A Gusher of Mergers
In August 1998, with the energy industry reeling from a sharp drop in oil prices, British Petroleum’s CEO made a daring move. John P. Browne, the cigar-puffing, Cambridge-educated chief executive took over Chicago-based Amoco in a deal worth $52 billion, turning his midsize British company into one of the world’s energy giants, in a league with Royal Dutch/Shell and number-one Exxon Mobil. Browne promised that he would slash $2 billion a year from expenses?and that half a billion would come from IT, where he saw cost-cutting opportunities from overlapping staffs and systems. The acquisition set off a wave of industry consolidation as U.S. business magazines compared Browne to General Electric’s then-CEO Jack Welch.
Amoco was the first of several high-profile deals for Browne, who had taken BP’s helm in 1995 after heading its exploration unit. He had watched as British Petroleum, which ranked 27th in the Global 500 in 1996, had become dependent on maturing fields in Alaska and the North Sea. With a limited world supply of oil and gas reserves, Browne saw little alternative to growing BP except through acquisition.
So the M&A action began. After Amoco came BP’s $26.8 billion purchase of U.S.-based Atlantic Richfield in 1999; $4.7 billion to snap up British lubricant company Burmah Castrol in 2000; and a $4 billion takeover of Germany’s Veba Oel. In August 2003, with BP ranked fifth in the Global 500, Browne invested $8.1 billion in Russian oil giant TNK, created during the Soviet Union’s collapse.
IT has long been central to Browne’s thinking?his commitment to IT outsourcing is cited in a business school case study and he’s been an Intel director since 1997. But the idea that IT could enable BP’s growth appeared to crystallize during this entrepreneurial surge. At Oxford University in 2001, he said: “It was only really two or three years ago that we started to see IT as a set of integrated technologies with a real business potential.” Browne added that he sees IT “not just as a service function…but as an activity which could change the nature of the business itself. We think of this area as digital business?an activity which allows us to focus on the benefits that the business and technology can bring in combination.”
As Browne set his philosophy in motion, a problem came up: BP needed a new CIO.
Enter John Leggate
The CIO job at BP opened up in 1998, during the dotcom frenzy. John Cross, Browne’s IT chief and a 23-year BP veteran, was leaving to join an Internet venture. Browne knew he needed a CIO with a deep knowledge of his company’s philosophy, a willingness to launch a massive systems integration project while cutting costs wherever possible and, most of all, someone as daring as himself.
Enter John Leggate, fresh from a year as president of BP’s Azerbaijan operations, where he had been part of a team negotiating a multibillion-dollar pipeline deal across the Caucasus Mountains?a project that inspired the James Bond movie The World Is Not Enough. An engineer by training, with no specific IT experience, the ebullient Scotsman had built nuclear power plants before joining BP, and then run North Sea oil rigs. He had even revamped the company’s HR department but had never implemented an ERP system or negotiated an IT outsourcing deal. Leggate, however, had built a reputation as a tough manager not afraid to cut costs and invest in technology to boost productivity. Browne admired Leggate’s work in the North Sea and Azerbaijan and made him CIO in January of 1999, just as the BP-Amoco deal was closing.
So began a partnership that’s lasted five years and counting. It’s a relationship in which the CIO embodies the CEO’s philosophy. Leggate has responded to the challenge by acting decisively as a cost-cutter in mergers; as a risk-taker in trying out new Internet and wireless technologies; and as a pragmatist in seeking payback for those investments. All the while, Leggate, part of BP’s senior leadership team, has pushed hard for top executives to consider IT’s importance to BP’s vision.
In action, that means that during the Amoco merger Leggate and his group?dubbed the digital business team?quickly found duplication within BP and Amoco’s IT departments and slashed redundant jobs and programs (BP declines to give a specific count). The team has worked nonstop at integrating processes and systems while outsourcing dozens of key IT services. And for Leggate’s part, since the start of the year, he has personally assured Browne and other top managers that BP’s $1.7 billion IT budget is spent in areas that will bring maximum return.
In a profession where an average tenure is four years and nine months, Leggate’s five years as BP’s CIO provides lessons in managing up, in leading by example and in keeping a focus on corporate goals. For starters, it helps to be driven. Leggate, like his boss, says he likes to do things ahead of competitors. He says that BP is a first-mover because “it’s in the genes,” adding that “time and time again, it is shown there are no prizes for coming in second.”
