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Saturday's
Lagniappe
Leading
change: An interview with the CEO of Eni
Paolo
Scaroni,
chief
executive officer of Eni
By Giancarlo Ghislanzoni
Paolo Scaroni explains how he helped rescue two troubled businesses
and now confronts what is in some respects a more challenging
task: leading a highly successful one.
Paolo
Scaroni is an Italian executive with wide experience running
European businesses. Currently chief executive officer of Eni—the
international oil and gas company, listed on the Milan and New
York stock exchanges—he was previously the head of Italy's
leading electric utility, Enel, and before that nursed the troubled
UK glassmaker Pilkington back to corporate health. Scaroni first
got to know Pilkington as CEO of Italy's Techint (the two companies
ran a joint venture in the late 1980s), though he acquired his
early knowledge of the glass industry at France's Saint-Gobain,
where he held a number of appointments, culminating in the presidency
of the flat-glass division.
Scaroni's
record at Pilkington and Enel makes him well qualified to talk
about corporate turnarounds. Eni, which he joined in June 2005,
represents a different sort of challenge. While Pilkington had
experienced some degree of difficulty and Enel needed a strategic
redirection, his present company was already doing well when
he assumed its reins, just over a year ago, and had no obvious
need for a sharp change in direction: powered by surging oil
prices and a significant rerating of its shares, it was already
hugely successful under his predecessor. Thanks to assets in
(among other places) Africa, the Middle East, and the Kazakh
offshore section of the Caspian Sea, Eni has an enviable position
to replace and increase its oil reserves over the medium term.
In 2005 the company's oil and gas production rose by 7 percent
while net profits jumped by 24.5 percent, to €8.8 billion.
Scaroni's
views on the outlook for global energy are widely quoted in
the mainstream media. In this conversation with McKinsey director
Giancarlo Ghislanzoni, he discusses his ideas on leadership,
his passion for simplicity in a world of growing organizational
complexity, and his trenchant views on the deficiencies of the
"European model."
The
Quarterly:
Your three most recent CEO positions—at Pilkington, Enel,
and now Eni—have involved very different companies facing
very different situations. Can you describe them to us?
Paolo
Scaroni: I have no doubt that the most difficult
situation for me was the first, when I was appointed CEO of
Pilkington. Up to that point I had never encountered the responsibilities
of running a public company with a large market capitalization
and outside investors; the whole "City of London"
aspect was new to me, and being a foreigner added some complexity.
Having previously worked for Saint-Gobain, however, I had a
lot of credibility in the marketplace, and I knew exactly what
I wanted to do.
Pilkington
at the time 1
was a commodity glass producer that had clearly lost its direction.
A commodity business is all about costs, and if you are not
cost efficient you simply find yourself out of the market. The
problem had been intensifying at Pilkington over many years
but was disguised by huge flows of cash, which came into the
company as a result of its licensing agreements. The tension
needed to deal with costs was simply not there. To give you
an idea of the inefficiency, there were 42,000 people in the
company when I arrived and 27,000 when I left—15,000 fewer—but
at the end of this period the company's output was roughly the
same. The nature of the transformation was therefore quite traditional
and very operational: it involved closing down plants, reducing
overheads, and generally restructuring costs.
The Quarterly:
The same could not be said of Enel's transformation, could it?
Paolo
Scaroni:
Enel is a different story. If I had to sum up what I was doing
during the three years I was there, it was restructuring the
strategy and, more particularly, reshaping the business portfolio.
Enel had become a kind of conglomerate, active in many sectors.
What we did was to refocus around the core businesses of gas
and electricity and divest the remainder to get rid of the distractions.
We cleaned the table, as I like to put it. If you have too many
problems to think about, you cannot cope with all of them.
The
Quarterly:
You like to reduce complexity in a business, don't you? What
needed to be done at Enel, and what were the benefits?
Paolo
Scaroni: My predecessor at Enel had been extremely
successful in turning what had been a state-owned service company
and quasi-monopoly into a more market-oriented business. But
in my view he had made a huge mistake, which was to try to turn
cost centers like IT, engineering, and real estate into stand-alone
profit centers. The IT department employed 1,500 to 1,800 people,
for example—too many for the businesses we were in—but
the company decided to try to sell IT services to other companies
anyway.
There
were two flaws in this approach. The first one is that it becomes
a huge distraction. All companies, but particularly small companies,
need a lot of management attention, so you can imagine what
happens if you start adding 30 new businesses to the portfolio.
The second point is that it's very difficult to transform a
cost center into a profit center. Why, after all, should the
IT department of Enel be competitive against the likes of Accenture
or IBM? Indeed, almost by definition such a department is noncompetitive.
In
my time at Enel, we either sold or reincorporated the businesses
that were peripheral to the core activities, and everything
automatically became simple, easy, and focused again. With fewer
papers to read and problems to solve, everyone in the management
team became more relaxed. It was very evident.
