Page 3By CIOinsight
Case Study: ChevronTexaco
When Dave Clementz first became president of Chevron Information Technology Company (CITC) in 1997, the job came with strict orders: Make IT pay for itself.
Thanks to a woolly and overgrown tangle of multiple platforms, software, servers and networks stretched around the globe, the San Ramon, Calif., oil giant's information technology subsidiary was consistently 10 percent to 15 percent over budget, and Chevron Corp. headquarters was tired of picking up the slack. "I had a mandate from the chairman of the board to do a couple of things," Clementz says, "mainly, to make the IT division more relevant to the business and to stop the bleeding."
It was a tall order, but during the next six years, Clementz and his team did all of that and more, hacking through Chevron's thorny IT with a combination of reorganization, standardization, outsourcing and zealous cost-accounting. In the first three years alone, annual enterprise IT costs were cut from $400 million to $320 million.
Then, in 2001, following Chevron's 2001 merger with Texaco Inc., Clementz got to pull an even larger rabbit out of the IT hat. Under orders, he cut IT costs by an additional $230 million a yearand this time, company-wide.
For a Q&A with former ChevronTexaco CIO Dave Clementz click here.
The size of the cuts sought reflected more than concern over redundancies stemming from the merger. According to Haim Mendelson, Codirector of Stanford University's Center for e-Business and Commerce, the requests signaled further evidence of a yawning credibility gap between IT and business-side executives: Oil companies live or die by how well they contain costs and achieve economies of scale. In the oil industry, cost is an important driver of profitability. Yet with 53,000 employees, operations in 180 countries and hundreds of thousands of contractorseach wanting their own type of IT system or suite of equipment, Chevron's IT budget was bloated and its IT department reactivetoo overwhelmed, at times, to proactively push new ways for information to benefit the business.
What to do? First, Clementz declared war on complexityand on the IT department's credibility problem. There was resistance. While the rationale for a single platform was obvious to Clementz, it was less so to those on the receiving end. "The challenge of standardization is that you take away the ownership of a technology from a specific location or business unit," says Robert Miller, CITC Manager in Product Management, Global Technology and Strategy. "Setting standards dictates an answer to people that they have to live with."
In order to convince the rest of Chevron that standardization would be better, faster and cheaper than the status quo, the IT team did it the hard way and piloted its PC standardization in one of the company's most problematic locationsthe frigid Tengiz oil field of Kazakhstan. Because of the area's far-flung locale and unforgiving climate, the installation of 1,000 computers had to be done early and at a breakneck pace before the onset of the harsh winter. With that done successfully, the IT team now had the means to effectively combat company skeptics. "It really became a very convincing argument that standardization was a valid concept," says Pete Brown, Planning Manager for Global Strategy and Planning at circ.
Next, Clementz declared war on bloated costs within his own department. He cut his 2,000-person staff by about 400 workers, eliminating those whose skills were no longer up to par or who exhibited resistance to change. Then, Clementz began outsourcing less critical tasks, such as the management of the mainframe, telecom, help desk and network operations, mostly to Electronic Data Systems Corp.
But by far Clementz's most important, though bloodiest, battle was to make both IT workers and technology strategy more directly accountable to business goals. How? He created what he called an "activity-based" accounting system, whereby the company's more than 60 individual business units would be billed for precisely the technology and IT services they usedrather than the arbitrary fee of the past, which was based on how many employees worked in each business unit. This, Clementz knew, would do more than force IT to figure out exactly what the business units needed. It would also force whole new levels of communication between IT and business managers that hadn't existed before and create a basis for improved IT-business alignment throughout the company.
Getting people out of their cubicles was awkward at first, but eventually, morale began to soar. "I'd send people out to have face-to-face conversations with the people in each business unit that controlled IT spending, and for the first time in some cases, we began to understand not simply more about the oil business, but also learn details about what the units needed and were thinking about in terms of future technology," Clementz says. To help speed the process along, he created company-wide Business and IT Forums, held twice a year, to assemble all 150 to 200 key IT and business leaders in one place to share their problems and jointly hammer out solutions.
Yet as with earlier efforts, Clementz once again met resistance. During one of the early Business and IT Forums, for example, there was a heated argument between Chevron's international managers and domestic groups over how much they were getting charged by CITC for network services. But Clementz persisted, determined to create solutions based on alignment strategy as much as on technology. At early meetings, he recalls, "we'd group people at tables by their regions, or business interests." Each person would be given two paper folders, one red and one green. "We'd put a proposal out there for a technology change, or ask the whole assembled group if they liked something we were doing," Clementz says, "and then just sit back and see what color cards came up."
