Assignment Strategic

Structuring enduring strategic alliances: the case of Shell Australia and Transfield Services

Steven Burdon, John Chelliah and Ajay Bhalla

1. Introduction

Firms are increasingly outsourcing both core and non-core functions ranging from IT to

engineering and facilities management services to seek benefits ranging from cost to

flexibility (Bhalla et al., 2008; Burdon and Bhalla, 2005). As the reliance on third parties

grows, managers seek possible benefits from outsourcing. In turn, they face challenges in

developing, managing and leveraging the outsourcing relationships. This paper

investigates how successful outsourcing relationships develop over time. Focusing on the

outsourcing relationship between Shell and Transfield, we explore how it developed over

what we term as the three distinctive developmental stages. We predict how this alliance is

likely to evolve in the future. The paper begins with the methodology we deployed before we

turn our attention to a detailed examination of the alliance between Shell and Transfield

Services. We conclude with managerial guidelines for structuring interorganisational

relationships in services outsourcing.

2. Research methodology

Three forms of data were collected and analyzed: data from outsourcing contracts between

Shell and alliance partners, data from an earlier study carried out in collaboration with

Transfield and Boston Consulting Group and new data from interviews. A total of 12

semi-structured interviews were conducted between November 2006 and February 2007

with key individuals involved in the outsourcing arrangements between Shell and Transfield

Services as follows:

B Shell: chief engineer, operations manager, operations controller, contract manager, two

project managers, maintenance manager, and two maintenance controllers.

B Transfield: site manager, supervisor, and a project engineer.

An interview guide with five distinct sections to guide the interviewer was designed for this

research. The first section introduced the interviewee to the specific areas to be covered.

The second section consisted of questions that explored the role and perceptions of the

interviewees in relation to the outsourced arrangements/contracts. The third section

canvassed the views of interviewees on key success factors, such as trust, flexibility, scale,

cultural fit and reward structures. The fourth section required interviewees to rate 18 specific

areas of the alliance contract using a rating scale of 1 to 10 (where 1 ¼ extremely

dissatisfied and 10 ¼ extremely satisfied). The fifth and final section asked interviewees to

identify strengths and weakness of existing arrangements. Interviewees were also

canvassed for their views on the strategic direction and change required for this

partnership to create value for the alliance in future. A questionnaire survey of the

relationship with a focus on tactical and operational satisfaction levels was circulated to all

PAGE 42 j JOURNAL OF BUSINESS STRATEGY j VOL. 30 NO. 4 2009, pp. 42-51, Q Emerald Group Publishing Limited, ISSN 0275-6668 DOI 10.1108/02756660910972640

Steve Burdon is based at

the University of

Technology, Sydney,

Australia. John Chelliah is a

lecturer at the School of

Management, Faculty of

Business, University of

Technology, Sydney.

Ajay Bhalla is an Associate

Professor at the Cass

Business School, City

University, London, UK.

55 operational staff of both Shell and Transfield was circulated. In total, 39 staff members

responded to this survey. This equated to a 71 percent response rate.

3. Findings

3.1 Background of alliance between Shell and Transfield Services

By the early 1990s the Shell Refinery had moved to a multiple sub-contractor approach for its

operations and maintenance to split up the work into a number of separate contracts and

then tender to three or four sub-contractors to obtain the best price for a fairly prescriptive

definition of operations and maintenance. During this phase, a traditional approach was

taken to tendering and awarding contracts for a fixed sum for a defined job, usually covering

a short-term commitment. The approach was to take the total work involved and construct

contracts that usually covered a single service followed by splitting the service into different

jobs that were then farmed out to multiple contractors. For each service, specialist

contractors tendered for the jobs. Operationally, this worked through a system of tenders

submitted by six mechanical contractors, three civil contractors, and two electrical

contractors. The belief was that this approach delivered the best competitive environment

and the best value for money.

