leadership culture case

BAB0149/30/99

Anne Donnellon, Associate Professor, Babson College, prepared this case as a basis for class discussion rather than toillustrate either effective or ineffective handling of an administrative situation. The development of this case was madepossible with the generous support of the Institute for Latin American Business Studies at Babson College.

Copyright © by Babson College, Institute for Latin American Business Studies, 1999 and licensed for publication toHarvard Business School Publishing. To order copies or request permission to reproduce materials, call (800) 545-7685or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, storedin a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical,photocopying, recording, or otherwise – without the permission of copyright holders.

YPF S.A.: Shaping A New Culture“We are trying to change a culture here, where decisions have typically been made

technically or politically, to one where all decision-making is based on good managerial andbusiness sense,” said Pablo Del Amo, Vice-President of Human Resources for YPF. S.A.,Argentina’s largest company. Change was not new to YPF, but the mindset Del Amo wastrying to alter was deeply ingrained in the formerly state-owned company.

Since 1993 when YPF S.A. underwent “the world’s most successful privatization,” the$ 6.1 billion1 oil company has continued to reinvent itself. The oil and gas exploration andproduction firm not only weathered a volatile market during Argentina’s economic crisis in 1995but went on to amaze analysts (and dismay some2) by acquiring an independent U.S. oilcompany. Losing its entrepreneurial leader, Jose “Pepe” Estenssoro, in a plane crash in thesame year slowed the company’s momentum somewhat, but it rallied in early 1997, whenRoberto Monti was named CEO of YPF.

Del Amo, a Spanish oil executive hired in 1995 from Schlumberger, was describing a setof human resource initiatives begun in 1997 to continue the transformation of the company into aworld class performer in the global oil industry. “We initially identified a list of 100 possiblethings to be done, but have decided to focus on ensuring that 3 or 4 concepts are well-understoodand effectively implemented by everyone in the company,” Del Amo said. The set of humanresource strategies included: promotion from within, management by objectives (MBO), variablepay, and succession planning. When asked how the program was proceeding, Del Amoresponded:

“Well, we’ve created a kind of trauma in the organization. (This cultural changeprogram) is like an organ implant; we will get some kind of reaction. There willeither be a period of convalescence or a rejection. It’s not comfortable to hearyou have to change.”

1 In 1991, Argentina set the value of the peso at one U.S. dollar.2 Crespo, Mariana. “Don’t Cry for YPF.” Financial World, Nov. 21, 1995, p. 62.

YPF S.A.: Shaping a New Culture BAB014

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Company BackgroundOil was discovered in Argentina in 1907. In 1922, what eventually became the state-

owned oil company began as its life as a government supervisory board, Dirección Nacional delos Yacimientos Petrolíferos Fiscales. Production boomed in the early years as Argentina’srobust economy grew to become the seventh largest in the world. However, this could only beaccomplished through the participation of foreign oil companies, because despite the country’snationalism, YPF could supply only 7% of Argentina’s oil needs. Thus virtually from its onset,YPF faced fierce competition from far richer competitors as it struggled to overcome its lack ofcapital, technology, and expertise. YPF was further hobbled by Argentina’s turbulent politicsand strong military, which created constant interference by the government in the company.

From 1945, when Juan Peron established extensive state control throughout the economyand nationalized foreign oil interests through 1989, when Carlos Menem embarked on anaggressive privatization program, numerous governments experimented to find some balancebetween control of the country’s natural resources and partnering to acquire necessary foreigninvestments. As one history of the company noted, “tensions between the political aspirations ofself-sufficiency in the face of rapacious oil multinationals, and the reality of YPF’s generallydisappointing performance is a recurrent theme in its history.”3

During these years, the economy of Argentina languished under the inward-lookingpolicies of military governments. Growth stagnated, investment declined, and inflation grewsteadily to the hyperinflation of the 1980’s that topped out at 3,080% in 1989 ( See Exhibit 1).Like most Argentine state companies during this period, YPF became bloated, bureaucratic andinefficient.

The hyperinflation crisis of 1989 forced an end to the series of incremental economicpolicies of the 1980’s that were designed to stabilize the economy and foster real growth. ThePeronist candidate for president, Carlos Menem, was elected in 1989 and then was persuaded totake office five months early to deal with the economic crisis in the country. He moved quicklyto reduce inflation and public debt. That same year, his government passed the State ReformLaw, which put up for sale 32 state-owned enterprises, including YPF.

