to meet high technical and quality standards, Schlumberger has assigned high-level executives as "ambassadors" to 44 important engineering programs. Among them: Massachusetts Institute of Technology, Kazakhstan's Kazakh National Technical University, Peking University, and Universidad Nacional Autónoma de México (UNAM). These ambassadors are generally high-ranking executives within the corporation, and they control substantial budgets, which they can use to help fund university research.
H. Sola Oyinlola, a Nigerian who in a 21-year career working for Schlumberger has held jobs on every continent except South America, is ambassador to Nigeria's University of Ibadan. The university has struggled during the decades of political upheaval in West Africa. Much of Oyinlola's work revolves around helping the university meet the company's educational requirements. Early in the relationship, he donated, on behalf of the company, several million dollars' worth of equipment, which the university used to create a state-of-the-art petroleum learning center. Today, Nigeria is a net exporter of engineering talent for Schlumberger, with more Nigerian engineers working for the company around the world than foreigners working in Nigeria itself.
Schlumberger, which employs people from 140 nations, gets points with clients, many of which are nationally owned, for staffing locally. "It's one of the strong selling points of Schlumberger in Nigeria that it is not an imperialistic model," says Oyinlola. That diverse and deep bench has also helped Schlumberger enter tough markets like Russia and Angola early.
The company's 16 highest-level executives represent 10 different nationalities. That diversity helps in an industry where most of the growth is outside the U.S. Geoff Kieburtz, an analyst at Smith Barney Citigroup (C ) who upgraded the stock to "buy" in early June, is predicting sales will rise to $12.9 billion this year -- 70% of which will come outside North America -- while earnings will climb 35%, to $1.67 billion. Schlumberger gets more of its revenue outside the U.S. than any of its rivals.
University alliances are just the start of Schlumberger's strategy. Once at the company, any engineer headed for the field goes through a three-year education program that combines classroom time with on-the-job projects. After an initial two to four months spent working on real jobs, field engineers come back to one of the company's 10 training centers, where they spend 12 weeks. The facility in Sugarland, Tex., just outside Houston, is typical. On a recent afternoon, students sat in small classrooms. On one side of the hall, a Schlumberger engineer lectured a group of about a dozen. Across the corridor, other students sat at computers working on projects, many still in the blue uniforms they wear on the campus' working oil rig. There's a strong bond formed within the groups. Years after their training, engineers say, they continue to keep up with classmates flung across the globe.
After 30 to 36 months, field engineers in North and South America cap their training by spending two to three days presenting a project that they have completed, something designed to address a real business need. If they pass, they are deemed promotable out of the field. Unlike many other companies, at Schlumberger strong performers from other disciplines often do a stint in human resources. It's seen as a gold star on a Schlumberger résumé, and 40% of its human resources staff are so-called visitors. Campus recruiting, for example, is only open to "high-potential" staffers.
Some don't make it through Schlumberger's extensive training. "It's not lifetime employment guaranteed," says Cox. Of new engineers hired for the field, 40% will drop out before their third year is complete. Schlumberger's research and development group loses only 10% in that early period -- but only one in four hires will make a full career at the company.
Not everyone is a fan of the system. Some former workers describe the company as "arrogant" and "insular" and its culture as "cliquish." Gould isn't surprised when he is asked about the characterization but counters that "any company that has an extremely strong culture has to live with those things." Daniel Guermeur, founder of Metadot, an open-source portal server, spent most of the 1990s working in technology at Schlumberger. He thinks that the company, which is still a client, is exceptional at recruiting globally and that it has maintained its technical edge. But he worries that there is less opportunity today for engineers to move up to top management than there once was, that as more MBAs move into the company, it's losing something. "People don't feel secure anymore," he says.
Still, there are many examples of engineers moving up the ranks. Of Schlumberger top management, 80% started at the company right out of school, many as field engineers. And the chance to move up keeps people happy who might otherwise burn out. Bartz, who runs the Victoria wireline station, joined the company in 1995. An avid sea kayaker, camper, fly-fisher, and snowboarder, he spent most of his early career as a field engineer in Alaska. In his office, he keeps a book of photos of that time, including some of the polar bear that clambered out of the water and sauntered past his jeep. There is a series, too, of the truck that hauled his rig back to safety in far northern Canada after it got stuck in a frozen river and he and an intern spent two days north of cell-phone and satellite range.
For years Bartz wanted only to be in the field. But even for an outdoorsman like him, that life eventually grew wearing. So the flat plains of Texas replaced the tundra of Alaska. And while he once puzzled over extreme technical challenges, he now spends much of his time on personnel matters. If to an outsider it seems a major jump, inside the company it's seen as entirely normal. "People who are able to solve problems are going to do that in a lot of different roles and succeed," says Kenneth L. Havlinek, a longtime R&D engineer and now the technology manager for Schlumberger's Product Center. The company seems to have already solved the biggest problem of all: talent.