Drilling for Savings
BP’s headquarters, a stone’s throw from Buckingham Palace, faces Saint James’s Square, one of London’s oldest and most prestigious addresses. Dukes and earls populated the square in the early 18th century and both Gens. Eisenhower and de Gaulle made their World War II headquarters here. Inside BP’s offices, however, all remnants of England’s history are replaced by its ultramodern, open floor-plan architecture. Earnest looking, nattily dressed executives scurry up and down curved stairways that lead to floors of clutter-free desks, surrounded by small, glass-paneled offices. At the top of the open stairwell lie the executive suites of Browne, who was knighted in 1998 and has since been known as Lord Browne of Madingley. A few floors below, Leggate (who recently was named a Commander of the British Empire, one step below knighthood) works at a laptop in his spare office.
Dressed in a crisp dark suit and bright blue tie, Leggate likes to talk about his interest in technology and BP’s accomplishments but is self-effacing and vague when asked about his own background. “It’s not about me, it’s about what my team has done,” he says in his lilting Scottish accent.
This much he’ll confirm: Leggate got his start in the energy field constructing nuclear power plants before joining British Petroleum in 1979. At BP, he made his name as an executive who could take on a problem and quickly produce results. “The CIO job came as a complete surprise,” says Leggate. “I have a wide range of experiences, which allows me to interact with the businesses and relate to and understand their challenges not as an outsider, but as someone who’s done it himself. That’s a great selling point for a CIO.”
Leggate was surprised to be a CIO candidate, but unbeknownst to him, his predecessor had eyed him as a possible successor. When John Cross left BP in 1998 to form his own Internet consultancy, the company considered a broad search. Cross remembered Leggate’s interest in technology and says he was particularly struck by Leggate’s work running an aging North Sea oil field. Leggate needed to slash costs, but instead of cutting across the board, he decided to boost spending in technology designed to help automate the drilling process. The result: a more automated oil field that continued to produce crude and revenue. “John was always proactive in deploying technology,” Cross says. When asked about his IT investments while working on oil and gas fields, Leggate says, “I used to bet on technology even in a down market.”
Cross proposed Leggate’s name to Browne, who approved it over the objections of a couple of managers who balked at losing one of their top executives. On a trip back to London from Azerbaijan, Leggate met with Browne and accepted the CIO job just as the company was starting the Amoco merger. “I have a good track record of bringing things together,” Leggate says, theorizing on why he was chosen for the job. “I’m good at driving base costs, finding value and making the whole thing work.” To the point: BP was using 10,000 software applications across the company when he became CIO. Within a year, they had scrapped 3,000 and hired outside contractors to manage another 5,000.
Drilling the BP Way into Amoco
As Leggate stepped in as CIO in January 1999, he faced the overwhelming challenge of integrating conservative, Chicago-based Amoco’s massive IT operations into BP, which had been on an outsourcing binge since the early 1990s and had already consolidated dozens of data centers and outsourced much of its help desk and application support work. By contrast, Amoco built systems in-house, and IT staffers feared losing their jobs. Leggate began working with Phiroz P. Darukhanavala, then vice president for IT merger integration and soon to become the company’s CTO and the hands-on leader of the integration efforts, and set out to identify overlaps in the IT departments. Leggate and Darukhanavala (known as “Daru”) say they learned from the Amoco merger the importance of spelling out the “rules of engagement” to designate who will create the integration plan. In the Amoco case, BP ultimately stepped in and imposed its will on Amoco, standardizing desktops on a BP operating environment and scrapping much of Amoco’s in-house IT systems, keeping only Amoco’s SAP platform for U.S. operations.
“You have to make it crystal clear who is in charge when you are integrating two companies’ systems,” says Daru, who is based in Warrenville, Ill. “There are no right or wrong answers, but you need to make a call, or you will be arguing for years.”
Leggate was given 24 months to find his half-billion dollars in savings, but it took only 11. “They clearly decimated Amoco,” Cross says, noting that Leggate effectively imposed BP’s agenda to outsource wherever possible and trim IT staff at Amoco and subsequent acquisitions. After his early success in cutting costs, Leggate’s colleagues gave him the nickname “Shiny Brain,” a moniker that also refers to his immaculately shaved head.
The integration tasks remain a major concern for Leggate’s team. With more than 100 ERP systems and dozens of payroll systems, BP continues to work its way through a morass of back-office integration. With merged companies, Daru says, “We always focus on getting employees connected first so that from day one people can communicate with anyone in the company with merged networks and e-mail. But in all these mergers, the back-office stuff was untidy. It will be a matter of years before it is all cleaned up.”
