Portfolio Management during the Transition

The situation 

Our client, a listed Natural Resources & Energy group, is in the midst of transition. The Energy Transition, dubbed by global Oil & Gas expert Daniel Yergin as the most profound change taking place in the industry over the past one hundred years, is presenting both significant, in some cases existential, challenges to industry players, as well as a host of new opportunities for growth and sustainability. The implications of this transition and how the group’s business portfolio might change were recognised early by the leadership team – in how the share of revenues and profitability would change over time, towards a cleaner energy mix, in how new acquisitions and partnerships could help transform the way the organisation works and, importantly, in how the group’s valuation would be affected – in effect, a re-rating of the business was becoming possible.

Many elements of the strategy became clear, as the leadership team got to work on the transition.  A key question to answer however remained – ‘How do we manage the inherent tensions between resources fuelling the growth of new core businesses and a highly successful fossil fuels business, which should not be neglected? And with that, ‘How do we enlist the support of a wide stakeholder group, for the transition’? What may seem a simple answer at a glance, is in fact a complex set of business policies, capital allocation rules, resource allocation processes, measurement and reporting mechanisms, which must remain coherent, in the face of industry disruption and various phases of the transition. We would be required to make key investment decisions facing uncertainty and today’s ‘portfolio rulebook’ no longer applies.

The solution

To solve this complex issue, we began examining Portfolio Management from the outset of transition. Together with leaders throughout the business, we adopted new mindsets to look at the business portfolio with a fresh pair of eyes, we created visual scenarios of what the portfolio might look like, not only next year or the year after, but to 2040 and key milestones in the business’ transition in-between. These were mapped across three horizons, encompassing both the evolution of the current business, related investments as well as ‘stepping stones’ towards emerging future businesses.

Hand-in-hand with this, the portfolio management function began to take shape. A continuous strategy process was adopted, within which portfolio management triggers were developed. to ensure various signals from the environment were being examined and the portfolio reviewed on an on-going basis. Integration with key processes in the business was another key aspect which required attention, so that resource allocation decisions could take place at speed and (where required) scale, to build the portfolio. Moreover, empowering business units to act, in their respective markets, was key for ownership of portfolio businesses – addressing leadership and culture, as the new vision for the group, the business strategy, various strategic options and potential opportunity areas were becoming clearer.

The impact 

One of the key outcomes of this work was the recognition of how important it would be to manage the portfolio, for the business to reach its aspirations. Portfolio management evolved from a necessary, often tactical function, to a strategic enabler for the transition of the business, leveraging key processes such as business planning, budgeting and performance monitoring.
As important was a growing ability to enlist external stakeholders in the transition, having a clearer view of how the business can evolve and the implications for the portfolio in which they have invested in, from early-stage, potentially disruptive investments to mature businesses and the broader social impact which the group could contribute to. Leaders from across the business (and levels in the organisations can now more easily contribute to the transition and such momentum is having a positive impact, well beyond the transition itself.

In Conclusion

A seismic transition, as described in this case, is not unique to Energy. Many industries are seeing the blurring of industry boundaries, new forms of competition and waves of innovation in their playing fields. These are not restricted to new technologies, but in management, the commercial and even regulatory spheres.  In all of these, managing the portfolio is a key contributor to the success of such a transition, and it begins well before a capital allocation or investment decisions are required. Starting early is key.

Fortunately, a growing set of organisations are demonstrating renewed interest in and adaptation of portfolio management, towards a strategic enabler of their business success.

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