Shell to scrap 1,200 jobs in big shake-up

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Industrial Correspondent

Royal Dutch Shell, one of the world's largest oil companies, is to cut about 1,200 jobs at its headquarters in London and the Hague as part of a dramatic overhaul of the group.

It is the most dramatic shake up at the company since McKinseys, the consulting firm, recommended changes in the late1950s. They returned again last November to advise Shell on the best way to cut costs amid rising competition.

Shell's unusual structure, which gives authority to regional organisations, is to be scrapped in favour of five large business units answering to a small corporate centre in a location yet to be decided.

Cor Herkstrter, group chairman, said Shell's structure must become simpler, less costly and more responsive to customers. "We see the business conditions of today, with flat margins and low oil prices, continuing into the future. There will be no let-up on all players in the strive for higher productivity, innovation, quality and effectiveness."

Shell's central services - including technical, legal and financial operations - will be the main casualties of the changes, along with the research arm. About 1,200 of the combined service staff of 4,000 in London and the Hague are to be cut, although details on where the axe will fall have yet to be given. Mr Herkstrter told staff that the changes will occur in the second half of this year and redundancy terms would be generous.

"We have a concept but we have not yet worked out the detailed blueprints of the new organisation. What I can give you is a commitment that the period of uncertainty will be kept as short as possible," he said.

The changes, although widely expected, have left staff feeling shocked. Shell was at one time considered a company where a job could be for life. Industry sources, however, point out that individual national operating companies have quietly shed about 10,000 jobs over the last year or so, leaving the world-wide workforce at 106,000. Five years ago, Shell employed 135,000.

The restructuring follows the appointment in November of McKinsey, the management consultancy company that helped give Shell its present structure about 30 years ago.

Under the existing system, more than 100 national operating companies answer to regional co-ordinators. This set-up will go and the operating companies will report to five businesses covering exploration and production, oil products, chemicals, gas and coal.

Mr Herkstrter said that in spite of net income of £4bn last year - up by 36 per cent on 1993 - performance has been "less than satisfactory".

"Some of you have been quick to point out that the net income in 1994 was the highest ever. Our performance is not as good as it needs to be. We have had to critically ask ourselves what changes are necessary in the service companies to provide a better platform for improving overall group performance," he said.

Mr Herkstrter warned that unacceptable duplication and confusion of roles have developed over the years and that the services companies are regarded as too costly by the operating arms they are meant to support. The operating companies feel their efforts to cut costs are not mirrored at the centre, he said.

The services and support operations are thought to cost Shell about $1bn (£625m) a year. Some City analysts were disappointed that the restructuring has not gone further, although others point out that the current structure, albeit outdated, has served Shell well. The company's return on capital is about 10.7 per cent, in line with the sector as a whole. Shell has been increasingly concerned, however, that rivals are closing the gap in terms of managementand financial strength.

Mr Herkstrter warned that the changes will be unsettling for everyone and are "not without risk". "We will have to learn new skills to adapt ourselves to meet new demands. There will be a significant period of adjustment and learning and while we go through this period we will have to keep our eye on the ball and not lose sight of external challenges and operational demands," he said.