Performance Management Creates Agility in Copper Mining
Last week I spoke with some of the business and HR leaders at Freeport McMoRan, one of the nation’s largest producers of copper, gold, and molybdinum. This company, which recently acquired Phelps Dodge, produces over 4 billion lbs. of copper each year, from its mines in North America, Indonesia, Chile, and Peru. The company generates over $16 billion per year in total revenues with over $1 Billion per year in net income.
Large Decentralized Operations
As one can imagine, this is a very big business. The mines owned by Freeport McMoRan are enormous, and the equipment used for digging and trucking are among the largest pieces of equipment in the world. Each of their global facilities uses slightly different technologies for the mining and production of ore, and must also deal with vastly different political, climate, and transportation networks. As a result, each mine is like a seperate company, with its own general manager and staff organization.
Dramatic Business Changes over the Last Five Years
Over the last five years the market for copper has changed dramatically. In fact, one could say it completely changed. As the chart below shows, copper prices have increased from about 75 cents a pound to almost $4.00 in a very precipitous rise.
Fig 1: Change in Copper Prices
This means that Freeport’s entire business strategy has changed. In the late 1990s and early 2000s the company focused on reducing cost to optimize profits. Operations personnel were trained to negotiate deep discounts on transportation and equipment costs, maintain equipment at the lowest possible cost (often incurring downtimes), and borrow or transfer heavy equipment from other locations to keep manufacturing costs low. When it was expensive to fill a truck to the brim because a loader was overworked, they filled a half-truck and waited for the next run. The overriding business goal was low cost production, not total production volume.
Today, however, the entire business strategy has shifted. With prices so high, the company is now motivated to ship the maximum volume at the fastest possible speed. Rather than negotiate low cost contracts for suppliers, the mines want expedited delivery of services, maximum uptime, and operations designed to maximize the production pipeline. Every pound of copper which a mine produces now delivers a very high margin to the company.
Performance Management Process to the Rescue
Since each mine is run seperately, when these dramatic changes took place over the last 3-4 years, it was difficult for top management to direct and monitor changes in these operational procedures. In fact, because of the decentralized operational structure, there was no way for anyone at the corporate level to see how people were organized at each mine and what particular metrics or goals they were using to manage operations.
Around the middle of 2007 the company realized that in order to speed the transition to a high-price commodity market, they needed a process to help managers at all levels direct and monitor changes in operational goals and procedures. They decided to implement a new, corporate-wide performance management process.
This problem, that of a major change in business and operations strategy, is very common in business today. Consider the problem of auto manufacturers as they retool plants and marketing programs to focus on fuel efficient cars and hybrids. Consider the changes which insurance companies have gone through as the insurance industry has restructured itself in the face of new global risks. Or consider the massive changes going in mortgage, banking, and construction industries in the face of falling housing prices and mortgage failures.
Each time an organization goes through such a shift, there are needs to change operational targets, realign goals, and even reorganize job functions. Such changes force managers and directors to change targets and goals. A well implemented performance management process provides this agility. And just as importantly, it gives directors and other top managers visilbility into operational goals and targets to make sure people are well aligned.
As Freeport McMoRan found, a highly decentralized organization can create accountability and efficiency – but makes alignment difficult. Implementing a well adopted, transparent goal management process can create business agility which translates into direct revenue and profit impact.
Importance of Performance Management Systems
In this case, the company selected Taleo’s new online performance management system. This system includes a very easy-to-use interface to allow employees and managers to establish well aligned goals. Most performance management systems provide this capability – but in this case the company chose Taleo because of the company’s existing relationship with Taleo and the product’s extremely easy to use interface. Since many of the workers in the mines only have occasional access to computers, they needed a system which required a minimum of training.
Freeport is now in their pilot phase of rollout, and the results have already been excellent. For the first time in decades the company has visibility into the goals and operational targets of more than 500 mine employees (the pilot group). As with all implementations, they had to focus initially on building a set of core competencies for their employees and establishing clear guidelines for goal development, but in a period of only a few months the company put the pilot system into production.
Bottom Line: Performance Management is a Business Process, not an HR Process
My point of this article is simple: we have to remember that tools like performance management, as important as they may seem to HR, are really business tools. In addition to providing support for your succession management and compensation process, performance management is one of the most valuable ways to create agility and alignment. Consider Freeport’s business changes over the last few years: their entire operational strategy has taken a 180 degree shift. How can an organization manage such changes? Through the use of a well implemented performance management process, such strategic business changes can be implemented in a fast, consistent, and measurable way.
We will stay in touch with Freeport McMoRan, and update you with progress as their rollout continues.