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Leading change: An interview with the CEO of Eni
posted by admin on 26/09/06

Paolo Scaroni explains how he helped rescue two troubled businesses and now confronts what is in some respects a more challenging task: leading a highly successful one.

Giancarlo Ghislanzoni

2006 Number 3

Paolo Scaroni is an Italian executive with wide experience running European businesses. Currently chief executive officer of Eni—the international oil and gas company, listed on the Milan and New York stock exchanges—he was previously the head of Italy's leading electric utility, Enel, and before that nursed the troubled UK glassmaker Pilkington back to corporate health. Scaroni first got to know Pilkington as CEO of Italy's Techint (the two companies ran a joint venture in the late 1980s), though he acquired his early knowledge of the glass industry at France's Saint-Gobain, where he held a number of appointments, culminating in the presidency of the flat-glass division.

Scaroni's record at Pilkington and Enel makes him well qualified to talk about corporate turnarounds. Eni, which he joined in June 2005, represents a different sort of challenge. While Pilkington had experienced some degree of difficulty and Enel needed a strategic redirection, his present company was already doing well when he assumed its reins, just over a year ago, and had no obvious need for a sharp change in direction: powered by surging oil prices and a significant rerating of its shares, it was already hugely successful under his predecessor. Thanks to assets in (among other places) Africa, the Middle East, and the Kazakh offshore section of the Caspian Sea, Eni has an enviable position to replace and increase its oil reserves over the medium term. In 2005 the company's oil and gas production rose by 7 percent while net profits jumped by 24.5 percent, to €8.8 billion.

Scaroni's views on the outlook for global energy are widely quoted in the mainstream media. In this conversation with McKinsey director Giancarlo Ghislanzoni, he discusses his ideas on leadership, his passion for simplicity in a world of growing organizational complexity, and his trenchant views on the deficiencies of the "European model."

The Quarterly: Your three most recent CEO positions—at Pilkington, Enel, and now Eni—have involved very different companies facing very different situations. Can you describe them to us?

Paolo Scaroni: I have no doubt that the most difficult situation for me was the first, when I was appointed CEO of Pilkington. Up to that point I had never encountered the responsibilities of running a public company with a large market capitalization and outside investors; the whole "City of London" aspect was new to me, and being a foreigner added some complexity. Having previously worked for Saint-Gobain, however, I had a lot of credibility in the marketplace, and I knew exactly what I wanted to do.

Pilkington at the time1 was a commodity glass producer that had clearly lost its direction. A commodity business is all about costs, and if you are not cost efficient you simply find yourself out of the market. The problem had been intensifying at Pilkington over many years but was disguised by huge flows of cash, which came into the company as a result of its licensing agreements. The tension needed to deal with costs was simply not there. To give you an idea of the inefficiency, there were 42,000 people in the company when I arrived and 27,000 when I left—15,000 fewer—but at the end of this period the company's output was roughly the same. The nature of the transformation was therefore quite traditional and very operational: it involved closing down plants, reducing overheads, and generally restructuring costs.

The Quarterly: The same could not be said of Enel's transformation, could it?

Paolo Scaroni: Enel is a different story. If I had to sum up what I was doing during the three years I was there, it was restructuring the strategy and, more particularly, reshaping the business portfolio. Enel had become a kind of conglomerate, active in many sectors. What we did was to refocus around the core businesses of gas and electricity and divest the remainder to get rid of the distractions. We cleaned the table, as I like to put it. If you have too many problems to think about, you cannot cope with all of them.

The Quarterly: You like to reduce complexity in a business, don't you? What needed to be done at Enel, and what were the benefits?

Paolo Scaroni: My predecessor at Enel had been extremely successful in turning what had been a state-owned service company and quasi-monopoly into a more market-oriented business. But in my view he had made a huge mistake, which was to try to turn cost centers like IT, engineering, and real estate into stand-alone profit centers. The IT department employed 1,500 to 1,800 people, for example—too many for the businesses we were in—but the company decided to try to sell IT services to other companies anyway.

There were two flaws in this approach. The first one is that it becomes a huge distraction. All companies, but particularly small companies, need a lot of management attention, so you can imagine what happens if you start adding 30 new businesses to the portfolio. The second point is that it's very difficult to transform a cost center into a profit center. Why, after all, should the IT department of Enel be competitive against the likes of Accenture or IBM? Indeed, almost by definition such a department is noncompetitive.