The
Quarterly:
Let's move on to Eni, where your employees must think the opposite—that
they are doing extremely well.
Paolo
Scaroni:
Absolutely. That's why I consider Eni a true challenge, because
over the last five to seven years, under my predecessor, Eni
has been highly successful, possibly the most successful oil
company in the pack in terms of share price, the growth of operations,
and international diversification. Over that period, indeed,
Eni has outperformed its peer group—for instance, Royal
Dutch Shell and Total—quite considerably. The reason,
in part, was three well-timed and shrewdly executed acquisitions
and the consistent delivery of results, which led to a market
rerating that eliminated the 10 percent or so discount at which
our shares used to trade relative to the rest of the sector.
For this reason, we cannot talk about a turnaround as such.
Eni is a company whose operating performance has been good and
which has been consistently well run, particularly in the upstream
Exploration & Production division. To make changes in such
an environment is difficult, but I believe that every company,
every organization, can be improved. The issue therefore is
how to fuel growth in the future and make changes in a company
that doesn't need to be turned around and shouldn't be turned
around. I often start my speeches by saying, "Don't try
to fix what is not broken."
The
Quarterly:
What are the necessary changes from your perspective?
Paolo
Scaroni:
The main challenge concerns the organization, and the process
of change started under my predecessors. Eni used to be a kind
of holding company, which included entities that were very powerful
and very independently run. The integration process is not finished,
but in the past few months we have been moving to create a real
corporate center that draws on the whole chain of the organization.
A
well-functioning organization will help us meet our main strategic
challenge, which is how to continue increasing growth in oil
production, and not necessarily by making acquisitions. All
the plans we have drawn up are based on organic growth. We don't
exclude acquisitions, but we have promised the market seven
years of consecutive growth without them. We can do this because
of our strong positions in some of the most promising areas
of the world, notably Algeria, Angola, Egypt, Kazakhstan, Libya,
and Nigeria. What all these countries have in common is that
there—unlike, say, in the North Sea—oil production
will be higher in 2020 than it is today.
The
Quarterly:
Has your leadership approach been different in your latest role?
Paolo
Scaroni:
Not really. I normally try to find three or four strategic concepts
that sum up the direction in which the company should be moving,
build up an organization that believes in these concepts, and
then repeat, repeat, and repeat them throughout the organization.
I am convinced that communication is a very powerful tool for
running large organizations such as this one. It works fine
if people know exactly where they are going, but in order to
know this they need to be able to grasp some easy concepts.
If it takes more than one minute to explain a strategy, something
is wrong. In my view, it has to be that simple. Successful things
are simple; I have never seen successful things that are very
complicated. You provide simple guidelines and repeat them throughout
the organization.
The
Quarterly:
So what would these concepts be at Eni?
Paolo
Scaroni:
Well, for example, we need to be sure everyone knows that we
want to grow as a company by doing what we are essentially built
to do—namely, winning exploration bids, running exploration
success stories by making some discoveries, allocating capital
expenditures to lift the oil, and then selling it. We also need
to be clear about where we want to do this, looking closely
at the oil-rich countries while being conscious of the political
risks, which we are able to manage.
In
gas we are number one in Europe. We want to retain our leadership
and take advantage of the fact that the market for gas in Europe
is growing. We want to invest in pipelines wherever we can,
since pipelines are a strategic asset for the long term. It's
easy stuff.
The
Quarterly:
When you articulate these concepts at Eni, do you set out a
timetable? Does the company get the sense of a staged approach?
Paolo
Scaroni:
The timing essentially follows from our planning system, with
the high-level concepts translated into a series of actions
that are taken over time. All mechanisms, like bonuses and the
compensation system, should generally encourage a sense of urgency,
a feeling that things should be done within a certain deadline.
Of course in the oil industry there is probably less urgency
than in many other industries, because the decisions you take
today might not give you a result for ten years. That does not
mean that you don't have to be quick, but the time horizon is
very different.
The
Quarterly:
How do you reconcile a company's time horizons and cycles, which
might be, say, as long as ten years, with the mandate of the
CEO, which might be shorter?
Paolo
Scaroni:
There is no conflict around the cost issues. How efficient are
you? What's your overhead spending? What are the optimum staffing
levels? These are always short term and should always have a
sense of urgency. On the investment side, of course, this is
an industry with a very long-term horizon. Eni, for example,
is the operator of the consortium that has been awarded the
Kashagan field, 2
the most important discovery of the past 30 years. The consortium
is investing $15 billion, but we will not be producing our first
oil from there until 2008. At this stage, we have no idea what
will be the Kashagan of 2015, but we need to start looking for
it now.
The
Quarterly:
Do these general principles hold good for other industries?
Did you apply these principles in the other cases?