This approach required high levels of supervision for both Shell and the sub-contractors and

encouraged a behavior of claims and variations by the subcontractor to alleviate the low

margins required to win the contract. In addition, the processes established by Shell placed

a significant performance risk with the successful contractor, the primary motivator being

cost savings. The evolution of this relationship from 1994 to 2008 had three stages.

3.2 Distinctive stages in the Shell and Transfield Services alliance

3.2.1 First generation – client server partnerships. Although the initial motivation for the

alliance was cost savings, Shell’s first contract was also an exploratory one to gain

knowledge and information on best practices. The knowledge gained from their first contract

enabled Shell to move more confidently to a second contract where their knowledge could

make meaningful changes to the ground rules required to lift the performance closer to best

practice. But high transaction costs associated with the multiple sub-contractors and their

claims and variations created a confrontational environment in the early 1990s. The review

was initiated at that time to increase the efficiency of the system.

In addition, there was tension in the relationship beginning in the 1990s as Transfield

managers believed the contract would not be renewed. This tension was exacerbated by the

fact that at that time, the Clyde Refinery was perceived as having high operations and

maintenance costs in comparison with other refineries in the world. An international

benchmarking scale of efficiency for oil refineries worldwide has now been in place for many

years and therefore each refinery can measure the efficiency of its maintenance operation by

benchmarking its efficiency against other refineries via the Solomon Index. During the late

1980s and early 1990s, Shell’s Clyde Refinery performance was in the lower quartile of its

peer group.

During this phase, a limited number of services were moved to a single contractor, ABB. The

first generation outsourcing contract used unit rates and management fees and an incentive

style of outsourcing and contract. For the first time, key performance indicators were used

‘‘ A total of 12 semi-structured interviews were conducted between November 2006 and February 2007 with key individuals involved in the outsourcing arrangements between Shell and Transfield Services. ’’

VOL. 30 NO. 4 2009 jJOURNAL OF BUSINESS STRATEGYj PAGE 43

for a restricted range of issues, including safety and quality. The cultural change in a

different method of approach was a major hurdle. Shell had to change the previous culture of

carrot and stick enticements that supervisors had used previously to one of cooperation and

partnership. During this period, from 1994 to 1998, there was still an ‘‘us and them’’

relationship between the organizations (Shell and contractors) and separate organizational

visions.

3.2.2 Second generation – trusted collaborative partnering. At the end of the first

outsourcing contract, a decision was taken to commit to a stronger partnership model,

usually called an alliance in the industry. We call this the ‘‘Second Generation’’ phase. During

this period, Shell conducted a review of alternative partners. Evaluation criteria for

commitment would still focus on efficiency and cost improvements for a partner that they

could trust and who would be flexible. This would allow a much stronger concept of

partnership to be built using each party’s specific capabilities.

In 1998, while choosing an alliance partner, the focus was on a longer-term commitment with

major re-evaluation every three or four years, with agreed-upon governance reviews. The

chosen outsourcing provider, Transfield Services Limited, was an integrated organization,

which had strong experience in the oil refining market and other heavy engineering

industries. This allowed greater integration of processes, facilities and equipment usage

through the shared vision over the next seven years. Both companies had a shared

risk/reward approach reflected by the individuals in the joint team and between both

organizations. They were able to concentrate on continual improvement via incremental

innovation by ensuring a climate of creative tension (Burdon and Bhalla, 2005).

They set key performance indicators and agreed to a flexible approach in changing focus

and efficiencies. Some of the processes created to assist the evolution included total quality

management facilitated by joint training, elimination of barriers and enhanced teamwork.

Other processes implemented to achieve these ends included clear and open

communications to establish a more inclusive environment and a culture that encouraged

staff members to challenge and improve processes as a team.

Strong leadership and commitment were necessary to make the changes, and this was

achieved by a communication and review mechanism at a number of levels. At a supervisor

level, daily meetings were held with the employees, and a weekly meeting at general

manager level. Every month, the operating teams from both organizations held a

management review meeting. Each quarter an alliance review meeting was held with senior

staff from both organizations of management directly connected to the contract. This would

include a divisional director from the service provider and the operating and planning

directors from Shell. Progress was measured by comparison with the Solomon MI and Shell

Manpower Industry indices. In the course of the partnership journey, the refinery had moved

from a lower quartile to an upper quartile efficiency performance according to the Solomon

MI index.