Today, BP is working to consolidate more than 400 data centers and server farms around the world, with plans to reduce the number to “a handful” in the coming few years.
The emphasis on outsourcing is by design. Leggate is pursuing BP’s pioneering strategy, which dates to the early 1990s when Browne and Cross sought a competitive advantage through efficient ways of buying IT services. BP still outsources on a large scale, with everything from telecoms, application development, data centers and help desk provided by vendors. The company took the model further in 1999 when it outsourced HR back-office processes to the Internet company Exult in a $600 million deal that transferred most U.S. and U.K. HR services to a Web portal.
When the strategy began, outsourcing drastically cut BP’s IT budget and headcount. In BP’s exploration unit (then led by Browne), outsourcing drove an IT budget drop from $360 million in 1989 to $132 million in 1995.
Now, Leggate says, the company has moderated the pace of outsourcing. Both Daru and Leggate say BP has learned to limit outsourcing contracts to three years and to avoid forcing alliances between outside vendors. In November 1999, BP made a $650 million bet to outsource telecom services to WorldCom, before its 2002 accounting fraud scandal was exposed. “Instability in that market has caused us to diversify our buying portfolio, to spread our risk,” Leggate says.
Daru, who calls himself Leggate’s right-hand-person and quiet adviser, notes that the company is gradually reducing the number of ERP systems and is moving away from best-of-breed packages toward more integrated suites for HR, accounting, retail and other back-office systems. “We’re not integrating for the heck of it,” Daru says, adding that a clear payback drives integration efforts. Daru calls Leggate a fast learner and considers part of his job to cultivate ties to the IT vendor world while Leggate maintains the critical link to the BP executive suite.
Digital Boom and Bust
Once done with the initial budget slashing from the BP-Amoco merger, Leggate set out to invest heavily in Internet technology. With Browne’s backing, he spent $250 million in 2000 on initiatives to get BP employees onto a common operating environment. He bought Internet-linked laptops for more than half of the company’s employees, including top management and oil rig workers. Now, 80 percent of the company’s 100,000 employees have computers, 2,000 of which are “living beyond the firewall” in an experiment with broadband wireless connections that puts them ahead of competitors Shell and Exxon Mobil. “One of my main jobs is to allow people here to be connected wherever you may touch down. If you’re in Jakarta, Singapore or Houston, you’re always in touch with your colleagues,” Leggate says.
Leggate and Browne’s early enthusiasm for all things Internet-related reflects the first-mover company ethos also evident in BP’s acquisition and outsourcing strategies. Sometimes, they admit, they have gone too far.
Both Leggate and Browne bet aggressively (and some would say unwisely) on online procurement, predicting large and quick gains in the business-to-business area. In 1999, Browne predicted with fanfare that BP would move 95 percent of its $25 billion in procurement to the Web by the beginning of 2001. When the company was able to achieve only 4 percent of purchasing online by that year, Browne said in a speech delivered at Oxford University (and cowritten by Leggate): “To have reached that sort of level would have required not just closely linked internal systems but also well-developed portals and a network of suppliers linked into a single process. Revolutions don’t come easily.”
In retrospect, Leggate says now that while the expectations were overblown, the vision remains. “Clearly, digitizing the supply chain in all its facets will be a long journey, but the dream?in a business context?has the touch and feel of an Amazon.com,” he says. He adds that BP will remain a first-mover where they see a clear payback. “Technological breakthroughs like Web services and RFID tagging, all of these will accelerate the drive toward digitization of the supply chain,” he says.
Cross, himself afloat in the dotcom bubble at the time, says that BP’s enthusiasm may have cost them. “They did play with tangential things, especially in B2B, and they surely lost a lot of money on that, as did everyone else,” he says. Leggate, who embraced the Internet more enthusiastically and publicly than other oil industry CIOs, still proclaims that BP’s goal is to “live on the Web.” It sounds a bit dated as a motto, but Leggate (echoing Browne) stresses the Internet never changed the laws of economics or the nitty-gritty nature of finding oil and gas. Leggate says: “Are we getting more for less now? That answer is yes. We can genuinely show about a 5 percent per annum trendline over five years in savings from technology.”