Despite the privatization program and numerous other regulatory changes to encouragebusiness development, the country’s inflation remained high. In 1991, Domingo Cavallo, aHarvard PhD in Economics, was appointed Minister of the Economy. A major part of Cavallo’seconomic program was the Convertibility Law, passed in 1991, which fixed the value of the pesoas equivalent to one US dollar. Under this law, the domestic money supply could not beincreased without a commensurate increase in Argentina’s international reserves.

The new economic plan and the convertibility law had immediate and positive economicoutcomes (See Exhibits 1 and 2). Inflation fell from 2,317% in 1990 to 172% in 1991 to 25% in1992. GDP increased from negative 6.2% in 1989 to 8.9% in 1991. New laws opened thedomestic markets to imports and minimized regulation in many sectors of the economy. Stateexpenses were reduced. Following Chile’s example, the social security system was privatized,producing better benefits while substantially increasing the amount of savings available for 3 Barham, J. “YPF Sociedad Anonima.” International Directory of Company Histories, Volume IV. Chicago, IL:St. James Press, pp. 577-8.


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investment. But all the changes in governmental policy in the early years of the Menemadministration would not be enough to create a strong economy unless they spurred the activeinterest of domestic and foreign business investors. To take the next steps toward lasting reform,Menem enlisted the help of Argentine business people. YPF, as the country’s largest company,was a logical starting point.

In 1990, Menem asked oil entrepreneur Jose “Pepe” Estenssoro to take over leadership ofYPF. Estenssoro agreed to take on the task of preparing the company for privatization, but madeno commitment to running the company beyond that stage. His three-stage plan involved: (1)divesting of all nonstrategic assets, (2) restructuring the remaining company, and (3) taking thecompany public. Accomplishing these milestones required a number of radical reforms by thestate, including deregulation of the oil and gas industry, independence from politicalintervention, and the right to renegotiate labor contracts allowing for new wage scales, as well asthe right to lay off surplus workers.

As a result of the first stage of YPF’s transformation, more than $2 billion worth of assetswere sold, and the workforce was cut by approximately 90%. While the labor negotiations wereextremely difficult, the company’s extremely generous severance packages eased the way to anagreement. YPF not only paid the one month of severance for each year of employment with thecompany that Argentine labor law required, it also offered extensive training programs and atwo-year commitment to buying services from employees who started their own firms.

Restructuring of the company was guided by management consultants from the U.S. Thegoal was to transform a very centralized, bureaucratic company into a highly profitable companycapable of generating high value for its prospective stockholders. Prior to restructuring, thecompany was organized by business segment, “with some 25 managers reporting to the presidentand executive vice president (and) little information….available on overall profitability and noneon that of its business segments.”4 Management was “driven by activity levels and volume,”rather than by costs or profits, according to one analysis.5

YPF was restructured into two business units and several corporate groups that wouldprovide shared services, such as purchasing, information technology and human resources. TheUpstream business unit was made up of several profit centers involved in exploration anddrilling; the Downstream unit profit centers were refining, transportation and marketing.

Privatization and AcquisitionIn January 1993, the investment banks hired to help YPF prepare for privatization

recommended that the IPO be scheduled for second quarter of that year. The capital distributionplan established in the law was revised to make a greater percentage of the stock available toprivate investors. The revised plan created 20% Class A shares (the federal government ofArgentina), 11% Class B shares (provincial governments), 10% Class C shares (YPF employees)and 59% Class D shares (private shares).

4 Yoshino, M. Argentina’s YPF Sociedad Anonima (A). Harvard Business School case #396-023, 8.5 Grosse, R. and Yañes, Juan. Carrying out a successful privatization: The YPF case. Academy of ManagementExecutive, 1998, Vol. 12, No. 2, 51-63.


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After a road show that took Estenssoro and his team all over the world describing the newmultinational, the details of the offering were finalized. The company would sell 35% of itsshares. The filing range was established at $17 to $20 per share, yielding a market value of $6 to$7 billion. The offering was oversubscribed, with U.S. investors placing the highest number oforders. One hundred sixty million shares were sold. The size of the offering was increased by30%, raising a total of 3.04 billion US dollars. According to many, the IPO of YPF was the mostsuccessful in the world. It was one of the largest in world history. It was by far the largest IPOfrom an emerging nation. Finally, the privatization increased the foreign investment inArgentine equity markets by 100%.

Privatization was hardly the end of the story. The oil industry’s newest private companyhad to join the rest grappling with declining oil prices, requirements for technologicaladvancement, and greater competition from more focused players. YPF’s first year of life as aprivatized company found the management focused on further streamlining of processesparticularly in the refineries and in the retail gas stations. The results were good; YPF posted a1993 profit of $706 million on sales of about $4 billion.

