The fall in global oil prices, volatility in other commodity sectors, and slower growth in China are placing Indonesian companies under significant financial pressures. In response, companies are cutting back capital-spending programs and operating costs.
In our experience, however, while this is a step in the right direction, it is often not enough to keep companies profitable. However, when combined with a coordinated transformation program, including aggressive cash management practices and refocusing on performance management, these measures can have real impact.
Take mining and oil & gas, which accounts for 10 percent of Indonesia’s nominal GDP. As mineral and oil prices decline from their 2011-12 peaks, this is the time to launch comprehensive turnaround programs to bolster margins and returns. This typically entails meaningful cost-cutting, including redrafting procurement contracts and developing lower-cost approaches to operations and maintenance; and redefining capital plans.
However in the face of intense pressure, often in time-sensitive situations, managers have little capacity to evaluate thoughtfully which activities and investments to support and which to cut.
Nevertheless, in our work with clients to help them turn around their businesses, we have seen organizations launch large-scale transformation projects and still achieve significant improvements in a remarkably brief amount of time.
For instance, an international mining company reduced costs for one of its largest operations by $2 billion in just 18 months after the launch of a comprehensive transformation program. The company renegotiated key contracts, established a reverse-auction system, restructured and streamlined both operational and support functions, improved performance management systems, and significantly increased productivity in production, maintenance and processing areas.
Similarly, an international oil and gas company reduced its spending by nearly 20 percent, among others, consolidating suppliers, eliminating or deferring capital expenditures, renegotiating wage contracts with unions, and sourcing from low-cost countries.
Working with a wide range of clients, McKinsey has discovered that such deep, coordinated transformations are required to radically improve performance. While there is no one-sizefits-all approach to turnarounds, successful turnarounds tend to share the same critical elements. And when implemented well, they often achieve a multiple of the savings initially envisioned.
Conduct a ‘private equity-like’ due diligence
Conduct a thorough assessment of opportunities, benchmark operations versus industry peers, develop top-down estimates for each business unit, and assess the capacity for a turnaround.
Assign targets and align incentives
Assign targets to all business leaders and incorporate delivery on these targets as a core key performance indicator (KPI) for performance evaluation. Establish this KPI with a contribution of 50 percent or more in performance evaluation to make the transformation truly top-of-mind – and business leaders act like owners in this process.
Empower the entire organization
Leverage the entire organization to identify, develop and drive opportunities – leaving no stone unturned. For instance, in a recent transformation of a mining company, more than 200 initiatives were identified, developed and executed by more than 80 employees – in just one mine.
Develop detailed implementation plans
For even the smallest initiatives, develop detailed action plans including activities, timelines and responsibilities. In the previously-cited mine example, more than 2,000 milestones were developed and tracked on a weekly basis.
Establish a rigorous process discipline
Install a weekly cadence to successfully manage and steer the huge amount of people and initiatives involved driving the transformation. For instance, twice-a-week check-ins with initiative leaders and once-a-week progress reviews.
Include a health improvement agenda
From day one of the transformation, monitor the over health and culture of the initiative.
Successful turnarounds often establish a chief transformation officer (CTO) who is fully dedicated to its execution and outcomes. Our work on such turnarounds relies on a few of the aforementioned principles, including a focus on cash flows rather than paper profits, seeing through even the toughest decisions such as restructuring or streamlining the organization and an assessment of risks and efforts to mitigate them.
While success can never be guaranteed, the application of these principles can drastically improve the impact and success of such programs.
Many companies in Indonesia and Southeast Asia need to get into better shape to weather tough times. They must generate more cash in the short term to remain profitable, while thinking about a longer-term strategy and its implementation. The current decline in the price of resources provides a timely opportunity for Indonesian companies to undertake aggressive turnaround programs to raise productivity and become more efficient.
Thomas Carlsen is a partner at McKinsey & Company, Indonesia; Eric Thompson is a partner at McKinsey Recovery & Transformation Services; Wim Walpot is an engagement manager at McKinsey & Company, Indonesia.