The Optimum Moves

In today’s volatile environment, yesterday’s optimum can quickly become today’s wrong answer.

The IEA’s August Oil Market Report is a good reminder of how quickly the assumptions behind operational decisions can move. Oil prices have traded through an unusually wide range, while geopolitical tensions have disrupted supply flows, inventories and maritime routes. At the same time, companies are adapting sourcing strategies and logistics networks to conditions that looked very different only a few months ago.

The logic cuts both ways. When prices fall, discipline can mean accepting less. When supply tightens, discipline can mean pushing for more. What stays constant is not the answer, but the question.

Yet large industrial organisations cannot redesign their plans every time the external environment changes. They need stable targets, governance and accountability.

This creates a difficult question for leadership: how do we stay disciplined in executing the plan without becoming prisoners of the assumptions behind it?

KPIs sit right at the centre of this challenge. Production efficiency should increase. Asset utilisation should be maximised. Inventories should decrease. Downtime should be minimised. These are familiar principles in industrial management.

But a KPI can improve while the business gets worse. I learned this very practically while leading an offshore E&P business unit in Brazil.

When 85% was better than 90%

During the 2014-2015 oil price downturn, we were revising our strategic and production plans for the years ahead. Our planning team presented a forecast indicating that production efficiency should be planned at around 85%.

My first reaction was predictable. Other operations were achieving around 90%. Why should we accept less?

The economics provided the answer. Increasing production efficiency further required progressively more well interventions, and therefore greater intervention rig capacity. Under the oil prices, intervention costs and operational conditions at the time, the marginal cost of recovering additional production eventually exceeded its economic value.

More than 90% would have looked better on the dashboard. Around 85% produced a better economic result.

But 85% was not a new truth replacing the old one. It was the optimum under those specific conditions. Change oil prices, rig costs, well performance or technology, and the optimum may move again.

What proved harder than understanding the economics was accepting the management implication. I still had to present the case several times to our leadership. I was effectively recommending we deliberately plan for an efficiency lower than what was technically achievable and what other operations were reporting.

The discussion only changed when the question changed, from “how do we get above 90%?” to “under these conditions, at what level of efficiency do we maximise economic value?”

Sometimes the hardest part of optimisation is accepting that the optimum looks worse on the dashboard.

The leadership challenge

The lesson from that period wasn’t that 85% was better than 90%. It was that the optimum depended on the conditions behind the calculation.

The same logic applies across industrial operations today. Geopolitical conflicts disrupt maritime routes, change transportation costs, and affect access to energy, equipment and critical resources. Capacity, inventory or supplier redundancy that looked inefficient under one set of assumptions can become valuable optionality under another.

The optimum is conditional, not absolute.

That creates a real tension for large organisations. They cannot operate like start-ups, pivoting every time oil prices, freight rates or geopolitical conditions shift. Industrial operations need stable plans, clear targets, investment discipline and accountability. Thousands of interconnected decisions depend on that stability.

But the same mechanisms that create discipline can also create inertia. Over time, assumptions become targets, targets become commitments, and commitments can quietly turn into unquestioned truths. An organisation can go on executing a plan extremely well, long after the economics that justified it have changed.

This is where leadership needs to make room for challenge, not to continuously redesign the plan, but to periodically step outside it and ask:

1. What has materially changed in the assumptions behind our decisions?
2. Which of our current targets would we set differently today?
3. Are we still optimising economic value, or have we become very good at optimising indicators chosen in a different context?

These questions are hard to ask from inside the system. The larger and more successful the organisation, the more processes, incentives and established views accumulate around the existing plan.

This is where an independent and experienced perspective can be valuable: not to challenge governance, but to challenge whether the assumptions behind it still hold.

KPIs remain essential management tools. But they are proxies for business objectives, not permanent truths.

The real leadership challenge is knowing when the conditions behind them have changed enough to ask the question again.