In addition to the ongoing internal changes, Estenssoro and others knew that investorswould be expecting to see the company expand beyond its mostly domestic operations to becomea true world player. They began exploring possibilities. In the fall of 1994, they identifiedMaxus, a large, independent U.S.-based oil company with reserves and operations in U.S.,Colombia, Bolivia, Equador, Venezuela, and Indonesia. The company had revenues of $691million, assets of $2 billion, and debt of $1 billion.

There was extensive internal debate about the timing, target, and cost of this acquisition.In the end, the winners were those who argued that this acquisition would provide YPF not onlywith critical offshore drilling technology and expertise, access to the U.S. oil market, but alsowith 13% of its reserves outside of Argentina, and thus some protection from the vagaries of theArgentine economy.6 On February 28, 1995, YPF’s tender offer of $745 million for Maxusshares was approved by the Maxus board. In March of that year, YPF’s shareholders approvedthe deal, making YPF a true multinational.

The implementation of the Maxus acquisition was still in discussion in May 1995, whenYPF was shaken by the news of Estenssoro’s death in a plane crash in Equador. By July of thatyear, the board had decided to ask former president Nells Leon to head the company. Becausethere was a lack of experience in international operations in the company, Leon hired RobertoMonti, an Argentine engineer who had worked for Schlumberger for over thirty years to takecharge of the Maxus turnaround. Leon subsequently proposed that if Monti succeeded, he benamed CEO of YPF.

By the end of 1996, Monti had downsized, restructured and turned around Maxus. Hehad accomplished this, in his own words, by “professional and disciplined cost-control….andaggressive and selective production increase (investment in those activities where we could getthe best and fastest return on investment, e.g., in the Texas Panhandle and Indonesia).” 7

6 In 1994-1995, the Argentine economy, like all of Latin America, was suffering from the effects of the Mexicodevaluation crisis.7 Internal memo by Roberto Monti.


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HumanResources

Technology

Aggressive,Profitable, andLogical Growth

ValueCreation

Headquarters staff was reduced by 50% over a three-month period. Office space wasconsolidated and unnecessary assets were divested. Operating income was quadrupled and a netincome of $12 million was realized in 1996, compared to a net loss of $131 million in 1995.

At the beginning of 1997, Roberto Monti was named chief executive of YPF S.A. andreturned to Buenos Aires to breath new life into the cultural transformation that Pepe Estenssorohad begun. Characterized as “one of the most proactive CEO’s in the entire oil industry,”8

Monti’s financial objective is to increase the ROCE from 10.4% in December 1997 to 15% in2002 (assuming a barrel price of WTI of $19.50). His strategic intentions were prominentlydisplayed in the company literature:

To lead the human resources initiative, Monti brought Pablo Del Amo back from Maxuswhere he had been the head of institutional relations. Del Amo’s charge was to create a newculture, one that would embody the new company and reflect new business realities in Argentina

Changing a CultureBefore the privatization process, YPF had been a centralized, hierarchical, and

bureaucratic organization.9 Senior managers made the decisions, and middle managersimplemented them. Technical expertise was prized, but assumed on the basis of one’seducational credentials. Careers progressed through a series of upward steps in one’s function.In fact, this reality was so deeply entrenched that the language reinforced it, by referring tofunctions as “careers” in Spanish.

Even after restructuring’s drastic delayering of the management ranks and theintroduction of new financial measures, people continued to believe that promotion should andwould be based on seniority and loyalty. As late as 1997, visits to the field sites by human 8 Lloyd Byrne of Morgan Stanley Dean Witter, quoted in “Oil Company of the Americas,” Business Week, 6/15/98,P. 42.9 Grosse, R. and Yañes, Juan. Carrying out a successful privatization: The YPF case. Academy of ManagementExecutive. 1998, Vol. 12, No. 2, 51-63.


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resource experts revealed the persistence of the old culture of deferring to authority. “ I found aculture of yes-men” according to one. The performance evaluation system, created by technicalspecialists, tended to be ineffective in changing these perceptions. Overly complex, the appraisalforms were not well understood by those filling them out or those receiving the appraisal. Thetechnical complexity of the system reinforced a cultural tendency to avoid giving negativefeedback. Pierre Brocvielle, human resource motivator for the Upstream Domestic Operationprovided the following example,

“I observed managers abdicating their managerial responsibility and hidingbehind the ‘computed evaluation’ with sweetening remarks such as ‘well, to behonest, my perception of your overall performance was not so bad. I would evenhave said that it was pretty good, but the computer says you are bad at this, and ifthe computer says it, we have to go along’.”

