2014 07 12 Ramadhan

Baru kali ini saya mengalami ramdhan yang sedih dan hampa. Semua akibat kelalaianku dan atasan yang tidak melakukan verifikasi. Kapan sekiranya Allah SWT akan memberikan pertolongan. Saya sudah lelah dan tak tahu harus bagaimana. Sabar ikhlas pasarah, kata itu yang sedang saya tanamkan pada diri ini. Semoga Allah memberi kekuatan dan ketenangan dalam menghadapi cobaan yang teramat berat ini.
Sekarang 2014 07 13. Besok pembahasan tim. memang ini semua kesalahan mereka tidak melakukan klarifikasi dan langsung menandatangani kontrak. Tapi Pak Heru, dan lainnya menyalahkan diriku atas semua ini. Hanya pak fauzan saja yang masih objektif dalam menilai. Beliau menyampaikan bahwa tanggung jawab sepenuhnya ada di isc sebagai fungsi procurement untuk produk tersebut. Rasanya nggak mungkin saya dapat berkarir di tempat seperti itu. Dimana semua orang tidak ingin menjadi bagian dari tim dan lebih mementingkan kepentingan atasan untuk segera menyelesaikan project.

2014 06 29

Hari ini persiapan puasa, hati masih belum tenang menghadapi bulan ramadhan. Pekerjaan membuat stress dan ada friksi dengan bawahan.
Jantung berdetak kencang, memikirkan apa yang akan terjadi kedepannya. Pikiran seakan melantur ke hal-hal yang negatif. Membuat hati setasa tidak tenang. Setan2 bekerja menggoda hatiku dengan kerasnya mereka mengatakan bahwa aku akan jatuh dan Allah membiarkannya. Keluarga sedang berkumpul namun tak satupun yang mengerti kegalauan hatiku. Rasa percaya diriku hilang, tergantikan oleh rasa takut. Takut akan adanya kesalahan yang tidak aku sadari. Ingin rasanya berlari dari dunia, meninggalkan segalanya.
Ketahuilah wahai setan setan terkutuk. Allah SWT sangat dekat dengan manusia. Dia akan selalu bersama hambanya yang beriman. Melindungi hambanya dan membukakan jalan terbaik untuk hambanya.
Sungguh menyesal diri hamba berdoa mengenai dua hal. Ketika sedang mencari kerja, hamba yang hina ini sangat marah kepada Allah SWT dan meminta dengan keras untuk mendapatkan kerja di perusahaan ini. Yang kedua, ketika selesai sekolah meminta untuk dipindah difungsi bisnis. Sekarang hamba bertobat, dan memohon lindungan dari Allah SWT dari kesalahan dan kelalaian hamba yang hina ini. Ya Allah, hambamu ini tidak menginginkan kekayaan dunia. Hamba hanya menginginkan ketenangan hati selama didunia. Kabulkan doa hamba yang telah salah mengambil langkah, membeli mobil dibandingkan mengumrohkan mertua hamba. Hamba berjanji akan membayar semua kesalahan hamba. Ya Allah Ya Malik, Ya Mukmin tenangkanlah hati hamba dan lindungilah hambamu ini dari godaan setan yang terkutuk.
Semoga dalam bulan ramadhan, pintu-pintu kemudahan dan maaf dibuka oleh Allah. Aammiiiin

2014 06 25

Hari ini kekantor dgn harapan dapat mecari solusi, namun hanya kesedihan yang diriku peroleh. Atasan-atasan tidak menegur dan memalingkan mata ke diriku. Hanya engkaulah yang maha mulia ya Allah. Yang dapat memuliakan diriku dan keluargaku.
Solusi, apakah ada daya yang bisa aku lakukan. Hamba hanyalah seorang asmen yang tidak bisa memutuskan dan menyelesaikan permasalahan ini. Ya Allah penuhilah janjimu untuk menolong hamba yang telah dalam posisi terjepit ini. Bagaimanakah caranya untuk menyampaikan ke arasan terkait permasalahan yang ada ini. Kecewa pada diri sendiri sungguh menumpuk. Ya Allah hamba memohon kepadamu segeralah mengirimkan bantuan atas segala permasalahan ini. Sungguh diriku dipenuhi kegelisahan, dan kegundahan. Tunjukkanlah jalanmu ya Allah, dan bukakanlah pintu-pintu penyelesaianmu. Amiiin.