In my time at Enel, we either sold or reincorporated the businesses that were peripheral to the core activities, and everything automatically became simple, easy, and focused again. With fewer papers to read and problems to solve, everyone in the management team became more relaxed. It was very evident.

The Quarterly: Let's move on to Eni, where your employees must think the opposite—that they are doing extremely well.

Paolo Scaroni: Absolutely. That's why I consider Eni a true challenge, because over the last five to seven years, under my predecessor, Eni has been highly successful, possibly the most successful oil company in the pack in terms of share price, the growth of operations, and international diversification. Over that period, indeed, Eni has outperformed its peer group—for instance, Royal Dutch Shell and Total—quite considerably. The reason, in part, was three well-timed and shrewdly executed acquisitions and the consistent delivery of results, which led to a market rerating that eliminated the 10 percent or so discount at which our shares used to trade relative to the rest of the sector. For this reason, we cannot talk about a turnaround as such. Eni is a company whose operating performance has been good and which has been consistently well run, particularly in the upstream Exploration & Production division. To make changes in such an environment is difficult, but I believe that every company, every organization, can be improved. The issue therefore is how to fuel growth in the future and make changes in a company that doesn't need to be turned around and shouldn't be turned around. I often start my speeches by saying, "Don't try to fix what is not broken."

The Quarterly: What are the necessary changes from your perspective?

Paolo Scaroni: The main challenge concerns the organization, and the process of change started under my predecessors. Eni used to be a kind of holding company, which included entities that were very powerful and very independently run. The integration process is not finished, but in the past few months we have been moving to create a real corporate center that draws on the whole chain of the organization.

A well-functioning organization will help us meet our main strategic challenge, which is how to continue increasing growth in oil production, and not necessarily by making acquisitions. All the plans we have drawn up are based on organic growth. We don't exclude acquisitions, but we have promised the market seven years of consecutive growth without them. We can do this because of our strong positions in some of the most promising areas of the world, notably Algeria, Angola, Egypt, Kazakhstan, Libya, and Nigeria. What all these countries have in common is that there—unlike, say, in the North Sea—oil production will be higher in 2020 than it is today.

The Quarterly: Has your leadership approach been different in your latest role?

Paolo Scaroni: Not really. I normally try to find three or four strategic concepts that sum up the direction in which the company should be moving, build up an organization that believes in these concepts, and then repeat, repeat, and repeat them throughout the organization. I am convinced that communication is a very powerful tool for running large organizations such as this one. It works fine if people know exactly where they are going, but in order to know this they need to be able to grasp some easy concepts. If it takes more than one minute to explain a strategy, something is wrong. In my view, it has to be that simple. Successful things are simple; I have never seen successful things that are very complicated. You provide simple guidelines and repeat them throughout the organization.

The Quarterly: So what would these concepts be at Eni?

Paolo Scaroni: Well, for example, we need to be sure everyone knows that we want to grow as a company by doing what we are essentially built to do—namely, winning exploration bids, running exploration success stories by making some discoveries, allocating capital expenditures to lift the oil, and then selling it. We also need to be clear about where we want to do this, looking closely at the oil-rich countries while being conscious of the political risks, which we are able to manage.

In gas we are number one in Europe. We want to retain our leadership and take advantage of the fact that the market for gas in Europe is growing. We want to invest in pipelines wherever we can, since pipelines are a strategic asset for the long term. It's easy stuff.

The Quarterly: When you articulate these concepts at Eni, do you set out a timetable? Does the company get the sense of a staged approach?

Paolo Scaroni: The timing essentially follows from our planning system, with the high-level concepts translated into a series of actions that are taken over time. All mechanisms, like bonuses and the compensation system, should generally encourage a sense of urgency, a feeling that things should be done within a certain deadline. Of course in the oil industry there is probably less urgency than in many other industries, because the decisions you take today might not give you a result for ten years. That does not mean that you don't have to be quick, but the time horizon is very different.

The Quarterly: How do you reconcile a company's time horizons and cycles, which might be, say, as long as ten years, with the mandate of the CEO, which might be shorter?

Paolo Scaroni: There is no conflict around the cost issues. How efficient are you? What's your overhead spending? What are the optimum staffing levels? These are always short term and should always have a sense of urgency. On the investment side, of course, this is an industry with a very long-term horizon. Eni, for example, is the operator of the consortium that has been awarded the Kashagan field,2 the most important discovery of the past 30 years. The consortium is investing $15 billion, but we will not be producing our first oil from there until 2008. At this stage, we have no idea what will be the Kashagan of 2015, but we need to start looking for it now.