When questions arose, for example, over whether Chevron was going to charge its employees in Nigeria for using the global network, people seated at the international tables began waving their red folders in earnest, forcing Clementz to stop the meeting and call on those assembled for a joint solution. "We didn't solve it that second," Clementz says, "but by the next morning, the network guys had figured out a formula they could use to give relief to the international people." Sure it would mean rates for domestic people would go up, Clementz remembers, but by the time the forum ended, however, the problem got solved: people who used the network the most, regardless of location, would need to pay the most for it. The decision set a new precedent for collective problem-solving within IT, and set the stage for a new, less hierarchical culture at the firm. Says Clementz: "It's an example of how a financial decision to break down the costs of everything leads to greater communication and then greater accountability, and then greater teamwork."
Still, even Clementz's own staff was less than thrilled, at first, about the move to activity-based cost-accounting. Besides demanding higher levels of communication and time-consuming consensus-building, it also would require extra work to perform the detailed cost analyses required by the new system. "Making these costs transparent was critical to getting the kind of alignment we needed," Clementz says, so he hired 10 more accountants to handle the extra load. Eventually, though, the savings reaped by the new system more than paid for the extra head count.
Knowing more led to surprises all around. While the new accounting system enabled more precise spending decisionsClementz was able to impose a new rule that IT had to recover to within 97 percent to 103 percent of its budget on projectsit also meant that if IT under-charged or overcharged business units for IT services, there could be an uproar. "When we first did the activity-based accounting, I discovered we were over-recovering about $30 million a year on the mainframes," Clementz recalls, "and about $10 million of that was being charged to the marketing department." So Clementz started handing out rebates to correct the errorsand to continue his drive to bolster his department's credibility. It worked. "I went to the marketing VP and said, 'Look, I've just done an analysis of the costs, and you've been overcharged for your mainframe, so we're going to reduce your mainframe charges by $10 million next year.' He looked at me like he wanted to kiss me." Rather than take the rebate and spend it on marketing, he decided to invest it in a new IT program.
Still, Clementz knew that if he were to make any long-term progress boosting credibility, his department also would have to rate itself on performance, and give business-side staff a chance to rate them, too. "We even ding ourselves if we fail to measure up to our metrics," Clementz says, "and I know that's not the norm for IT departments."
ChevronTexaco continues to hold annual IT performance reviews that dock bonus pay if IT fails to recover cost within 3 percent of budget. Business-side managers also rate CITC on performance metrics, including network reliability, the number of service outages, how well service level agreements are fulfilled and how close IT projects come to being on time and on budget.
Sound brutal? It was: Most people employed under the old system ended up quitting or getting fired. And while the overall IT workforce shrank by 25 percent, the turnover in CITC upper management was even higher. Of the original senior management team that Clementz inherited in 1997, none remain. The next-level management team is mostly new now, toowith perhaps only about 15 percent Chevron veterans who, Clementz says, understood the importance of making IT responsive and fully accountable to business. "There's an old saying we use at this company a lot when you're going through a massive cultural change: 'You either change the people, or you change the people'," Clementz quips. "You change what's between their ears, or you change them out, and that's what you have to do if you want to drive change and drive it in a hurry."
This July, Clementz, 58, retired from ChevronTexaco and opened a consulting firm. The CITC staff has kept the structure Clementz and his team created. His IT and business forums and meetings with customers have been institutionalized and help to keep business and IT budget goals more closely aligned. An open-book policy means that any CITC customer can see what they were charged and why.
And time sheets are being kept now too, if not quite perfectly, then well enough. Says Clementz: "Do people fill them out religiously? No, they probably fudge. They get close to a deadline and customers are beating on them about costs, and they probably don't account for all their hours. But I tell you it's a hell of a lot better than it used to be. We're a lot closer, maybe within 10 percent of the truth versus, well, you didn't even know . . ."
Measure for MeasureEvery month, ChevronTexaco's IT team rates itself on dozens of metrics, using a digital "dashboard" of red, yellow and green markers to rate performance per team, employee and department overall.
Here are some of the key measures:
Worker Productivity Yearly performance reviews for each IT worker aim to root out the company's least productive 10 percent. "Our customers always raise the bar for us."
Fulfillment of Service Level Agreements If IT fails to deliver on time, or if it overcharges for services, it gives rebates, which boosts the credibility of IT with the business-side executives.
Number of Business Incidents The IT team tracks the number of outages and subtracts cash from worker bonuses if the organization fails to meet certain targets for improvement.
Financial Performance Is IT recovering costs and driving costs out of the system? ChevronTexaco IT is required to stay within 97 percent to 103 percent of its budget, or employee bonuses get cut.
Number of Safety Incidents "For us, it's not slips, trips, falls or motor vehicle accidents but people having repetitive stress injuries," Clementz says. If incidents increase, performance reviews reflect the rise.
For Q&A with Dave Clementz about his use of activity-based cost accounting to achieve better IT-business alignment, click here.
Margaret L. Young is a freelance writer based in Silicon Valley. Her work has appeared in a variety of publications, including BusinessWeek, the San Jose Mercury News and Stanford Business.