Hiring during and after privatization was opportunistic and expensive, as the companycontinued its transformation into a highly profitable global player. Managers from othercompanies and countries were wooed with big compensation packages to come join the newYPF. When a department felt the need to hire consumer marketing experts (historically, a rareand largely unnecessary expertise in the closed economy of Argentina) or technologicalspecialists, managers were empowered to recruit such talent wherever it could be found. Evennew college graduates were recruited with very competitive salaries that encouraged them todecline offers with multinationals like Citibank and Gillette. The aftermath was a well-staffedorganization with the expectation that talent would be brought in from the outside at a premiumcost. For some, this practice fit well with the new entrepreneurial culture at YPF. For others, itwas seen as an expensive habit that negatively affected the morale of those already on board whoaspired to higher jobs now being filled from the outside.

In 1997, Roberto Monti named Pablo Del Amo as Vice-President of Human Resources tochange these practices. Del Amo, an experienced line manager from Schlumberger who hadjoined Monti at Maxus in 1995 as Vice-President of Institutional Relations, characterized thehuman resource initiatives implemented soon after he came: “this is Roberto’s program; I washired to drive it. We are trying here to change the culture of YPF to make it one where peoplefeel empowered and able to make good business decisions.” The programs that Del Amo andthe HR staff put into place also enabled the company to attract talented young people who wouldnot otherwise be interested in a career in the local oil company.

A New Design for Human ResourcesHuman Resources’ program for aligning YPF S.A.’s organizational design with its

strategic intentions consisted of six major initiatives and a new HR structure. The programswere: promotion from within, management by objective (MBO), identification and developmentof high potential performers, peer recruiting at targeted universities, extensive customizedtraining of all professionals, and pay for performance throughout the organization.

In a February 1998 memo Del Amo announced a new structure for HR, which was to bedivided into “two big performance areas: motivation services and administration services.” Themotivation services were housed in the company’s strategic units and were assigned to be the


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“direct and permanent contact with our operations.” Administrative services, such ascompensation, labor relations, training and recruitment, were “in charge of giving effective andefficient response to the necessities and requirements of their ‘internal customers’ (the businessunits).”

Del Amo explained the need to distinguish between the two services that HR provided,

“After downsizing, we were called ‘inhuman resources,’ because we were seen asthe people who helped the manager fire people. Our role is evolving here frombeing the administrator in the field whose primary purpose was labor relations,through the current phase to a purely, technical administrative work that could beoutsourced. Our goal is line managers who understand and handle well all the HRissues affecting their people.”

Pierre Brocvielle, Human Resource Motivator for the Upstream Domestic BusinessOperations, elaborated on his role in the current phase,

“We previously had very weak managers in the field, who were really justadministrators consuming resources rather than developing them. In my opinion,a manager should be an expert at producing two things: one thing is oil and thesecond is people. A manager who only knows how to produce oil is merely anadministrator of resources. Our weak managers, in the past, used HumanResources only to hire, fire and handle salary. We had to separate ourselves fromthat tradition and so we came up with the name of “motivator.”

“Our role is identify and develop relationships with the right universities forrecruiting, to sell the company image, to take the temperature of the organizationat employee roundtables in the field. We also help managers identify appropriateperformance objectives for their staff and we constantly preach the benefits ofperformance appraisal.”

Ignacio Letemendia, Human Resource Motivator for Downstream, described one of manycommon questions the motivators had to handle, “when we rotate someone into a job above aperson who had been there waiting and hoping for the promotion, the disappointed ask ‘why notme? What’s my future if it’s not to step up to my boss’s job?’” Letemendia, like his associates inthe Motivation Services, finds himself in such instances explaining to employees both therationale for, and the details of, the new human resource programs.

Promotion from Within

YPF S.A. adopted the policy of promotion from within for a number of reasons.According to Del Amo, the primary reason was that such a policy would motivate everyone inthe organization to perform more effectively, especially when accompanied by a newmanagement by objectives approach to performance appraisal. The new policy also signaled asignificant change in the qualifications for moving up at YPF; it was no longer a function ofhaving the right degrees and sufficient seniority. Now, promotion would occur as a result ofone’s performance and potential. Hiring from within a loyal and highly motivated workforcealso reduced the need to compete in the expensive external labor market. Finally, promotion


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from within was expected to help create a culture where people developed the capability to riseto new challenges over and over again. Del Amo elaborated this concept:

“The difference between us and companies that hire externally is that here peoplealways lack specific experience in the job in which they are placed and so they aretested and forced to stretch. Those people who can rise to the occasion, and mostdo, will become the kind of managers we will always need here at YPF. Managerswho learn to learn.”