Towards the end of this period, a further opportunity for enhancing the partnership emerged.

Higher oil prices and the shortage of refined capacity led to an increase in the number of

small capital works totaling approximately Australian $100 million over a three-year period.

‘‘ An international benchmarking scale of efficiency for oil refineries worldwide has now been in place for many years and therefore each refinery can measure the efficiency of its maintenance operation by benchmarking its efficiency against other refineries. ’’

PAGE 44jJOURNAL OF BUSINESS STRATEGYj VOL. 30 NO. 4 2009

Shell decided to extend the scope of a maintenance project to include these capital projects

and in essence transfer the jointly developed capabilities to a different part of Shell’s

business. As the alliance moved toward best practice standards, both Shell and Transfield

sought improvement by encouraging teamwork between the organizations and providing

systems for quick selection of improvement projects and speedy implementation and

recognition.

3.2.3 Third generation – joint strategic engagement. A third stage involving joint strategic

engagement describes Shell’s current position, driven by applying the skills and resources

of the maintenance team on site to small capital projects totaling $100 million over a

three-year period. The skills involved and the availability onsite of the people could be

applied efficiently to a new service on a cost plus basis. In essence, the third stage refers to

applying capabilities of the service provider to another aspect of the customer’s business, in

this case capital works. We summarize the three stages in Figure 1.

3.3 The next phase: how should the alliance change in the future?

New challenges emerged from the previous phases of the relationship and governance

arrangements. In the initial phase, the focus was primarily on cost efficiencies, but as the

operation moved closer to best practice further efficiencies were likely to be much smaller.

When our interviews took place in June 2007 with both Shell and Transfield employees, the

latest extension of the contract had been operating for 12 months. During the interviews it

became obvious that Shell managers thought new benefits should be part of the strategic

alliance. So the challenge for the team from both organizations was to set new strategic

objectives for the alliance to move to the next level of success. The alternative was for

management to accept incremental improvements.

The 2003 study reported in Burdon and Bhalla (2005) established thirteen primary benefits

sought by Shell managers from the outsourcing arrangement. During the interviews,

managers were canvassed for their views of the benefits sought in order of importance. The

results are summarized in Figure 2.

In this study, eight Shell managers involved in the previous study were asked to rate the

relative importance of the same 13 primary benefits. In addition, they could add any others

Figure 1 The three generations of service outsourcing

VOL. 30 NO. 4 2009 jJOURNAL OF BUSINESS STRATEGYj PAGE 45

that they considered relevant and rate their importance collectively with the 13 already

identified. While comparing the top six issues between our 2007 study and the 2003 study,

there were notable changes in the top six benefits sought (see Table I).

The 2003 survey showed high levels of satisfaction for ‘‘safety’’, ‘‘easy-to-work-with’’ and

‘‘flexibility’’ and dissatisfaction with ‘‘innovation’’.

Next, the relationship was surveyed with a focus on tactical and operational satisfaction

levels. Figure 3 compares the survey results by occupational groups for both the alliance

partners.

Scores of 70 percent and above indicate that the Shell and Transfield employees on average

believe that tactical and operational issues were dealt with extremely well (63-69 very well;

60-62 satisfactorily; below 60 this issue is not dealt with in a satisfactory manner). As can be

seen from these overall scores, 12 of the 19 issues surveyed achieved an overall score of

very good or extremely good. Those requiring attention are training, suitability of key

Figure 2 Table of 16 key benefits expected – their relative importance, satisfaction and the

positive or negative gap between the two ratings

Table I A comparison of the top six benefits in order of importance between surveys

undertaken in 2003 and 2007

Top six 2003 Top six 2007

Safety Safety Cost Understanding business Reliability Flexibility Quality Easy to work with Access to best practice Cost Flexibility Innovation

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performance indicators, alignment of goals and improving processes and strategies, with

strategies for improvement and innovation both considered unsatisfactory.