A Business-IT Pipeline
According to Jill Feblowitz, an analyst at AMR Research, all of the oil giants are “on the same page” wrestling with ERP consolidation and pouring dollars into “digital oil field” initiatives that promise increased oil production through 3-D imaging and real-time, automated drilling techniques. “Everyone is focused on creating more flexibility with these initiatives because of the heightened uncertainties in the Middle East and other regions,” Feblowitz says. The challenge for CIOs at the oil giants, says Dick Cooper, director of Deloitte Consulting’s global oil and gas practice, “is to marry these new technologies with cost and budget information.”
Analysts characterize BP’s technology strategy as aggressive, but they also agree that when it comes to aligning IT and business strategy, BP seems to be further along than its rivals. That task has been made easier by Browne’s interest in IT and Leggate’s business experience. “What was unusual about John Browne was that here’s a CEO that not only thought IT mattered but made it clear by his actions,” says Michael Earl, dean of Templeton College at Oxford University and an expert on the CIO role and on CEOs who have pushed an IT agenda. Earl adds that Cross set the stage for Leggate by working closely with Browne and getting top-level approval for his bold decision to outsource much of IT in the 1990s.
The origin of BP’s aggressive style lies in a management structure that is less hierarchical than its competitors. Once a rigid, state-owned company, BP’s structure shifted dramatically after the British government sold its final 30 percent share in 1987. When new management took over in 1992, the company was split up into 150 business units with managers’ pay linked to their unit’s profits. Now, ambitious managers like Leggate must demonstrate a business case for each investment. Leggate describes his task of assuring top management that money is wisely spent on IT projects as a “restraint model” that involves both challenges by outside experts and a robust debate within the senior leadership team.
Even after the disappointment of the Internet bust, Leggate retains a hard-to-restrain glee when talking about technology’s promise. (Cross, who is in regular touch with Leggate, says the CIO’s enthusiasm helps him sell BP executives on the importance of IT.)
For a presentation on radio frequency ID tags to Browne and 40 other executives, Leggate invited colleagues from Procter & Gamble and the brewer Scottish Courage to talk about how they had used RFID to verify the age and freshness of a product and to track pallets and crates. “Our people went away really enthused,” Leggate says of the meeting. “We decided to harness that energy level and launch four major projects.” BP is implementing sensory networks using RFID chips for applications such as tracking rail cars in the chemical business. “It’s important to see, and to show, whether there is a business case, as opposed to just chasing a technical dream,” Leggate says.
Exploring for Value
In August 2003, Browne made BP the first Western oil company to buy a major equity piece of an integrated Russian oil and gas company, giving BP a 50 percent share in a venture dubbed TNK-BP. Two months later, the arrest of Mikhail Khodorkovsky, president of Yukos, the country’s largest oil company, roiled the Russian financial markets. Browne voices confidence in the investment, but analysts say the jury is still out.
Risk, however, is integral to BP’s strategy. To Leggate, the culture of risk-taking means that projects such as those using RFID are adopted quickly and wholeheartedly if they can help the bottom line. New deals like the one with Russia’s TNK mean the integration challenges will continue. Leggate prefers to delegate systems integration details to Daru’s team and focus on strategy and cost controls.
Leggate’s team is moving away from proprietary systems toward commodity computing and open-source architectures. The group is looking at using a new class of software that will allow far-flung employees to access applications over the Internet and to download only the piece of an enterprise program they need. According to Daru, this type of software-on-demand would involve SAP and some other types of applications but is still in experimental, although promising, stages.
From the outside, BP appears to have embraced risk more than its rivals by doubling in size, venturing into unstable regions or diving headfirst into the Internet and other technologies. And many of the risks seem to have paid off. For example, the Amoco buy turned BP into a major supplier of natural gas, which has tripled in price since 1998. Soon after, Exxon bought Mobil and Chevron took over Texaco. Today, BP vies with Royal Dutch/Shell for the title of second largest integrated oil company after Exxon Mobil.
At BP’s London offices, however, recklessness seems a foreign concept. “Our natural bias for innovation has to be handled carefully so that we always find the business point,” Leggate says. He adds later that BP “undertakes a high and rigorous degree of analysis and testing before it places its bets.” Although Leggate relishes discussing BP’s philosophy, the CIO post at Britain’s largest company can be a lonely one, Leggate has told Cross. “It’s dangerous territory because, like a CEO, you are always getting shot at,” Cross says. “John is an ebullient character, though. He’s like a big rubber ball that can take the knocks and keep bouncing along.”