Learning from BP

The release this week of BP’s internal investigation of the Deepwater Horizon oil rig accident brings a new occasion to reflect on the lessons that executives at other companies should draw from BP’s experience. While the full story will certainly develop over time from a variety of perspectives, an initial read through BP’s report by our Compliance and Ethics Leadership Council research team underlines three important points for other major companies in our membership.

1. Culture, Not Process, is the Essential Risk Management Control

To us, the BP report suggests that procedures and controls are a necessary condition for effective risk management, but not a sufficient one. A company’s standards and processes will fail if employees do not feel empowered to follow the standards during times of stress or they fear retaliation for reporting “unwanted” information.

The report and other sources detail how parts of BP’s culture may have tolerated shortened safety procedures as they fell behind investment schedules and other deadlines. For example, the company cut short a procedure involving drilling fluid that is designed to detect gas in the well and skipped a quality test of the cement around the pipe (another buffer against gas) despite BP’s report finding that there were signs of problems with the cement job and despite a warning from the cement contractor company.

Our reading of BP’s report suggests there was not a strong culture of communication across its own team leaders and partner companies. Having multiple players can restrict access to critical knowledge and slow decision-making processes to a dangerous point. Nor did there appear to be a culture where managers were expected to seek out or share contrary information from a different perspective. These cultural elements allowed issues to continue without the application of comprehensive expertise.

Interestingly, the report’s recommendations largely focus on adding more controls, more checks and balances, with “auditable risk management processes,” new minimum standards, and increased self-audits. While some criteria and thresholds did not exist prior to the accident, it is unclear whether the lack of these controls and audit mechanisms directly caused the accident itself. The larger question is: how can companies ensure that additional processes do not become simple check-the-box type exercises for the staff on the front line?

The onus on any company’s executives is to communicate both the benefits and costs of non-compliance, create a safe environment for raising and resolving issues, and reward desired behavior even when that behavior may make it less likely that the firm will hit short-run financial goals.

Our work in CEB’s Legal and Compliance Practice examined over 100 major companies’ cultures and their employees’ perception of that culture. The research showed that employee discomfort in speaking up is a leading indicator of compliance failures and is strongly correlated with certain facets of overall business performance. Work in our Operations Practice examined how employee work with quality management systems, and found that 85% of employees at Fortune 500 firms don’t believe it is their job to follow these systems, even if the system specifies their personal role.

Also, recent survey work by the Finance and Strategy Practice shows that 59% of employees do not share bad news and negative feedback because they fear it will affect their careers. On average, employees would forego a massive $1 million to $10 million in company earnings to avoid reporting bad news or negative feedback.

2. Is Anyone Training Employees To Make Better Decisions in Adverse Conditions?

While all major companies provide training and development in managerial decision-making, relatively few companies specifically teach their employees about how human decision-making changes dramatically in periods of stress.

The BP report details how managers made flawed (but individually rational) judgments under stress. For example:

• Managers showed a disbelief in unwanted information; managers continued to believe pressure levels were normal, despite contradictory information of 1,400 psi on the drill pipe connected through the wellbore to the non-flowing kill line with 0 psi.
• Abnormal changes in pressure were inaccurately attributed to a phenomenon referred to as annular compression or bladder effect. Two individuals stated that they had previously observed this phenomenon; after discussing this concept, the rig crew and the well site leaders accepted the explanation. This reflects two problems: 1) the apparent inexperience or lack of knowledge of the other individuals that prevented them for noticing a potential red flag, and 2) the basic human tendency toward groupthink.

Analysis by the Corporate Strategy Board shows that fundamental flaws in how the human brain interprets trade-offs can lead decision-making astray. Four that seem to chime with the BP report are:

1. Overconfidence: Great confidence hinders the ability to make accurate estimates
2. Anchoring: Current experiences are too easily tied back to past experiences
3. The Herding Instinct: The behavior and opinions of others inspire conformity
4. The Sunk-Cost Effect: The continuation and completion of an unprofitable project is preferred over its termination

The BP report describes that much of the rig workers’ analyses of key data depended largely on individual interpretations. In addition, the guidance for many of the key tests conducted on the oil rig (e.g., the negative pressure test) did not provide detailed steps and did not specify success/failure criteria. As such, the outcomes of these tests largely depended on the leadership and problem-solving skills of individuals in real time—often making decisions with little time and information and susceptible to the four shortcomings listed above.

To us, this suggests an opportunity for member companies to reassess their need for increased training on leadership skills and decision-making in times of stress. This is a chance for companies to equip lower-level managers with the proper tools, training, scenarios, FAQs, etc. to act and make decisions in times of high uncertainty.

3. The Management of a Web of Suppliers, Partners, and Subcontractors is Fraught With Peril

The BP report should remind managers that companies are not able to entirely shift operational or reputational risk to a partner, subcontractor, or supplier. Presumably, BP had in place significant and comprehensive controls and contractual requirements for its contractors and other service providers. However, questions remain about whether these contractual requirements were actually implemented, assessed, and monitored by BP. Typically, we find that companies tend to over-invest in initial due diligence and contractual safeguards at the expense of ongoing, real-time monitoring and remediation.

For more detail on supply chain-specific problems, read our separate post from operations specialist Amy Whiteman, and readers can learn more about a new fee-based service from PSC Solutions for members that are seeking a deeper level of supplier management support.


Leslie Altizer, Vidhya Balasubramanian, Tracy Davis Bradley, and Abbott Martin of the Legal and Compliance Practice also contributed to this post.