The alignment of staff managers and organizations on specific issues is an important part of

the process, along with engagement, if partnerships are to be effective, particularly in the

area of innovation and continual improvement. Interestingly, there was a very high

agreement between management and operations staff amongst the Shell employees.

Overall, the Transfield management tended to score the relationship at a higher level than

Shell. One of the issues that received low scores was the suitability and strategies to improve

key performance indicators. The environment is one where the workforce is under

considerable pressure to achieve outputs that improve profitability for the oil refinery. This

translates into significant pressure on the workforce of both organizations. Key performance

indicators were seen as very positive drivers in 2003 but gradually cost efficiencies started

to plateau and may even have become marginally inefficient. This situation was mainly due

to problems within Shell’s planning department, culminating in an increase of unscheduled

maintenance work. Further, with high oil prices and marginal profitability of the refinery,

priorities shifted to optimizing output with small capital works rather than minimizing

maintenance costs. This shift in priorities exerted pressure on the maintenance staff of both

Figure 3 A comparison of satisfaction levels of 19 elements between Shell and Transfield

employees to indicate where alignment exists between the partner’s employees

VOL. 30 NO. 4 2009 jJOURNAL OF BUSINESS STRATEGYj PAGE 47

organizations who were now struggling to demonstrate value for money. The quote below

from a Shell manager typifies the pressure issue:

Prior to the contract renewal there was a big effort to ensure things worked, but since then the effort

is to ensure things continue and there is less pressure. Our planning is unrealistic and key

performance indicators are ineffective. The percentage of unplanned jobs is high because of

problems with planning. This affects efficiency and we need to realign key performance indicators

with job starts. Weplan in a vacuumwithout consideration for availability of equipment to do the job.

From these interviews, it was clear that the relationship was on solid foundation with strong

levels of trust and commitment from management of both organizations to an ongoing

relationship. No adverse comments were made by interviewees toward the alliance.

Throughout the interviews, we canvassed the participants for their views on the areas that

were seen as essential, the areas that were working and what needed to be improved. Their

responses can be classified as follows:

B Corporate relationship. There was a feeling of familiarity, trust, and joint productivity,

enhanced by the transfer of Transfield people into Shell staff roles and vice-versa. The

interviewees referred to the visible signs of partnership such as joint brochures and logos.

Transfield’s supervisor explained: ‘‘Sometimes I don’t know who I work for. I make

decisions on behalf of Shell. I treat my client as if it is my business.’’

B Interpersonal relationships. It was impressive to hear all of the interviewees using ‘‘us or

we,’’ indicating the feeling of a shared destiny between staff of both organization.

Transfield staff felt integrated into Shell and was proud to wear both companies’ logos on

their corporate uniforms. There was a strong feeling that staff was approachable and

open to being challenged when necessary. When staff did criticize, they were quick to

acknowledge that ‘‘both sides are to blame’’, thereby avoiding the ‘‘them and us’’

syndrome. A Transfield manager explained the relationship in the following way: ‘‘The

mentality has changed from them and us to a team approach, which leads to more

productive outcomes.’’

B Cultural alignment. Shell and Transfield have a strong safety culture and are perceived as

valuing their people. Both have an ethos of hard work and commitment through working in

teams. A manager from Shell explained: ‘‘One way to keep the partnership functioning

well is to arrange informal get-togethers where colleagues can really get to know and

understand each other.’’

B Performance. Transfield employees were acknowledged as being good at maintenance

with high standards of quality and reliability. This was demonstrated by Shell asking

Transfield to leverage their capabilities to new areas of operations (for example: a new mix

of maintenance shut-downs) and capital projects.

B Scale. Although Shell is a very large global company, Transfield has the scale in

operations and maintenance in Australia to leverage resources for flexibility and bring

increased manpower from other locations in emergencies.

