Internal Reliability Departments and the Allocation of Corporate Capital

I have worked with internal reliability teams in companies ranging from the oil majors, through to mining majors, and including large scale infrastructure companies and institutions in water, rail and electricity.

Without exception all of these departments delivered what could only be described as mediocre results. Harsh words, but somebody needed to say them.

It needs to be added that this had nothing to do with the people who work there. These people are often brilliant, sometimes exceedingly so.

They are also exceptionally driven, exceptionally motivated and people who (like all of us) tend to sincerely enjoy what they do.

So what's the problem? If everyone is so smart and so driven they should be successful shouldn't they? - Not at all. Many brilliant and motivated bankers just allowed the worlds economic system to fall in a heap.

I think there are a lot of reasons for this. The focus on critical assets instead of return on assets, mindless copying of their peers, and a range of other reasons.

However the issues that stands out to me above all else is the lack of a customer service focus.

When you work in a large organization it is hard not to think as others do. You all get similar pay packets, work under similar conditions, and are all driven within the same organizational culture.

I think that departments such as this are going to be coming under increasing levels of scrutiny as the recession worsens in the near future.

The most important executive responsibility of any organization, protected under law in many western economies, is the creation of shareholder value. This means the allocation of capital.

They have three options for capital allocation (Warren Buffets views not mine)

1. Buy growth through expansion or acquisition

2. Generate growth through internal improvement initiatives

3. Return the capital to their shareholders via buy-backs and dividends etcetera.

Departments like these, in fact all of us really, live in area number two.

And if we are not a good choice for the allocation of capital then the organization is obliged to look elsewhere.  Think this is far fetched?

I used to work for BHP Engineering back in the day when I worked in Latin America. Towards the end of my tenure there BHPE was bundled up, with its software and technologies, and sold off to Hatch and a few other smaller players.

Why? Do you think it was because they could get a good price? They didn't, big asset centric organizations don't make brilliant sales people of assets.

They sold them because it was no longer a valid and value adding allocation of their capital. Period.

And BHPE held a proud place in the BHP pantheon back then. If it happened to them, it can happen to others. And if the value is not there, then the executive directors of these organizations actually have very little choice but to look elsewhere for these services.