The Quarterly: Do these general principles hold good for other industries? Did you apply these principles in the other cases?

Paolo Scaroni: Absolutely. Take my views on organizational integration and what happened at Pilkington. That company had used the revenues from its flat-glass technology to acquire other businesses in the industry, such as Flachglas Wernberg of Germany, Pilkington Libby Owens-Ford of the US, and a big Brazilian glass manufacturer. What was astonishing to me when I joined Pilkington was how independently all these companies were run, to the point where they had their own boards, remuneration committees, and audit committees. One of our major initiatives was to launch a program called Building One Pilkington to put together the companies, eliminate the boards, and introduce central purchasing and central finance, which at the end of the day is the best way to reduce overhead. I repeated this message for several years until all the previous structures were destroyed, transforming those companies, essentially, into factories, on the one hand, and customers, on the other. The rest was cut out. The cascading of the Building One Pilkington concept was very important to communicate the newly focused strategy and a subsequent implementation program, just as it was at Enel.

The Quarterly: Let's come back to that sense of urgency, which we agreed was easier to tap in companies experiencing difficulty. How do you get that urgency in a company that doesn't face an economic crisis or severe investor pressure?

Paolo Scaroni: Talking from an Eni perspective, the sense of urgency in Exploration & Production comes about through our oil production targets. The background of the other two major businesses in the group—Gas & Power and Refining & Marketing—is quite different. Gas & Power was a monopolistic type of business, historically, while R&M has not faced an intense competitive environment. In these two businesses, the only thing you can do to create the appropriate sense of urgency is to benchmark yourself against others so you can see what others have been doing and where you should be doing better. Stretch targets are always a good way to get people to improve quickly.

The Quarterly: As an experienced nonexecutive director of other companies yourself, do you think this position provides a special perspective on change or an opportunity to make a special contribution?

Paolo Scaroni: It's not easy to give a diplomatic answer! In a true public company, such as Pilkington, nonexecutive directors have considerable power and responsibility—above all, the ability to fire the chief executive. I have been involved with companies where this has happened, including one in which there was a dramatic meeting in a London hotel. In companies, such as Eni, that are listed but not public in the Anglo-Saxon sense of the word, the nonexecutives have neither this power nor this responsibility. So the role is different, though not meaningless. In Italy we are getting closer to the Anglo-Saxon system in some respects, but not this one.

The Quarterly: That raises a question about more widespread change, which many people think is needed by business systems in continental Europe. What's your experience after working in France, Italy, and the United Kingdom?

Paolo Scaroni: In this context, I believe that some concepts are exactly the opposite of what they seem. When, for example, you read the European press, the talk—notably in France—is about people fighting to hold on to their precarious jobs. Well, personally, I think precarious jobs are fantastic, but the reality is that all jobs have to be precarious. Without the current labor legislation, companies in Europe would be able to create millions more jobs, as they have done in the UK. To me it is unbelievable that the boss of a company in France, Germany, or Italy devotes a lot of effort to the task of how not to hire new people, when we should be devoting our time to thinking how we can hire them.

In continental Europe, we have developed a mentality which says that if you were born in, say, Lyon, you deserve to live all your life in Lyon, with nobody ever firing you for any reason, every year making 5 percent more than the year before, and retiring when you are 58. In my view, that's a pretty boring prospect, but apart from anything else, in a global world it's an impossible dream. All politicians understand as much, but every time they try to explain it they are no longer elected. From the employee's point of view, so-called freedom means doing dull and stupid tasks, working on when your boss is nasty and undermining your career—all because your job is "safe." Stability, in reality, fires back, and in this respect Belgium, France, and even Spain are worse than Italy. In a world in which everyone is changing, by contrast, you can quit when you are unhappy, find a better job, and compete.

The Quarterly: Some of these sentiments, I understand, appeared in a guide you wrote for young businesspeople—a best seller in Italy some years ago. Would you change the content if you wrote it again?

Paolo Scaroni: Oh, yes! It's very outdated, and some of it was a bit tongue in cheek, like what sort of wife to marry. But one thing I would not change is the importance for young people of a strong curriculum vitae, with the various schools you attended, the languages you speak, the experiences you have been through, and the jobs you have held. A good CV is your real wealth, and the most important thing it can bring is freedom. A good CV allows you to sell yourself in the market; without one you will rely on luck or a boss who happens to like you. How you went about selling yourself in the 1980s was different from how you go about it now, and it will have changed again by the 2020s. But the basic principle will stay the same.

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