B Continual improvement. Throughout the second phase, Transfield’s ability to

communicate with its staff and ask them for better ways to make productivity savings

and improve safety is well recognized. Processes existed between both sets of

employees to facilitate these improvements. Examples include ‘‘Continuous Improvement

Process’’ (CIP) and the Vice President’s Award – ‘‘A better way’’. In addition, the ‘‘Global

‘‘ In 1998, while choosing an alliance partner, the focus was on a longer-term commitment with major re-evaluation every three or four years, with agreed-upon governance reviews. ’’

PAGE 48jJOURNAL OF BUSINESS STRATEGYj VOL. 30 NO. 4 2009

Asset Management Execution’’ (GAME) was being developed between Shell and

Transfield to focus on improvements to systems procedures and training.

Finally when exploring the question of ‘‘where to from here?’’ a number of interviewees said

that leveraging Transfield’s corporate skills and capabilities in new ways was a high priority.

There were a number of issues being explored:

B Organizational constraints. Generally, the interviewees from Shell felt that the current

organizational configuration and processes in both companies needed to be reviewed

to ensure that they did not impede the opportunities for innovation. Examples given in

the interviews covered such as areas as the challenges of Shell’s planning department

in dealing with the new mix of maintenance shut-downs and small capital works without

reducing the level of Transfield’s planned activity. Another example was the opportunity

to look at new methods of efficiently handling small capital works that would require

discussion and interfaces with the design groups. Shell’s chief engineer explained:

‘‘We are not sure whether we are getting good value for small capital projects.

Combining maintenance with these projects should be efficient but we need to develop

best practice procedures and costs for small capital works.’’ Interviewees from

Transfield, on the other hand, felt that it was difficult for their site staff to gain access to

corporate wide skills and knowledge of best practice. Judging from other organizations

and industries with similar issues, this leveraging of capabilities across an organization

is more likely to occur if alliance coordination is a separate function reporting to the

CEO or equivalent (Kale et al., 2002). Separate departments or functions will only

leverage their skills to a party outside their business unit if their impact is measured

and rewarded. British Telecom is a similar organization that has successfully dealt with

this challenge (Kale et al., 2002). Therefore, an exploration of their methodologies may

be beneficial.

B Transformational innovation. All Shell senior staff interviewed consistently wanted

Transfield to challenge their processes and interfaces. This will require moving the

spotlight to larger more complex issues such as Transfield’s involvement at the

construction phase. Such a move will require separate dedicated structures and

resources and a formal process for transformational innovation.

B Risk/reward. The previous study the authors conducted showed that the key

performance indicators were seen as constructive and providing a mechanism for

improvements. In this study, three years later, there was some criticism of the structure

and measurement of the key performance indicators from employees from both sides.

A common theme in comments from the Shell’s employees was that the key

performance indicators no longer had the right balance between risk and reward. The

increased workload and changing priorities in a period of skills shortages was a

challenge for all employees. And as the pressure to increase outputs intensified, the

balancing of safety risks and productivity were also a potential for differences. One

solution might be to move the pioneering and transformational projects, including costs

and rewards, out of the general contract of managing by key performance indicators

into a more tailored model. In addition, separating operational tasks (e.g. shut-downs)

from small capital works with specifically tailored key performance indicators catering

for both is worthy of consideration.

4. Managerial guidelines for success in structuring enduring cooperative relationships

The Shell-Transfield case provides an understanding of how longer-term outsourcing

develops from a simple exploratory phase with the intention to reduce costs into a more

strategic and complex partnership in which the alliance partners virtually operate as one

firm. There are several key stages in the process that managers should bear in mind when

going through the decision process that leads to structuring an enduring inter-organizational

relationship.

VOL. 30 NO. 4 2009 jJOURNAL OF BUSINESS STRATEGYj PAGE 49

4.1 Moving beyond a cost savings mindset

A formal cross-functional executive steering committee from both the firm and service

provider needs to lead the strategic decision-making and structuring/business model

process, ensuring that joint development of best-in-class vision remains a strategic concern,

rather than an outsourced, out-of-mind issue for the firm.

4.2 Working towards aligning with the service provider

Though contract management is an essential capability, selection of service providers who

share a passion for the depth and quality of service levels is a first step in this process.