Promotion from within required other changes in the organizational design of YPF inorder to achieve the desired effects. To make employees believe that promotion would be basedon one’s performance required that the performance evaluation system effectively assessedperformance and identified areas for development. To ensure that key managerial positionscould be filled promptly (a critical requirement in the new Argentine business climate wherethere was considerable competition for managerial talent), there needed to be a company-wideinventory of high performers.

Management by Objective

When YPF S.A. was a state-owned company, the focus of management was on increasingproduction and, as a result, employees’ secure government jobs were rarely in jeopardy. As aresult, performance appraisal was not a part of the organizational design. Later, as part of theYPF privatization process in the early 1990’s, consultants designed YPF’s performance appraisalform and process, which were viewed by line managers as very complex and not particularlyhelpful in the tasks of coaching or holding personnel accountable for results. A new approachfor measurement of performance was needed. In 1997, the HR staff developed a new form and aprocess that emphasized the establishment of specific objectives, as well as critical otherperformance factors to be assessed by the manager.

Exhibit 3 displays the MBO form that was to be used by managers in conversation withtheir direct reports four times during the measurement year. Initially, the manager establishedwith the employee the specific objectives that he or she would work toward during the year.Managers were instructed to identify up to two team objectives for each employee to work onand up to six individual objectives. Each objective was to be given a weight (“Score”) indicatingthe amount of relative time and effort it merited. After each quarter of the year, the manager andemployee were expected to sit down and discuss both the objectives and the employee’sprogress. For example, one manager was assigned midyear to a new program on theimplementation of SAP and as a result, the weights of her original objectives were significantlyrevised. These conversations produced focused attention on results contributed by eachemployee and created opportunities that never before existed for providing developmentalfeedback on how a manager was doing his or her job and where he or she needed to improve.

At the end of the year, the manager had a final conversation with the employee about theobjectives. Accomplishment of these objectives contributed up to 80% of the employee’s finalperformance score for the year. The additional 20% of the employee’s performance score wasbased the manager’s assessment of other factors of the employee’s performance (see page two ofExhibit 3), such as how creative each was, how adept each was at dealing with cultural diversity,and the extent of each’s technical knowledge and global business understanding, etc. When


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accomplishment of objectives and these other performance factors were summarized, eachemployee was given an overall score ranging from A to D, in a forced ranking. This assessmentwas then shared with the employee along with recommendations for future training anddevelopment. These assessments and recommendations led to another new HR strategy: theidentification and development of high potentials.

High Potentials

In order to fully implement a promotion from within policy, YPF needed to put into placea process for identifying and developing the best talent in the company at every level. Thesefairly common practices in the U.S. were challenging to introduce in a corporate culture in whichrelationships and loyalty were important, and where educational credentials such as one’s schooland degree and one’s seniority had traditionally been the ticket to promotion.

Identifying high potentials started with the MBO process but did not stop there.Managers were asked to choose from among their “A” performers which 5% had the greatestpotential to continue learning, developing, and contributing value. Initially, this task wasdifficult with managers claiming that all the “A’s” were high potentials.

According to one YPF manager,

“When evaluating employees, managers were careful not to qualify any one as a"bad performer" fearing that the "upper administration" could sack him andcreate potential problems and they would not qualify many as "top performers"either, so as not to have to justify their opinion to the hierarchy. They wouldtherefore end up squeezing everyone between "good" and "very good". Lookingto inventory our reservoir of "top potentials", managers would regularly promotetheir old-timers mixing up potential with experience.”

Brocvielle in the Upstream Domestic Operations found that the way to get managers toidentify the very best,

“was to ask on the one hand for a list of highly capable employees, the kind of"pillars" who could take over the daily operation any time and, on the other hand,to ask for another list of people who, given the right training and development,could outperform anyone at a much higher level of responsibility. That waymanagers had room to recognize their "good old-boys" and felt at ease identifyingthe real "top potentials" I was looking for to structure development plans for ourbusiness unit.”

The next very challenging but developmentally critical task was for managers in the samebusiness unit to compare and rank their high potentials to identify the highest potentialperformers in the division. Del Amo pointed out that the “discussion of who is doing what, howwell, and why it matters,” reinforced the new cultural norm that results mattered and peoplewould be promoted based on their performance and potential to add value.

For several years, the plan for developing high potentials had been to send 20 of themabroad every year to an MBA program. Del Amo believed that this was too expensive for thecorporation and produced questionable value for two reasons. First, since most of the high


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potentials had been in the company such a short time, the program was not always successful.Second, as Del Amo speculated, “Why does an oil company need so many MBA’s?” Thecompany decided that development would proceed in two ways. First, the company woulddevelop the business acumen it required by continuing to send managers at the highest levels ofthe company to short executive education courses in Europe and the U.S. Secondly, it woulddevelop its high potentials by giving them a series of developmental assignments. One aspect ofthis development required the creation of succession plans, such that for every managerial orprofessional position, possible replacements were identified, with the successors’ replacementsalso specified.

