Leverage the power in numbers
After dealing with sustained low oil and gas prices, cancelled projects and significant job losses, it's becoming clear that the oil and gas industry cannot rely on a return to the oil heydays of years past anytime soon. A fundamental change is on the horizon for this resource-based industry as companies find themselves running out of cost-cutting options within their organizations. Improving efficiencies, laying off employees and running leaner operations are no longer enough. So what other options are there?
Recently, Grant Thornton LLP and JuneWarren-Nickle's Energy Group conducted roundtables in Edmonton and Calgary to discuss just that. Twenty-five senior executives from the service and supply industry came together for two thought-provoking discussions about the challenges ahead and how the oil and gas sector can find new ways to redefine best practices and reach a new and more sustainable level of success.
Despite the changes taking place in the industry, our roundtable participants believed solutions are out there for those willing to shift their thinking and adapt— with collaboration being the primary key to future and sustained success. Results from the 2016 Service and Supply Outlook Report, released earlier this year, reveal this is already happening—43 percent of service and supply companies reported considering collaboration strategies to cut costs in 2015. But as our roundtable discussions revealed, companies hoping to thrive in this new era will have to do more— and leverage the power of collaboration to increase profit margins, strengthen their internal operations and acquire a broader view of the industry and its future.
Oil and gas is an industry notoriously prone to pendulum pricing and bottom dollar bids. It's a cycle that has stuck for decades, but a lower-for-longer market means this trend may no longer allow sustainable operations. That said, the roundtable participants believed there are a number of ways service and supply companies can permanently lower costs and increase profit margins—provided they're willing to adopt collaborative approaches that include some key components.
Partnering with a complementary service provider can boost your sales network, improve your product or service offering and bring significant cost savings. The key is to clearly determine your goals upfront—and find the right partner to help you get there. This can be done by:
- Combining fixed cost centres to reduce overall overhead costs. This can range from offering unused space in your shop at a reduced rate to sharing resources or equipment.
- Teaming up with complementary service providers to expand service offerings and leverage each other's networks to gain access to new markets and customers. This not only helps provide a more well-rounded option to customers of both companies but, working together, can result in increased efficiencies. This, in turn, can allow both companies to reduce their prices and maintain or increase margins.
- Considering joint bids. Strategic alliances can reduce bidding wars and inefficiencies. This will add significant value to both the bidding company and the end customer. The entire bid process along with any subsequent jobs will run smoother as a result if there is a pre-established relationship between service providers.
- Gifting a poorly-performing division of your company to a strategically chosen competitor in exchange for a royalty. This strategy can solve a cash flow issue and create goodwill within the industry.
Enhance communication and trust
While forming a strategic alliance is one way to lower your costs and increase your profit margins, a clear, honest and open customer communication strategy can also greatly alleviate the constant pressure for price cuts—and preserve your profit margins in the process. To ensure your customers understand where you—and your prices— are coming from, make sure you consider the following:
- Clearly outline your expectations. Be prepared to either take a hit or walk away should the situation call for it.
- Reach out regularly. Frequent communication allows you to fully understand your customers' business needs and better tailor your offerings to meet them.
- Put your customers first. When you treat your customers like partners, and innovate with their needs in mind, you end up helping yourself in the process.
- Uncover new ways to help. Think about what products or services you aren't currently supplying to your customers and then offer them— along with a price reduction—in return for additional business.
- Go beyond traditional invoicing. Consider offering credits forward and applying them to future projects— or set up a master service agreement or subscription-type model where customers have monthly access to your services, guaranteeing you regular payment.
- Keep your valued suppliers close. Avoid asking for price reductions whenever possible. Taking a team approach to your most important relationships will encourage those suppliers to continue working with you, allow you to manage your costs and find ways to become more efficient.
Although every company faces unique challenges, lower-for-longer oil prices still affect the industry as a whole. That means service and supply companies should look at the big picture and tackle industry challenges as a united front. But how does an entire industry adapt and reinvent itself?
- Be active in industry associations that regularly lobby for change, whether political, environmental or regulatory.
- Don't just rely on your industry associations to have a voice. Contact your local provincial and federal government representatives and speak out. Just imagine the impact if everyone in the sector did this.
