The Process Safety Professional. Industrial Experience. Chapter 6/3

Excessive Cost Reduction

We are releasing sections of the book The Process Safety Professional to our subscribers. This post is taken from Chapter 6 ‘Excessive Cost Reduction’ (continued).

The current Table of Contents for the book is here.

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FLAG #2 — EXCESSIVE COST REDUCTION (Continued)

The following are examples of cost-cutting measures that can lead to problems.

Reduction of “Non-Essentials”

When managers want to cut costs they first look for supposedly “non-essential” activities or resources, such as training or excessive inventory of spare parts in the warehouse. Reducing expenditures on such activities and resources certainly leads to short-term cost reductions. However, over a longer period of time these cuts can create unsafe conditions. In Lessons from Longford Hopkins notes that cuts in the maintenance budget played a major role in that disaster.

A careful analysis of the findings from a facility’s incident investigations can help determine if cost-cutting measures may have gone too far. For example, if many incidents result from people not having sufficient training, then maybe the Training Department was “slimmed down” too far. Alternatively, if those incidents result from failed equipment items, then the Maintenance Department needs to be provided with more resources.

Reductions in the Work Force

In recent decades companies have been relentless in their drive to reduce head count. The pressures to do so have often resulted from mergers and acquisitions where the justification for the merger was that overlapping and duplicated functions could be eliminated, thus resulting in the elimination of “unnecessary” jobs. However, such cuts may represent a false economy; indeed merging two organizations may actually require a temporary increase in the number of service personnel so that the two different systems and cultures can be integrated successfully.

One particularly troublesome issue to do with work force reductions is that, when cuts are made, it is often the personnel with more experience who leave. Such people, being older, are more likely to be qualified for early retirement or “the package”. Also, their departure leads to a greater reduction in costs because they are paid more than the younger employees. Unfortunately, this means that the newer people have fewer gray-haired mentors to monitor their actions and decisions. This loss of experience problem is not new — indeed it is the theme of Trevor Kletz’s book, Lessons from Disaster - How Organizations Have No Memory and Accidents Recur (Kletz 1993).

Staff reductions have been particularly noticeable in corporate and engineering departments because many of the people who work in those departments are not perceived as being critical to the attainment of short-term production goals. Therefore, it is often felt that they can be released (or not replaced when they retire). If their expertise is required, it is argued, then experts from outside companies can be brought in on a contract basis. In fact, managers may choose not to bring in anyone at all. They may simply ask their remaining personnel to carry out a larger number of tasks. Such a strategy creates three difficulties.

1. The engineers that remain have more work to do in the same amount of time than they had in the past. Therefore, no matter how dedicated they may be, it is likely that their work will not be as thorough as it would have been in the past when more time was allowed to study specific technical issues.

2. There will be fewer subject matter experts to help identify and correct problems. If the company expert to do with pressure relief valves, say, retires and is not replaced, then problems with the design and operation of relief valves may not even be identified.

3. Even if outside experts or retirees are brought in, they will not be au courant with what is going on at the facility, so it is less likely that they will be able to offer immediate help. There is some company knowledge that cannot be brought in off the street. If a person has worked at a company for many years, particularly in a specialist department, and he leaves without having trained a replacement, there is almost certain to be a loss of “corporate memory”. People brought in from the outside may be very knowledgeable, but they cannot possibly know all of the history and background as to why things are the way they are at this particular location.

The “Big Crew Change”

A phrase sometimes used in the petroleum industry to describe the loss of experienced personnel is “Big Crew Change” (Gell 2008) , also referred to as the “silver tsunami”. The phrase is mainly used with regard to the large number of baby-boomer generation engineers and technical experts who will be retiring after the year 2010. These experienced personnel are not being replaced by sufficient younger people with comparable technical skills and experience. For example, it has been reported that,

Between 1983 and 2002, the number of U.S. petroleum engineers declined from 33,000 to 18,000 . . .

In other areas of plant operations, the loss of personnel is compensated for by using increasingly powerful computer systems. For example, a DCS (Distributed Control System) can carry out many of the functions previously performed by several operators. Similarly, sophisticated design software lets one engineer carry out calculations that previously had to be done by a team. Yet there remain certain actions that have to be carried out by people; the loss of skilled personnel in these situations represents a true loss.

Flattened Organizations

Gaps between the layers of management have grown as a result of programs that “flatten the organization”. Consequently the gaps between the layers of supervision and management have increased. Relatively junior and inexperienced employees are called on to make decisions without being able to tap into the guidance and assistance of more experienced personnel. Moreover, newer employees will have fewer opportunities to learn from their more experienced predecessors during the normal course of their work.

Another concern is that the number of experienced people in many organizations has been reduced, Hence, many process changes that were previously handled quickly and effectively on a semi-formal basis by experienced personnel who knew each other very well, and who also had an intimate knowledge of the processes for which they were responsible now must be handled in a more formal manner.

Aging Infrastructure

Not only is the workforce aging, so is the equipment itself. The manager of a large U.S. oil refinery dating from the 1920s recently said of his facility that, “The steel is tired”. He was concerned that an accident could occur because so much of the equipment was old and worn out and that it was not being replaced or upgraded quickly enough. Another manager, this time at an old petrochemical plant, said, “My plant is old but the engineers are young”. He did not intend his phrase as a compliment. He was worried about the problems caused by old equipment and the fact that his technical staff lacked the knowledge and experience to address those problems.

Out-Sourcing

One way in which staff reductions can be made, while keeping the organization functioning, is to out-source work to outside companies and personnel. If the work is truly one-off, such as the engineering and installation of a new piece of equipment, then the use of an outside company will usually be the best choice. However, if the work being out-sourced is a core function then this strategy can create difficulties. No outsider, no matter how experienced and talented, can know all aspects of an operation in the way that a long-term employee can.

For example, on one plant a particular compressor started to vibrate slightly. The long-term employees knew that this vibration was the precursor to a more serious problem, and that immediate corrective action was needed. However, these employees had been replaced with outside contract workers. The new workers did not recognize the seriousness of the vibration, hence they did not take corrective action quickly enough, and a serious leak of process fluids occurred.

The loss of experienced personnel also reduces the chance of developing long-term solutions to operational or maintenance issues. A contract worker is less likely to care about such long-term issues, and so is less likely to make suggestions and contributions. Yet the involvement of all employees is crucial to the success of a process safety program.

Not Enough Time for Detailed Work

One consequence of the relentless reductions in the work force is that people become so busy that they do not have enough time for detailed work. In particular, they do not have time to check their work, or the work of their colleagues. Hence a greater chance that errors will slip through exists.

In engineering and design companies, the lack of resources can lead to calculations not being properly checked. In the case of operating facilities, the lack of time for detailed work may lead to operating instructions being written without being checked

or work permits being issued in haste.

Project Cutbacks

It is an unusual project that does not run into scheduling and/or budget problems. Such problems inevitably create pressure to take short-cuts or to eliminate some equipment items so as to get the project back on schedule thereby increasing the chance of a PSM short cut. The Management of Change and Operational Readiness programs should help ensure that such actions do not create an unacceptable safety problem.

Organizational Spread

One feature of the increased globalization of commerce is that an increasing amount of project work is spread around the world. This is done to reduce costs and to exploit the availability of skilled personnel.

Spreading work around the world means that companies have to rely heavily on their formal decision-making processes; there is less opportunity for person-to-person interaction. Yet it is just such interactions that are invaluable in risk management work, particularly with regard to the identification and assessment of hazards. The more the organization is spread, the greater the belief that process is all and that no special, subjective skills are required.