2014 06 24 Malam

Malam 2014 juni 24, semakin malam hati semakin tidak tenang. Mengingat kembali masalah yang ada dan flash back kejadian tersebut. Begitu banyak pilihan yang bisa aku ambil namun tak satupun yang terpikirkan saat itu. Kenapa hati tidak tergerak kenapa badan tidak bertindak. Apakah ini yang namanya takdir atau kelalaian? Begitu sedih mengingat saat itu. Tapi yang terjadi tidak bisa dirubah lagi. Yang bisa kita lakukan adalah melanjutkan masa ini dengan tetap berpegang pada Allah SWT. Ketetapannya tidak akan bisa berubah. Kita hanya bisa menerimanya. Namun percayalah bahwa semua ketetapannya dalam memberikan ujian telah disesuaikan dengan kemampuan dan pertolongan akan tiba.
Ujian terhadap diri sendiri saya tidaklah khawatir namun ujian juga berimpact kepaslda anak dan istri sungguh memberatkan hati. Namun kkta harus percaya, setiap makhluk telah ditetapkan rezekinya masing2. Cobaan atasku ini, insyallah tidak mengurangi rezeki atas anak, dan istriku. Amiiin.
Saya hanya mengharapkan untuk dapat mendidik anak2 hamba hingga akhir hayatku ini. Hal yang menjadi tanggung jawabku. Ya Allah janganlah engkau cabut tanggung jawab itu. Saya sangat berat untuk menerimanya. Kasihanilah anak hamba dan ostri hamba. Selalulah beri mereka pertolangan dan 4ahmat atas merekA. Amiiin

Ujian berat dalam hidupku

Tahun 2014 juni 24, kehidupanku yang kujalani tersandung oleh kesalahanku dalam menjalankan project. Manajemen dan tim tidak melakukan review atas hasil yang kukerjakan. Semua berjalan dengan cepat hingga ditandatanganinya kontrak tersebut. Sekarang pada tanggal ini semua berjalan dengan salah. Harga kontrak tinggi mengakibatkan harus dilakukan renogosiasi, permasalahannya apakah hal tersebut dapat di renogisiasi ke pihak ketiga?. Mengingat pihak ketiga tersebut seorang lintah darat yang gila akan uang. Semua kesalahan ditimpakan ke diriku. Sungguh diriku ini sangatlah lemah, manusia biasa yang tidak mampu melakukan apaun terhadap kejadiannya ini termasuk melakukan renegosiasi.
Ya Allah, sungguh berat cobaanmu ini. Hamba yang  hina ini hanya bisa berdoa kepadamu yang Maha Besar, Maha Kuasa, Maha Pemurah, Maha Pengasih, Maha Penyayang dan Maha Mengabulkan. Hamba memohon pertolonganmu untuk diberi kesabaran, kekuatan, ketenangan hati dan pertolonganmu. Tak ada daya yang bisa aku lakukan sebagai seorang staf selain berusaha memberikan sumbang pikiran kepada tim yang telah membenciku dan menunggu pertolonganmu. Aku tak punya kewenangan untuk merenogosiasi, menyampaikan masukan dan pandangan ke bod. Ya Allah bantulah hambamu ini yang telah tersudut oleh kesalahan hamba sendiri. Hanya engkaulah ya Allah Yang Kuasa yang bisa mengangkat dan memudahkan segala urusanku. Sungguh masalah ini membuatku semakin tahu arti kehilangan dan sesungguhnya dunia itu fana. Hamba mohon lindungilah selalu anak dan istri hamba, janganlah engkau kurangi takaran rezeki merwka karena kesalahan hamba. Kuatkanlah kedua orang tuaku dan muliakanlah mereka. Karena hanya engkaulah yang Maha Mulia yang bisa menaikan derajat seseorang. Sujud dan hidupku ini sesungguhnya hanyalah mililmu Ya Allah. Khusyukan sholatku Ya Allah. Amiiiin

Measuring Corporate Performance With” Focus” Indicators

I would like to argue that having a restricted set of focus performance indicators is more beneficial than having numerous performance indicators. I would like to scope my argument within oil and gas industry since I use my experienced in that type of business to support my argument.

Today business environment is changing rapidly. It can be seen from the financial time report 30 years ago. Many companies that had the highest rank don’t exist anymore. Most economy experts argued that those companies were failed to identify the trend changes in business’ environment and failed to implement its strategy to business processes. There is why most companies nowadays monitor their business progress to adapt business’ environment.  The way they monitor the progress is by using management control systems with result control. They compare their result with internal requirement and other companies.

