Behind Oil Profits: A Look At ExxonMobil's Technology Alignment

By Mel Duvall  |  Posted 2006-05-06 Email Print this article Print
 
 
 
 
 
 
 

Rocketing oil prices are driving the nation's big oil companies to record profits. And ExxonMobil stands out in the industry. By investing in proprietary systems and ensuring that technology is tightly aligned with its top goals of finding more oil and ga

The scene was not at all flattering. The leaders of the nation's top six oil exploration and refining companies stood before the Senate Judiciary Committee on Capitol Hill in March, hands raised, ready to be sworn in.

The chief executives-arguably a clutch of the most powerful men in America-were not accused of any crime, but the image captured by television cameras certainly created the appearance of a trial.

They had been hauled in to explain why Americans were emptying their wallets at $2.50-a-gallon gas pumps and paying an average of $1,000 in natural gas bills to heat their homes-35% more than last year-while oil companies were raking in record profits. Combined, the six companies represented at the hearing, ExxonMobil, Chevron, ConocoPhillips, Valero Energy and the American arms of Royal Dutch Shell and BP, earned a staggering profit of $110 billion in 2005, on revenue of $1.4 trillion.

One company in particular, ExxonMobil, was responsible for almost one-third of those profits-$36.1 billion. But if the public and senators thought chief executive Rex Tillerson was there to apologize, they were wrong.

"No doubt about it, we had an unusual and outstanding year," he told the committee. "Even so, we earned less than 10 cents per dollar of sales. Many large industries earned in excess of 18 cents per dollar of sales last year. And I'm not here to say that's a bad thing."

When it comes to business, Exxon is nothing if not a straight shooter. And no company seems clearer about itself and its mission. Every ounce of energy the company expends is directed toward pumping more oil and gas-and profits-from its operations.

And that carries over to its information technology.

Exxon has proved to be a master at aligning technology with its corporate goals, whether it's in support of its exploration for new oil and gas resources or squeezing costs out of its refineries, chemicals businesses or gasoline outlets.

"They are at the absolute end of the scale in terms of being an organization that understands their business goals and the role that technology plays in helping them achieve those goals," says Prof. Arvind Malhotra, a technology alignment specialist with the University of North Carolina's Kenan-Flagler Business School. Each year, Exxon sends some 300 leadership candidates to Kenan-Flagler with the primary goal of achieving, as the school puts it, "the alignment of the thinking of future leaders with its fundamental business principles."

"The entire organization understands the company's philosophy and its goals," Malhotra adds, "and clarity of process and clarity of objectives in turn leads to a strong alignment between the business and I.T."

Certainly, Big Oil has a big budget to spend on technology. The company, Tillerson boasts, will spend $700 million on a wide range of technology initiatives in 2006, on everything from developing applications to find harder-to-reach oil deposits, to researching new corrosion-resistant pipelines to transporting oil in arctic regions.

But Exxon's counterparts also have big technology budgets. Its three closest competitors, Chevron, Shell and BP, had technology budgets averaging about $380 million over the last five years. As a ratio of sales, they are about the same. (Exxon's I.T. spend is about 0.16% of sales, compared to an average of 0.15% of sales for Chevron, Shell and BP.)

The big difference is Exxon's approach to spending. Its technology budget is strictly tied to the company's two biggest priorities: finding more oil and gas, and wringing costs out of operations.

And the company will spend where it sees a need. It has invested billions of dollars in proprietary business intelligence systems; these include reservoir simulators that help it determine how best to get the most oil out of the ground, and 4D seismic technology that allows the company to create pictures of the geology beneath the Earth's surface that are so realistic, geophysicists can practically "see" where oil deposits are waiting to be tapped. Exxon estimates it spent as much as $60 million alone in developing its state-of-the-art reservoir simulator, called EMPower-a commitment to technology it says will continue to keep it at the top of the exploration game.

Tillerson, with his no-nonsense attitude, makes the company's philosophy of corporate alignment sound simple. It all comes down to discipline, he says; the discipline to invest only in projects and technologies that can achieve an attractive rate of return, and the discipline to walk away from a deal or technology-for example, solar power-when it doesn't make financial sense.

Achieving alignment is something chief information officers and business unit managers in all companies have struggled with for decades.

And continue to do so, according to Jerry Luftman, a professor at Stevens Institute of Technology in Hoboken, N.J., and author of a book on the subject, Competing in the Information Age: Align in the Sand. "Yes, we've been talking about this for years, and we've developed all kinds of metrics and measurement tools to address the problem ... but it is still one of the biggest challenges," he says.

But Exxon's financial results provide a convincing picture that these obstacles can be overcome. It continually outperforms its peers in metrics such as net profit margin (9.7% in 2005 compared to 7.9% for its peer group), return on capital employed (31% in 2005 compared to 22%), and profits as a percentage of shareholders' equity (33% versus 24%). And while revenues have soared since its merger with Mobil in 1999, from $232 billion in 2000 to $371 billion in 2005, its workforce has been reduced from about 100,000 globally to 85,000.

With the price of oil inching above the $70-a-barrel mark, Exxon pushed aside General Electric and Wal-Mart in 2005 to become the biggest company in the U.S. To put its $371 billion in revenue into perspective, the entire gross domestic product of Saudi Arabia last year was $341 billion, according to the CIA's World Factbook.



Story Guide:
Straight shooter: CEO Rex Tillerson Doesn't Play Games



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Contributing Editor
Mel Duvall is a veteran business and technology journalist, having written for a variety of daily newspapers and magazines for 17 years. Most recently he was the Business Commerce Editor for Interactive Week, and previously served as a senior business writer for The Financial Post.

 
 
 
 
 
 

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