Succession planning also involved rotating high potentials throughout the company.There had been several notable examples. One was an accountant who had worked only incorporate staff functions who was sent to be second in charge on a oil-drilling site in Indonesia.Another was a sales and marketing manager who was promoted to be manager of a refinery.

These rotational assignments caused quite a stir in the organization. One business unitmanager, Julio Tellechea, head of domestic refining, reported a conversation with one of thosepassed over in such rotations, “this person told me, ‘I would do a much better job than thatperson,” and I agreed but went on to say that this company needs managers who know the corebusiness but also know and understand other areas like corporate planning or marketing.”Letemendia reported that when asked by another such person about his future, “I told him andothers, ‘we want you to be trained in all manufacturing areas, and you have to be willing to moveand learn’.”

To persuade a talented manager to move his/her family to a distant site to undertake a jobthat was totally unfamiliar, it was necessary to offer assurances that one’s salary level would bepositively rather than negatively affected. So, to facilitate such rotational assignments, HRcreated new, cross-organization salary bands.

Recruiting

In the new design for managing YPF’s human resources, recruiting played a critical role.The HR management believed that for the company to become a highly profitable globalcompany, it needed to create its own pool of highly talented and technically trained oilprofessionals. Competition for talented college graduates was especially tight in Argentina,where new economic and political stability was creating a business boom. Multinationalcompanies were growing in Argentina, including all the major oil companies, and all werebidding for the country’s best people. Previously, YPF’s recruiting was done by outsideconsultants at considerable expense.

Under Monti and Del Amo, YPF developed an approach to recruiting not unlike the oneused by other world oil companies, such as Shell, Exxon, and Schlumberger: they created acollege recruiting program to find and attract new professionals. The HR motivators in eachbusiness unit were responsible for this activity. They were assisted in this work by a set of highpotentials from the line organizations who were rotated into this function for one year. The taskwas to identify the top universities around the world-producing engineers, build relationshipswith them, and sell YPF to them and their graduating students. The hope was to hire 200 newcollege graduates each year.


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The profile of the new recruit was described by Carlos Minervini, HR training director,“someone with the potential to learn, the ability and interest to work autonomously, and aninterest or experience in internationalism.” Brocvielle elaborated the profile, “we are looking forpeople who are flexible and who have respect for others who are different from themselves;people who are interested in us and interesting to us.” The typical college graduate was anengineer, but business students were also occasionally recruited.

Rotating high potentials into the recruitment task was challenging. Neither they nor theirmanagers were enthusiastic about this assignment. In fact, as Del Amo put it, “we choose twopeople and even if their managers scream, ‘you can’t take him!’ we bring them in for one year.We give them no particular training, we just say ‘go find people like yourself. We call this‘clonification’.” After the year of recruiting, these high potentials get a new assignment. “Ifthey have kept their “A” rating, the company will give them an even bigger job than they wouldotherwise have at this stage of their career,” said Del Amo. “I want to keep getting people likethis in HR; I want people to see that spending some time in HR is one of the ways to move up inthis organization.”

The plan was that eventually all of the company’s professional and managerial talentwould come from the set of people recruited in this way. The new vision of YPF’s recruitingand development was depicted in the form of the letter “Y.” (Exhibit 4) All new hires wouldenter at the base of the “Y” at what was called grade 21 and, after completing their trainingrequirements, would be promoted. After grade 24, the “Y” forked and high performers weredistinguished as managerial or technical, and their careers would develop in one of those twotracks.

Del Amo described the new hiring and career tracking plan as “a compulsory, equalizingprogram; if you have the profile to join us, you enter the same door as everyone else. You learnthe same things that everyone else hired for your division is learning. If you have a PhD andthink you are better than others being hired, you should be able to run faster through theprogram.” A significant part of the program for moving up, especially for the new collegegraduates and other external hires, was the development of technical expertise in the oil business.To meet this need, YPF had developed a customized training program for becoming an oilprofessional at the company.

Amanecer Programme: Customized Professional Training

Amanecer Programme, the development plan for new hires, was a rigorous combinationof hands-on training and classroom learning. Specific technical competencies required for eachjob grade had been carefully inventoried by HR with the cooperation of the line management.New hires started their employment developing technical expertise in either upstream ordownstream processes in classrooms at Buenos Aires Institute of Technology (ITBA).