This case also happens in Pertamina, the company that I work for. Pertamina is an integrated oil and gas company. Its main business units (BU) are exploration of oil and gas field, production, refining, distribution and marketing of fuel and gas products. It also has 23 subsidiary companies that are not correlated to its main business such as Hospital, Training, and Airlines. Pertamina’s Board of Directors (BOD) performs as Board of Commissioners (BOC) for the subsidiary companies.

Pertamina set performance planning and control system to monitor progress and achievement of all Bus and Subsidiaries. Pertamina’s Business Evaluation Department guides this system to ensure that the system is working in all BU through the year. Every end of year, this department works with BOD to set Pertamina’s financial target for the next year. They set the target base on sum of all BU financial targets. Therefore all BUs and Subsidiaries calculate their financial forecast for the next year. This forecast is discussed with the BOD to get approval. During that discussion also, all BU and Subsidiaries report their financial achievement for that year to the pertamina’s BOD.

In 2008, BOD decided to expand Pertamina’s business and made it more responsive to the environment. It set clear strategy to increase profit. To make sure the strategy was implemented to all business process, it decided to use balanced scorecard system. This system emphasized that all BUs and subsidiaries business processes is directed to get more profit.

Business evaluation Department worked very closely with all BUs and subsidiaries to develop the Balanced Scorecard system. First, it aligns Pertamina strategy to get profit with pertamina’s financial strategy. After that, the strategy converted into lag financial measurements. It is resulted 8 indicators to be monitored. They were ROE, ROI, Cash Ratio, Current Ratio, Collection Period, inventory turn over, Total Asset Turn Over, and TMS to TA. These indicators were cascaded to the customer perspective. As a result, there were 20 indicators only for this perspective. Internal business indicators were developed into 123 indicators and learning and growth were 46 indicators. BOD chose 45 indicators that it would like to assigned to the BUs and subsidiaries. Therefore BU’s Head Officer and Subsidiary’s BOD had 45 performance indicators. They will get bonus/reward according to their achievement for those entire indicators’ target.

BOD was sure that the next year company will get profit from all BUs and Subsidiaries activities. Moreover, alignment process was successfully implemented in all employee performance indicators and rewards system. Financial performance up performed only because the oil price was increase. If the result was compared to index prices then it was underperformed. Therefore in year 2008 report, company’s profit target was below target. The report also showed that performance’s results in many operational areas were under target. As result most employees got bonus which was lower that last year. Many employees started questioning the performance indicators that they have. Most of them were not satisfied with their performance indicators, especially with the number of the indicators.

In this situation, I acknowledge some advantages for using many indicators. One of the advantages is that a company that uses many indicators is able to see the whole company performance progress. In order to come with the right decision, Pertamina’s BOD preferred to have all sense of business progress. These all sense of business progress can only be given if the company monitors all internal business and external trend progresses. Therefore, the BOD asked to have many indicators in the company to reflect those progresses. it also can have broad view of market trends. As example rather than only measure total product sales volume, it is better to measure sales volume in each specific product, so that company know which product has increase in demand.

Another advantage is that having many indicators will increase the probability to have counter measures. As example for a sales person the probability to measure her/his performance not only from sales’ profit but also from the sales volume and other indicators that influence her/his sales profit’s achievement. The argument is that product price or oil price has a big influence for sales’ profit. Therefore measuring only sales profit is not sufficient to indicate that person success in sales.

Last advantage is that having numerous indicators will reduce the risk for having a bad performance result. A risk avoidance employee will prefer to have numerous indicators. The reason is that numerous indicators will help to boost up other indicators that achieve low performance.

In the other hand, there are many advantages to have focus indicators. Moreover, the need to have many indicators doesn’t mean that it is necessary to make those indicators as performance measurement. Company needs to differentiate performance indicators from monitoring indicators. Pertamina could monitor many aspects that are related to its business progress as part to support decision making only.

In my opinion, it would be better if employee have performance indicators are of highest importance for them to measure the progress of their tasks / missions. These focus indicators have several advantages. These advantages will not only benefit employees but also the company.