Managers can start with a pilot, and assess the possibility of acquiring a minority stake in

order to endorse trust and joint ownership of risks and rewards. It is also useful to build

service provider incentives. Such incentives could be in the form of allocating a percentage

of billing in service provider development programs such as sponsoring staff deputations

across functions, and supporting training days.

4.3 Engaging in constructive tension

Most successful service outsourcing arrangements have an element of constructive tension

built into the contract. To enable the constructive tension, it is essential that firms have

renegotiation options built into their contracts. This could be in the form of rolling five-year

contracts where the client and service provider negotiate key performance indicators based

on the past year’s performance.

4.4 ‘‘Joint engagement’’ task force

A joint operational task force should meet at regular intervals, with the objective of

cross-pollinating ideas around needs and emerging trends. The task force needs to put in

place well-defined processes that not only facilitate measurement on key dimensions but

also allow capturing nuances and unresolved service level and workforce issues.

5. Conclusion

Many large firms in Australia, the US and the UK are moving to service outsourcing which

covers the sectors of information technology, business processing and engineering and

facilities management (EFM). Whilst firms in the UK and the US have significant percentages

of IT and business process services already outsourced, the Australian market is less

developed.

However, in the engineering and facilities management sector Australia is one of the most

advanced countries in the world. When EFM outsourcing started in the early 1990s, it was

primarily to reduce costs in non-strategic areas. Once these efficiencies have been gained,

the next challenge for managers is to continue to build value in third party partnerships and

leverage strategic skills that would not otherwise be available. Shell was one of the first to

move into outsourcing EFM and their experience over 16 years is therefore worthy of study.

Shell and their current partner Transfield face new challenges after having successfully built

a relationship where considerable labor savings were made in the first phase. Phase two

encompassed incremental innovation as part of their strategy to become one of the most

efficient maintenance operators in the world as judged by the Solomon MI index. As they

move into a ‘‘third generation’’ arrangement, they face a challenge of how to continue to

improve the alliance outcomes.

‘‘ Strong leadership and commitment were necessary to make the changes, and this was achieved by a communication and review mechanism at a number of levels. ’’

PAGE 50jJOURNAL OF BUSINESS STRATEGYj VOL. 30 NO. 4 2009

Shell’s best practice approach is generally applicable to all organizations in the quest for

competitive advantage in an increasingly competitive global environment. Firms first need to

establish the necessary building blocks of trust, and demonstrate flexibility to enable a

cooperative environment in the initial developmental phases of their relationship. This will

lead to the next phase in the form of synchronizing the culture and processes to measure

and delivering best in class outcomes.

Keywords:

Strategic alliances,

Outsourcing,

Operations management,

Innovation

References

Bhalla, A., Sodhi, M. and Son, B.G. (2008), ‘‘Is more IToffshoring better? An exploratory study of western

companies offshoring to South East Asia’’, Journal of Operations Management, Vol. 26, pp. 322-35.

Burdon, S. and Bhalla, A. (2005), ‘‘Lessons from the untold success story: outsourcing engineering and

facilities management’’, European Management Journal, Vol. 23 No. 5, pp. 576-82.

Kale, P., Dyer, J. and Singh, H. (2002), ‘‘Alliance capabilities, stock market response, and long-term

alliance success: the role of the alliance function’’, Strategic Management Journal, Vol. 23, pp. 747-67.

About the authors

Stephen Burdon is a Visiting Professor at the University of Technology, Sydney. His research interests include strategy, outsourcing, media convergence, and innovation.

John Chelliah is a lecturer in Global Strategic Management, Management Consulting and Innovation and Entrepreneurship at the University of Technology, Sydney. His research interests are management consulting, strategic management and entrepreneurship.

Ajay Bhalla is an Associate Professor at Cass Business School, City University, London. His expertise is in global offshoring, intellectual property, and family firms.

VOL. 30 NO. 4 2009 jJOURNAL OF BUSINESS STRATEGYj PAGE 51

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