AEB_03.03.05_P.McMorran.ppt

Integration at TNK-BP: HR’s role Association of European Businesses, 03 March 2005 Paul McMorran

• TNK-BP in overview

• The TNK-BP merger integration process

• HR’s role in the process

• What we’ve learned

Overview

TNK-BP geography

TNK

ONACO

SIDANCO (57%)

RUSIA Petroleum(29%)

Rospan (44%)

ААRВР

TNK-BPSIDANCO (25%)

RUSIA Petroleum (33%)

Moscow retail

50%50%50%50%BP

Alfa Access Renova

• Reserves and production

• Long-term growth rates

• Leveraging on existing Russian partnership

• World-class technology

• World-class management

• Strong international partner

ААRВР$1.4bn SLAVNEFT (50%)

$6.15bn ($2.4bn + $3.75bn in ВР shares)

TNK-BP transaction

BP Directors:Patrick Chapman

Brian Gilvary

Tony Hayward

Lamar McKay

AAR Directors:Len Blavatnik

Alex Knaster

Viktor Vekselberg

Jean-Luc Vermeulen

TNK-BP Board of Directors

Chairman – Mikhail Fridman (AAR)Deputy Chairman – Richard Olver (BP)

COOVekselberg/McVay

Executive DirectorKhan

EVPUpstreamDibtsev

EVPDownstreamConsidine

EVPTechnology

Dupree

EVPField

ServicesLyubashevsky

CFOPotter

EVPPPMCook

EVPSupportServicesBennett

EVPStrategy& Bus.

DevelopmentSliger

EVPInternalAffairs

Kondrashov

ChiefLegal

CounselMaydannik

BP TNK External Hire

Board of Directors

President & CEODudley

TNK-BP top management

Average Daily Crude Oil Production, million bbl (2003)

1.61 1.58

1.271.08

0.630.49

0.39 0.360.24

0.18

0.18

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

YUKOS LUKOIL ТNК-ВР Surgutneftegaz Sibneft Tatneft Rosneft Slavneft Bashneft

mill

ion

bp

d

• Third largest Russian oil company

TNK-BP and Russian industry peers

TNK-BP: One year after the Deal

History

• BP-AAR deal announced February 11, 2003

• Legal agreements signed June 2003

• TNK-BP operational September 1, 2003

Today

• TNK-BP fully operational 17 months

• First results – robust 2003 and 2004 performance:– Production growth 14%– Exports 52% of production– Enhanced debt structure– Paying down debt– Five year strategy adopted– Strong 2005 business plan

Making TNK-BP Work

• Our goal is to become a world-class Russian company and industry leader in Russia

• We recognize that this is not an easy task, and encounter many difficulties in making the new company work

• The challenge is to bridge the divergent standards existing across the organization by:

– Imposing high standards of corporate governance– Achieving world-class HSE performance

– Building TNK-BP’s own corporate culture

Building a TNK-BP culture

Cultural challenges• Public company and owner-founder company heritages

• Putting the right incentives to performance

• Building a progressive common corporate culture that encourages performance, initiative and creativity

Solution: • Even mix of heritages embedded at senior and middle

management levels and across key management

• Mixed functional teams in management and operations facilitate cooperation and knowledge transfer

• Cultural integration program

Cultural Integration: Management heritages

Acquisition Failure Rates: Survey of 150 deals over $500m

17%

20%

33%

30%

SubstantiallyErodedReturns

ErodedSome

Returns

CreatedMarginalReturns

CreatedSubstantial

Returns

Source: Accenture Research (OS Journal, April 1999: M&A integration - Lessons from winners)