First, focus indicator gives a clear goal for the company and gives clear directions for employee to achieve that goal. From the first Management Control System (MCS) Class, it was stated that one of the reason for a company to assign Control System is to get clear goal within the company. The goal should be clear, specific, and challenging for the employee. In Pertamina, employees always have problem every beginning of year when the BU Head Officer and Subsidiary’s BOD communicate their performance target. With 24 performances to be achieved within that year, they don’t know the company strategy for the following year. It’s not clear whether the strategy is developing new product by developing innovation, increasing revenue by entering new market or reducing cost by increasing specialty, since every year they have many things to achieve from increasing ROI, increasing revenue, increasing product development, decreasing cost and improving innovation capabilities. Christopher D. Ittner and David F. Larcker, author of Coming Up Short on Nonfinancial Performance Measurement, argued that when companies don't know what to measure, they often end up measure too much indicators. As result, these 24 indicators made employees unable to focus their effort to achieve the target. All employees tend to daily activity which doing the business as usual and hoping there will be good result within the last year. The reason is that there was no clear direction on what to achieve.

More over some indicators are contradictory. For example the Production BU Head must achieve a certain target for Total cost, in the other hand he has performance target to spend money for none directly correlated activity in business such as innovation learning and environment activities.  Therefore when the total cost is forecast to exceed budget within the year, he will neglected performance target for innovation learning and environment. As result, 2008 survey showed very low capabilities to build innovative product and environment friendly process. And he got blamed from the BOD for neglecting those activities. His argument is that there isn’t clear direction for him whether he should reduce cost or increase innovation and environment friendly capability.

Therefore, the BU’s Head Officer and Subsidiary’s BOD must have focus indicator so that they have clear strategy direction to be communicated to their employees. And so that Pertamina’s employee could focus their effort to achieve the goal.

Secondly, having focus indicator will motivate employees because it reduces the complexity for linking performance and reward system. From the fourth lesson of MCS class, the Professor explained that company should assign number of performance indicators that motivate employee in getting their performance’s rewards. For example in Pertamina, to get the total performance from all indicators, managers should assign weighted level for his/her employee indicators. This is a very difficult task because s/he must compare all indicators based on the critical level, easiness to achieve and effort needed. To get objective result for the weighted, s/he must use analytical hierarchy process which is demotivating for some people because its complexity. Moreover sometimes to make it simple, many employees assign average weight for all indicators. As result, most the weight lies between 5-7% each. This weight is considered low and not very motivate for them to achieve it. Therefore using focus indicator, employees has less complex performance system. They can also easily assign higher weight for more important indicators since less comparison between indicators.

Another advantage of using focus indicators only is that the employee could remember and monitor her/his performance easily. To support my argument, the article of The Magical Number Seven, Plus or Minus Two by George A. Miller (1956), a person can only remember effectively 7 + 2 things. Therefore it is better to have focus indicators so that employee is able to keep on track of his/her performance easily without disturbing her/his activities to achieve her/his performance. On the other hand, if there are 8 financial and 16 operational indicators for an employee, there are so many reports to make. Most BU Head officers complained that they spent half month for every month only to make the financial report for the previous month. As a result less time was spent to make operational decision for the following month. Moreover, reducing employees’ effort for handling their performance’s report, Pertamina installed MySAP program which is more expensive to buy and to maintain than using manual report system.

As conclusion, a company that assign focus indicator will benefit more from having a clear goal, clear directions for employee, less complex rewards system, and less time and effort to monitor the indicators. And to get clear businesses trends and counter measure, Company can support performance system with monitoring other indicators that are not related directly to the performance rewards system.

Reference:

1.      The Magical Number Seven, Plus or Minus Two: Some Limits on our Capacity for Processing Information, George A. Miller, 1956

2.      The Balanced Scorecard - Measures That Drive Performance, Robert S. Kaplan and David P. Norton, 1991.

Coming Up Short on Nonfinancial Performance Measurement, Christopher D. Ittner and David F. Larcker, 2003.

REAL OPTION VALUATION: MW PETROLEUM

I. Company background and description on each of 4 projects

In 1991, Amoco Corporations, a conglomerate of petroleum and chemical corporations, decided to divest some of their smaller properties and when further cuts were needed, they looked to divest the middle section of assets in its marginal curve. As a result, they formed MW Petroleum, a free-standing exploration company that was even as large as some of independent oil companies. It operated exploration and development for well, approximately working interests in 9,500 wells in 300 production areas.

Amoco then prepared to sell MW Petroleum to a mid-size independent petroleum company. Apache Corporation was interested in buying most portions of MW and was the only buyer that appears to be a good fit in the market at that time. Apache, with revenue of $270 million, believed that achieving high profit could be realized by acquiring marginal properties and operating well with expertise. Therefore, the deal was likely to be a win-win situation for both parties, if they could reach a reasonable price to accept.

The asking price from Amoco was $1 billion. Was it a reasonable price?

We will discuss this number, and find a conclusion to this question through our document.

