“Lower forever” is a term used inside oil giant Shell to describe future oil prices. Not “temporary downturn” or “entering a new cycle,” but “lower forever.”
The demand for fossil fuel is expected to peak as soon as 10 years from now. At that time, oil prices—and the industry they support—will begin to change forever, as described in an excellent Jan. 24, 2018, Fortune article by Jeffrey Ball titled “Inside Oil Giant Shell’s Race to Remake Itself for a Low-Price World.”
The phrase “lower forever” has the virtue of brutal honesty. It shows that Shell accepts the existential threat that comes with a permanent reduction in demand for a company’s core products. And it focuses the company on making foundational changes, rather than protecting the status quo or nibbling around the edges of change.
In another piece of brutal honesty, Shell’s CEO admits, “We don’t know anymore where the future will go.” However, even lacking a specific destination, the company is aggressively taking steps that will reduce its risk, prepare for a new revenue model, and discover a new role. Those steps constitute a playbook for any organization facing permanent decline in its core business.
Avoid stranded assets. Shell is concerned that when oil prices decline, the company could be left with expensive assets that will not be sufficiently profitable and that no one will want to buy. The company is aggressively reviewing its portfolio and divesting these lower performing assets. For example, Shell recently sold most of its stake in a Canadian oil sands project for $7.25 billion.
Make major cuts in operating costs. No matter what role Shell plays in the future, it must ensure that it can maintain a sufficient margin as oil prices fall. Despite its current profitability, Shell has laid off 12 percent of its workforce, with more cuts to come.
Rethink current operations and products. Shell also is working to reduce its own carbon footprint (which currently is nearly as large as that of Germany) and to decrease the carbon content of its products, aiming for a 20 percent reduction by 2035.
Develop future scenarios. Shell has been hard at work analyzing potential changes in demand for various forms of energy and penetration of new technologies such as electric vehicles. High energy demand and low new-technology penetration would be the closest to the status quo. Low energy demand and high technology penetration would mean massive disruption for Shell.
Pick a path, make investments, and hedge your bets. Shell is placing bets on multiple approaches to clean energy, investing in wind and solar power, acquiring an electric-car-charging company and a British electricity company, and developing plants that can tap multiple energy sources. Shell is also making an investment in hydrogen as a future carrier for multiple forms of energy. As Shell’s ultimate strategic path becomes clearer, it plans to significantly increase the related investments.
Legacy health systems find themselves in a position remarkably similar to that of Shell. Multiple forces are causing a decline in demand for core inpatient services and revenue for these services. We don’t know exactly how quickly that decline will take place. New approaches to care delivery—such as retail models and virtual care—and new players—such as UnitedHealthcare/Optum and CVS/Aetna—are emerging, but we do not know exactly what models and companies will predominate.
Occupying a position similar to that of Shell, hospitals and health systems can take away two major lessons from Shell’s approach to “lower forever.”
First, accept the inevitability of permanent change. Socioeconomic forces make major changes to our healthcare system inevitable. An acceptance of that inevitability has significant implications for organizational planning and strategy. Planning becomes less about modifying existing strategies and operations, and more about designing entirely new roles, revenue models, structures, and operations for a new environment.
Second, the specific future may be hazy, but actions can and must be taken immediately. We may not know the future specifically, but we know it directionally, and that direction is a decline in profitability for core services. The Shell example shows that meaningful actions can be taken even in absence of a certain future. Cost reduction is imperative for the inevitably downward direction of core revenue. Scenario development is imperative to shape strategic decisions. Coordinated and significant investments and participation in new care models provide important experience, as well as positioning organizations to take advantage of multiple opportunities.
Oil is a big, complex, capital-laden legacy business. Planning cycles for new initiatives can cover a decade or more. In an industry like that, a change coming as soon as 10 years from now requires immediate action. Shell has recognized that fact and is moving accordingly.
“Big, complex, and capital-laden” is an equally apt description of American healthcare. Like Shell, America’s hospitals need to adopt a brutally honest view of the future and take the necessary actions to translate an acceptance of “lower forever” into a new business model that can handle a very uncertain future.