Paolo
Scaroni:
Absolutely. Take my views on organizational integration and
what happened at Pilkington. That company had used the revenues
from its flat-glass technology to acquire other businesses in
the industry, such as Flachglas Wernberg of Germany, Pilkington
Libby Owens-Ford of the US, and a big Brazilian glass manufacturer.
What was astonishing to me when I joined Pilkington was how
independently all these companies were run, to the point where
they had their own boards, remuneration committees, and audit
committees. One of our major initiatives was to launch a program
called Building One Pilkington to put together the companies,
eliminate the boards, and introduce central purchasing and central
finance, which at the end of the day is the best way to reduce
overhead. I repeated this message for several years until all
the previous structures were destroyed, transforming those companies,
essentially, into factories, on the one hand, and customers,
on the other. The rest was cut out. The cascading of the Building
One Pilkington concept was very important to communicate the
newly focused strategy and a subsequent implementation program,
just as it was at Enel.
The Quarterly:
Let's come back to that sense of urgency, which we agreed was
easier to tap in companies experiencing difficulty. How do you
get that urgency in a company that doesn't face an economic
crisis or severe investor pressure?
Paolo
Scaroni:
Talking from an Eni perspective, the sense of urgency in Exploration
& Production comes about through our oil production targets.
The background of the other two major businesses in the group—Gas
& Power and Refining & Marketing—is quite different.
Gas & Power was a monopolistic type of business, historically,
while R&M has not faced an intense competitive environment.
In these two businesses, the only thing you can do to create
the appropriate sense of urgency is to benchmark yourself against
others so you can see what others have been doing and where
you should be doing better. Stretch targets are always a good
way to get people to improve quickly.
The
Quarterly:
As an experienced nonexecutive director of other companies yourself,
do you think this position provides a special perspective on
change or an opportunity to make a special contribution?
Paolo
Scaroni:
It's not easy to give a diplomatic answer! In a true public
company, such as Pilkington, nonexecutive directors have considerable
power and responsibility—above all, the ability to fire
the chief executive. I have been involved with companies where
this has happened, including one in which there was a dramatic
meeting in a London hotel. In companies, such as Eni, that are
listed but not public in the Anglo-Saxon sense of the word,
the nonexecutives have neither this power nor this responsibility.
So the role is different, though not meaningless. In Italy we
are getting closer to the Anglo-Saxon system in some respects,
but not this one.
The
Quarterly:
That raises a question about more widespread change, which many
people think is needed by business systems in continental Europe.
What's your experience after working in France, Italy, and the
United Kingdom?
Paolo
Scaroni:
In this context, I believe that some concepts are exactly the
opposite of what they seem. When, for example, you read the
European press, the talk—notably in France—is about
people fighting to hold on to their precarious jobs. Well, personally,
I think precarious jobs are fantastic, but the reality is that
all jobs have to be precarious. Without the current labor legislation,
companies in Europe would be able to create millions more jobs,
as they have done in the UK. To me it is unbelievable that the
boss of a company in France, Germany, or Italy devotes a lot
of effort to the task of how not to hire new people, when we
should be devoting our time to thinking how we can hire them.
In
continental Europe, we have developed a mentality which says
that if you were born in, say, Lyon, you deserve to live all
your life in Lyon, with nobody ever firing you for any reason,
every year making 5 percent more than the year before, and retiring
when you are 58. In my view, that's a pretty boring prospect,
but apart from anything else, in a global world it's an impossible
dream. All politicians understand as much, but every time they
try to explain it they are no longer elected. From the employee's
point of view, so-called freedom means doing dull and stupid
tasks, working on when your boss is nasty and undermining your
career—all because your job is "safe." Stability,
in reality, fires back, and in this respect Belgium, France,
and even Spain are worse than Italy. In a world in which everyone
is changing, by contrast, you can quit when you are unhappy,
find a better job, and compete.
The
Quarterly:
Some of these sentiments, I understand, appeared in a guide
you wrote for young businesspeople—a best seller in Italy
some years ago. Would you change the content if you wrote it
again?
Paolo
Scaroni:
Oh, yes! It's very outdated, and some of it was a bit tongue
in cheek, like what sort of wife to marry. But one thing I would
not change is the importance for young people of a strong curriculum
vitae, with the various schools you attended, the languages
you speak, the experiences you have been through, and the jobs
you have held. A good CV is your real wealth, and the most important
thing it can bring is freedom. A good CV allows you to sell
yourself in the market; without one you will rely on luck or
a boss who happens to like you. How you went about selling yourself
in the 1980s was different from how you go about it now, and
it will have changed again by the 2020s. But the basic principle
will stay the same.
About
the AuthorsGiancarlo Ghislanzoni is a director in McKinsey's
Milan office.
Notes
1 In
1997.
2
Located in Kazakhstan.
Giancarlo
Ghislanzoni
is a director in McKinsey's Milan office. . Petroleumworld
not necessarily share these views.