Afterward, they were assigned to work in one of the units of the company. When theyhad completed the practical assignment, the recent hires would participate in a course designedto review the theoretical aspects of the expertise, evaluate the knowledge acquired during thepractical assignment, and review company’s basic management concepts. The same cycle oflearning activities occurred at each job grade from level 21 to level 24 (see Exhibit 4).


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Although most of the Amanecer participants are college graduates, the programme is alsoopen to all other non-graduates such as technicians. This was highly unusual for the companyand the country. Typically, one’s educational credentials were included on one’s business card.For example, it was common to see a card with the title “Ingeniero” (engineer) or with thedesignation “Licenciado,” which was the equivalent of a master’s degree in the U.S.

Advanced technical and management development for employees who had promoted tothe job grades in the branches of the “Y,” was more tailored to the person and his or her position.Typically, such employees traveled abroad for short courses in prominent institutions.

Pay for Performance

Linking employees’ pay to the company’s performance had been an important HRstrategy at YPF since its privatization in 1993. The program gave participating employees apercentage (variable by salary grade) of their annual salary if the company met its financialtargets. In 1998, a new bonus program, BONACC, was established, based on the company’sreaching its target of having a return on capital employed (ROCE) of 10.8% for the said year.Its objectives were to “turn all employees into Company ‘shareholders,’ motivating the feeling ofsharing a long-term common future, (and to) attract, retain, and engage all employees with longterm growth and value creation strategies.”

All 10,000 employees of YPF S.A. participated in this program and they were qualifiedto earn up to a maximum of 10% of their annual base salary, if the company met or exceeded theROCE target. If the company achieved a ROCE between 10.5% and 10.8%, the percentagewould be proportional to company performance. If ROCE were less than 10.5%, there would beno bonus payment.

In 1997, approximately 500 of the most senior employees also participated in anadditional bonus program called PROBON. In 1998, eligibility in PROBON was extended to allof the professional employees from grade 24 up, with a total of 1760 employees participating.Based on their individual and team performance against the objectives established at the outset ofthe MBO program, on their other performance factors (as explained above), as well as on theirsalary grades, these managerial and senior technical employees could receive a significantamount of variable pay.

Employees at salary grade 24 could receive up to 10% of their annual salary, whereasemployees at salary grade 33 could receive up to 35% of the same basis. PROBON ’98 paymentof maximum targets was directly linked with YPF 1998 net income, such that if net income wereequal or greater than $801 million, employees would receive the total participation percentagefor which their performance ranking and individual and team goal achievement qualified them.If net income were between than $600 million and $801 million, there would be a proportionatepercentage reduction of the participation percentage. If net income were below $600 million, noPROBON payments would be made.

There also existed a retention program, now called PRODAA, which used to be veryselective. Starting in 1993, this program was used to award phantom stock to 50 seniorexecutives as a reward for high potential and as a way to retain them. Participation in theprogram was decided upon by the CEO, with the recommendations of the Vice Presidents of the


13

strategic business units. In 1998, the pool of participants in the Retention program was increasedto 600 participants and the criteria were expanded to include the highest performers with thehighest potential as well as critical employees at all levels of the company. Phantom stockamounts were discretionary and no linked with employees base salary. The program had a two-year vesting period with a maximum total exercise time of 10 years from the grant date.

Stock prices had fluctuated over the last year (Exhibit 5) and the net income of $580million for the year was disappointing, largely due to the drastic decline of world oil prices in1998 (Exhibit 6). As of 12/98, the return on capital employed was only 10.4%. As a result, noone received the bonuses provided under either program. However, YPF decided to grant allemployees an extraordinary bonus to recognize the effort made during 1998 when ROCE atnormalized WTI prices had increased from 9.38% to 10.47%.

Assessing the Transformation

Some managers clearly worried about the company’s losing its entrepreneurialmomentum and the favor of financial markets. Indeed the stock price tumbled from a peak of$38 in October 1997 to $31 in June 1998, and kept going as world oil prices went into a free fall.Concerns about a government sell-off of its 20% of YPF stock created considerable investorconcern.10 Nevertheless, Mr. Monti enjoys unusual favor among fund managers, in a December10, 1998 Wall Street Journal article on stock picks, YPF was recommended as a good buy.11

Internally, the view of the culture change was cautious. Human Resource Motivator,Pierre Brocvielle characterized the stage of the effort, “after splashing the soup with the spices ofthe new culture, the changes are now percolating down to flavor it.” However, he went on todescribe the many changes of behavior and attitude that he had observed in his almost two yearsin the job, “when I used to hold an employee roundtable, people just came, listened, and left.Now, people actually talk about how they see the company. They ask questions, even if theirboss is present.”