• Average premium paid is 36% above market value

• Only 33% of companies recover costs incurred in the deal

• Typical merger loses 16-49% of combined market share within 3-5 years

• 50% of “failed” M&As are attributed to poorly planned integration

• 75% of domestic M&As fail to reach their financial targets

• 33-50% are later divested

Mergers and JV’s are common, but successful integration is elusive

Do Don’t1. Create a single integration

process

3. Be clear on how decisions are made

5. Take time to reflect and plan phases of work

7. Sustain integration process after Day 1

9. Focus on total value creation

• Don’t forget the big picture

• Allow parallel processes

• Allow the businesses to go forward unchecked

• Continue “at pace” without recharging the team

• Think you’re done at Day 1

• Focus only on cutting costs

• Get buried in the detail

Steps to Successful Integration

Integration Governance

Board

IntegrationDirectorate

• Provide assurance

• Ratify major decisions

• Resolve major conflicts

• Champion new culture

• Set objectives, targets and milestones

• Report on progress

• Manage cross cutting issues

• Manage integration resources

IntegrationWork Teams Facilitate, define and execute the program

of work

Develop processes to facilitate integration

Report on progress

Integration Organization

Organization &People

Integrated Policies,Processes & Systems

Baseline & Performance Management

Synergy

Communications

Shareholder Interface

Upstream Down-stream

FieldServices

Tech-nology

GPAFinanceCorporate Business Services

Str

eam

s of

wor

kWork streams and work teams

Work teams

3. Take time to reflect and plan phases of work

Mobilize teams

Analyze current

state

Design organization

models

Determine actions

required for Day 1

Appoint executive

Appoint leadership

Connect current staff

to TNK-BP structure

Choose common processes & systems

Define corporate policies & governance

Identify synergy opportunities

Complete actions required for control at Day 1

Prepare Day 1 events

Ensure accountability for integration is with line management

Set-up processes to monitor integration post Day1

Day 1

Phase 1 Phase 2 Phase 3

Reflection Point Reflection Point

Integration planning

Time

Deg

ree

of

Inte

gra

tio

n/

Imp

rove

men

t

Day 1

Day 100

Control Consolidate Transform

Horizon 1 Horizon 2 Horizon 3• Financial

control

• Operational control

• One organization

• One set of processes

• One set of systems• Transform TNK-BP to

achieve its aspiration

The big picture

HR integration workscope

HR Organization

EmployeeCommunication

Terms & Conditions

Cultural Integration & Change Management

Selection and Appointment

HR Organization (and MIT team)

Severance & Transition

Day 1 Planning & Headcount

TrackingOrganizational Design

Step 1

Assemble candidate pool,

resumes

Step 2

Review consolidated candidate pool

Create data base

SidancoTNKBP

Others

Senior leaders HR

Step 3

Selectpreferred candidate(+alternates)

Organization modelsLevel 3 job outlines- Streams: Upstream, Downstream, Technology & Oilfield Services- Functional Groups

Selection Board with input from Level 2 leaders

Update data

Step 4

Discuss opportunity with preferred candidate

Level 2 leaders

Update data with outcome of discussion

Step 5

Confirm acceptanceto Selection Board

Accept

Yes

No

HR

Step 6

Make offer (letter of employment)

Step 7

Announce appointments

Interactive process with Level 2 Leaders and Selection Board

Name, Present position, CompanyLocation, Business Area or Function etc.

AcceptYes

No

HR Communications, with HR input(2 waves)

Offers made

Preferred listing

Level 2 leaders discuss options with employees not selected

Update data with outcome of discussion

Round 3 selection process

TNK-BP HR Support – Weekly Flash Report

Team Name: Team Lead: Date:

Main activities this week: Planned activities next week:

Key Issues: Other:

HR SupportManagement Tracking & Communication

HR Integration Highlights

• 75 executive appointments, 60 days before Day 1, on entirely new compensation and incentive programs

• Key employment policies in place by Day 1

• TNK-BP expatriate policies in place by Day 1

• 300 appointments by Day 1, 1148 appointments by Day 20

• 160 severances. Transition staff reduced to 15 by Day 100

• Compensation strategy for head office complete by Day 1.

Terms and conditions harmonized by end 2003

HR Integration Highlights (more)

• Cultural Integration program initiated and expanding

• Facilitated culture-building events for senior executives

and workshops for senior management

• Company-wide baseline employee survey completed

• Developed company-wide strategy and draft Collective

Agreements for 2004

• Orientation/enrollment conferences for 200 HR staff

What we’ve learned:

• In major mergers, HR’s role as business partner is not an aspiration - but an imperative

• Ongoing business partnership for HR is not a right. We must deliver, and demonstrate, sustained value

• Creating value depends on HR’s grasp of the business, and on business leaders’ grasp of the value HR can bring

• Communicating HR value is HR’s responsibility!

TNK-BP HR Committee - our partnership platform

HR as Business Partner