II. Valuation Methodology

Generally, the Discounted Cash Flow method is the most popular valuation methodology for financial analysts. It uses the concept of time value of money; the future cash flows are estimated and discounted back to present value with the discount rate which is the cost of capital incorporated with the risk of the project. However, questions still arise if the DCF is the right valuation tool for every project evaluations, regardless of features embedded in the projects. DCF is used to evaluate the projects at initial by assuming all the expected cash flows are likely to be generated; however, it does not incorporate management’s ability to make changes or react to situation along the way. Opportunities for R&D, M&A, licensing, expanding, downsizing, and abandoning projects are the examples of flexibility that managers can potentially execute but DCF does not capture the value. In the end, rejecting projects with negative NPV might actually disregard investments that offer a company more flexibility in operations and investing.

Real option valuation is more appropriate in evaluating investments under conditions of uncertainty that is the successfulness of the reserves in this case (proved developed, proved undeveloped, probable and possible reserves). It captures the value of the options embedded in each investment projects. There are 4 approaches of option pricing: Black-Scholes formula, replicating-portfolio approach, expectation pricing, and risk neutral valuation. In this case, we used Black-Scholes formula.

III. The solution for this case uses several assumptions for each variable

Duration:

Duration use in this solution based on time that the company spent high capital expenditure. The assumption is that the high capital expenditure is used for investment. The investment goal is to maintain developed proven reserve and to develop the undeveloped proven reserve, probable reserve and possible reserves.

In this case:

Duration for proved developed reserve is three years because the high capital expenditure spends are in year 1, 2, and 3. After three years the capital expenditure is low therefore should be treated as production cost rather than investment.

Duration for proved undeveloped reserves is four years because the high capital expenditure spends are in year 1, 2, 3, and 4. After four years the capital expenditures is low therefore should be treated as production cost.

Duration for probable reserves is five years because the high capital expenditure spends are in year 1, 2, 3, 4, and 5. After five years the capital expenditures is low therefore should be treated as production cost.

Duration for possible reserves is six years because the high capital expenditure spends are in year 1, 2, 3, 4, 5 and 6. After six years the capital expenditures is low therefore should be treated as production cost.

Cash in:

Cash in use in this case is divided into two parts. First part, cash in within duration time. Cash in during that time is cash that generate from operation. In the second part, cash in after duration time. Cash in that use is cash that generate from operation and terminal time subtract with capital expenditure. Detail of the cash in could be seeing in the Appendix.

Cash out:

Cash out use in this case is the cash use for investment. The team assumes the cash use for investment is the highest capital expenditures spend by the company. Detail of the cash in could be seeing in the table Appendix.

Volatility:

The team assumes the volatility of the project base on the probability of the reserves for going production as predicted. That probability could be seen in the table below which is based on oil and gas term, source of investopedia.com.

Oil & Gas Reserve Clasification	Probability for having reserves or going to production as predicted
Proved	90%
Probable	50%
Possible	10%

Table 1.

Risk free rate:
Risk free rate use is 10 years U.S. government bond in 1990 and 1991 which is 2.67

IV. Calculation

Price for the four projects is the total premium of real option of the four projects. Detail calculation of the projects is shown below.

a.    Proved Developed Reserve

Interest risk free:   2.66%

NPV cash in (Ps): $671.47

NPV cash out (Pe):           $9.65

Duration:               3 years

Volatility:                90%

b.    Proved Undeveloped Reserve

Interest risk free:   2.66%

NPV cash in (Ps): $185.14

NPV cash out (Pe):           $45.50

Duration:               5 years

Volatility:                90%

c.    Probable Reserve

Interest risk free:   2.66%

NPV cash in (Ps): $156.85

NPV cash out (Pe):           $39.24

Duration:               5 years

Volatility:                50%

d.    Probable Reserve

Interest risk free:   2.66%

NPV cash in (Ps): $204.75

NPV cash out (Pe):           $104.31

Duration:               6 years

Volatility:                10%

The total price we could give is equal to $ 1,072.12 Millions (662.56 Millions + 157.89 millions + 129.17 millions + 122.50 millions).

V. Conclusion

With the calculation we can conclude that the asked price from Amoco of 1 billions is lower than real option exercise. Therefore by exercise we can get economic profit of $ 72.12 millions (1,072.12 millions – 1,000 millions).

Therefore Apache should exercise the asked price from Amoco to gain the economic profit.

Reference

1.    www.investopedia.com

2.    www.apachecorp.com

3.    MW Petroleum Case, Harvard Business Review Case.