The promotion from within program and the customized training program were generallyviewed as positive steps toward ensuring that YPF would have the talent that it needed. Someargued that as along as it was not enforced as rigidly as it was presented, the program wouldwork well; however, in the words of one manager, “young professionals don’t have the expertiseyou need… if they had had that policy earlier, we wouldn’t be here. It’s reasonable from a costperspective and consistent with promote from within, but its application is too strict now.”

Business unit managers expressed strong support for the recruiting and training programs.According to Antonio Allegretta, Vice-President of Lubricants Division, the new HR programswere going to help his division grow by sending him 60 of the new recruits with sales andmarketing experience. Julio Tellechea, Refining Division Manager, was also anticipating hisnew recruits, explaining that “the Plan Amanecer looks good but it is just starting and we will seeall of its potential over the next one or two years.” He also liked the rotation and the highpotentials programs, “I am beginning to see some very young people reaching managerial

10 Torres, Craig. “Argentina puts big state assets up for sale bid to cash in spoils before next election.” The WallStreet Journal, 12/07/98, p. A26.11 Torres, Craig. “Stock pros return to victory over darts,” Wall Street Journal, December 10, 1998, p. C1.


14

positions and that is a very good thing for the company.” In his view, the benefits of the rotationprogram were that the business unit got new perspective on their operations, and the personachieved a broader knowledge of the company, creating greater motivation and productivity.

The rotation program, though, was not without its critics. One manager characterized itas too Darwinian, “it moves people into new jobs and leaves them to struggle. We like todevelop people here, not just move them around.” Another voiced concern about how theprogram would fit with the career development plans of talented, well-educated middlemanagers, “to manage their opportunities, they may not want to rotate out of their ‘careers’ (i.e.,functions) without getting more experience and responsibility in it.”

The MBO program had strong support by many. One professional noted that “I am betterthan I was before. I have challenging objectives, but I know I can do them and they will benefitthe whole company.” Agustin Diz, a Ph.D. physicist and one of nine product champions in theEngineering and Technology unit, praised the program. “MBO is helping to create a newmindset in this company by creating a unified vision of what everyone is doing, and how itrelates to what the CEO is trying to do.” As Del Amo put it, “just having MBO was a big step;before people were just doing activities, with no sense of working for results or of valuecreation.”

Del Amo, the major agent of the cultural change was sanguine about what had beenaccomplished, “it’s going to take 10 years to make the transition, but we need to be sendingsignals now about the kind of company we are becoming.” He believed strongly though that thecurrent financial picture, due largely to oil prices, would have looked much worse without thekinds of programs that HR had put into place in 1997.


15

Exhibit 1

Evolution of Inflation

0.0%1000.0%2000.0%3000.0%4000.0%

1985

1987

1989

1991

1993

1995

1997

Year

Infl

atio

n

Exhibit 2

GDP Growth Rates

-10.0%

-5.0%

0.0%

5.0%

10.0%

1985

1987

1989

1991

1993

1995

1997

Year

Ch

ang

es

in G

DP


16

Exhibit 3 A

YPF Annual Performance Appraisal Form, Part A


17

Exhibit 3 B

YPF Annual Performance Appraisal Form, Part B


18

Exhibit 4

YPF’s Training & Professional Career Development Program

Functional orIntegrativeManager

SeniorDevelopment

ExecutiveEducation

ExecutiveAdvisor

Advisor

Leader

Specialist

Senior Professional

Professional

Jr. Professional

Professional Trainee

Technician

3333

30 30

2727

25

24

23

22

21

StrategicManager

OperatingManager

External Course

External Course

External Course

External Course

Induction

Profile•High Potential•Professional•Bilingual•Movable

Profile•Technical•Self-learner•Motivated to Progress

Plan Amanecer(TrainingCourses)

Managerial Technical & Professional

Technical Programs(Field Operators)


19

Exhibit 5

Brent Current Month FOB US$/Barrel

$5

$10

$15

$20

$25

$30

Jan-9

3

Jul-9

3

Jan-9

4

Jul-9

4

Jan-9

5

Jul-9

5

Jan-9

6

Jul-9

6

Jan-9

7

Jul-9

7

Jan-9

8

Jul-9

8

Date

US

$ P

er

Ba

rre

l

Exhibit 6

West Texas Int., Cushing US$/Barrel

$5

$10

$15

$20

$25

$30

Jan-9

3

Jul-9

3

Jan-9

4

Jul-9

4

Jan-9

5

Jul-9

5

Jan-9

6

Jul-9

6

Jan-9

7

Jul-9

7

Jan-9

8

Jul-9

8

Date

US

$ P

er B

arre

l

leadership culture case

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