Halliburton, BP Prove Jim Collins Right

A federal investigation has found that the Halliburton cement mixture that BP used to seal the bottom of the Gulf of Mexico’s Macondo well was unstable–and Halliburton knew it. When the results were sent to BP, the oil giant didn’t act on them. When Halliburton tested the mixture again one week before the oil spill, it still didn’t meet industry standards, but Halliburton didn’t tell BP until after the spill. As a result, the well was sealed with faulty cement–and we all know what event is correlated with that.

The New York Times reports:

The failure of the cement set off a complex and ultimately deadly cascade of events as oil and gas exploded upward from the 18,000-foot-deep well. The blowout preventer, which sits on the ocean floor atop the well and is supposed to contain a well bore blowout, also failed.

In an internal investigation, BP identified the faulty cement job as one of the main factors contributing to the accident and blamed Halliburton, the cementing contractor on the Macondo well, as the responsible party. Halliburton has said in public testimony that it tested and used a proper cement formula on the well and that BP’s flawed well design and poor operations caused the disaster.

The commission obtained from Halliburton samples of the same cement recipe used on the failed well, including the same proportion of nitrogen used as a leavening agent and a number of chemicals used to stabilize the mixture. The cement slurry was sent to a laboratory owned by Chevron for independent testing.

The mixture failed nine separate stability tests designed to reproduce conditions at the BP well and did not pass any, according to Chevron’s test results, which were returned to the commission this week.

BP had also been aware of equipment problems on the Deepwater Horizon rig before it blew. Not only was BP demonstrating incompetence, but one of its main suppliers was, too. Both parties were sloppy and short-sighted. What could explain this?

On a corporate level, Jim Collins’ “How the Mighty Fall” comes to mind. In it, Collins describes the five stages of decline in successful corporations:

* Stage 1: Hubris born of success. Stage 1 kicks in when people become arrogant, regarding success virtually as an entitlement, and they lose sight of the true underlying factors that created success in the first place.

* Stage 2: Undisciplined pursuit of more. Companies in Stage 2 stray from the disciplined creativity that led them to greatness in the first place, making undisciplined leaps into areas where they cannot be great or growing faster than they can achieve with excellence—or both.

* Stage 3: Denial of Risk and Peril. As companies move into Stage 3, internal warning signs begin to mount, yet external results remain strong enough to “explain away” disturbing data or to suggest that the difficulties are “temporary” or “cyclic” or “not that bad,” and “nothing is fundamentally wrong.” In Stage 3, leaders discount negative data, amplify positive data, and put a positive spin on ambiguous data.

* Stage 4: Grasping for salvation. The cumulative peril and/or risks gone bad of Stage 3 assert themselves, throwing the enterprise into a sharp decline visible to all. Those who grasp for salvation have fallen into Stage 4. Common “saviors” include a charismatic visionary leader, a bold but untested strategy, a radical transformation, a dramatic cultural revolution, a hoped-for blockbuster product, a “game-changing” acquisition, or any number of other silver-bullet solutions.

* Stage 5: Capitulation to irrelevance or death. In Stage 5, accumulated setbacks and expensive false starts erode financial strength and individual spirit to such an extent that leaders abandon all hope of building a great future.

BP and Halliburton–and the government, for that matter–have all displayed signs of being in Stages 3 or 4. (In fact, after watching Jon Stewart’s Obama interview today, I see the government as being well along Stage 4, with a visionary leader, game-changing plan, and, listening to Obama’s interview arguments and language, internal functioning that reflects skilled incompetence.)

What makes me glum about this scenario is that there’s not just one company or organization involved. Instead, there are a boat full of major organizations all simultaneously displaying signs of incompetence and impending failure. Now that regulators are unearthing the extent of this functional disaster, I desperately hope that Jim Collins’ optimistic words hold true:

The signature of the truly great vs. the merely successful is not the absence of difficulty. It’s the ability to come back from setbacks, even cataclysmic catastrophes, stronger than before. Great nations can decline and recover. Great companies can fall and recover…As long as you never get entirely knocked out of the game, there remains hope.