- Take advantage of networking opportunities at industry events. Your industry peers will understand better than anyone the challenges you are facing. The power of brainstorming and idea sharing can be tremendous. Don't wait for someone else to change. For example, focus on doing business with companies that value more than the lowest price. Participating in bidding wars only drives the market down further, which hurts everyone.
Transforming employees into team members
Layoffs in the oil and gas sector are an unfortunate side effect of today's economic climate. But while reducing headcount is never an ideal scenario, it does present an opportunity to re-evaluate how your company operates, fine-tune your processes and better utilize your top talent.
To get the most out of your remaining employees, however, it's essential to build a culture of collaboration. This can be done in a variety of ways.
Prioritize strong communication
Just as maintaining clear communication with your customers is essential to business success, so is communicating with your employees. As your business positions itself for the future, here are a few things to keep in mind:
- Stormy seas make better sailors. Be honest and open with your team to address the fear surrounding potential future layoffs. Your integrity and ability to converse without fear is paramount in today's environment.
- Have conversations with the right people. No one knows what's happening in the field like your team on the ground. Seek input from those directly affected by decisions to gain a better understanding of what their needs really are and the most efficient way to meet them, rather than making decisions solely on price at the boardroom level.
- Align everyone to a common goal. Too often different departments are disconnected and operate in silos, which leads to miscommunication and inefficiency. All departments should have an understanding of the mandates and roles of other areas in the organization, and how this fits into the overall strategy and vision for the organization.
Develop your people
In today's environment, your entire team has to be on its toes and ready to respond, which can be difficult if morale is low and fear is high. Increased turnover has the potential to create serious knowledge gaps, massive inefficiencies, low morale and potential safety issues. To avoid this, it's essential to pay attention to your people.
You can do this by:
- Taking advantage of idle time to train less experienced workers. This will not only allow you to seamlessly fill the labour gap as your experienced employees retire, but it will also place your business in a strong position to respond when the market improves.
- Engaging key employees. If you have one department busy while others are idle, consider putting your people on projects outside of their normal role. This not only keeps people out of a rut, but will help break down silos between departments within the organization.
- Empowering your team to make decisions. Ask your employees to be innovative in reducing inefficiencies and uncovering new business. Shared leadership creates an environment where everyone is fully invested in the future of the company—and leads to better decisions all around.
- Focusing on the positive. Repel negative thoughts by training your team to continually look forward, think creatively and seek out new opportunities.
- Keeping your finger on the pulse of the industry. Hire outside-the-box— such as promoting an experienced foreman to sales—and ensure your sales team is out in the field rather than behind a desk. You'll not only gain a stronger presence in the industry, but you'll benefit from a stronger team as well.
- Shifting to a non-commission-based sales environment. Although this may seem counter-intuitive in a dog-eat-dog world, this will encourage a culture of collaboration that views a sale as "ours" rather than "mine", leading to more satisfied customers that are less focused on price.
Improve your processes
Strong, seamless processes are the backbone of an efficiently-run business. To ensure your processes are as strong as possible, consider
Going back to basics.
It's harder for your team to adapt to a changing environment when there are too many complicated processes. Opportunities are lost when it takes too long to react.
Hiring an outside project management company.
The cost to outsource this function may be less than the cost of the inefficiencies and losses of an improperly managed project. Alternatively, look to the construction or mining industry to model how they manage projects.
Lowering overhead by moving some specialties out of house
Logistics, marketing and accounting services, for example, could easily be delivered by third party providers.
Bringing on an advisory board.
An advisory board can help provide strategic direction, allowing your management team to focus on operations.
Restructuring your divisions.
Try to set up your organization with collaborating and productivity in mind.
The overall cost of operations isn't limited to the dollar value of expenses. Time, inefficiencies and strategic oversights can also cost you dearly if they're not properly managed. To keep costs to a minimum, therefore, it's essential for all companies within the oil and gas sector to work together, see the big picture and understand the true costs of doing business.
Information is power
All too often, companies in the oil and gas sector struggle with the daily tasks of getting their product or service to market —a challenge that can typically be easily remedied with simple process adjustments and technology adoption. To make these changes, however, you first must acquire the right information. This is done by:
- Implementing an ERP system to analyze the cost of labour, supply and materials and help you understand your true cost of doing business;
- Adopting CRM software to keep track of your customers, analyze their purchasing habits and better anticipate their needs by appropriately customizing your product or service; and
- Considering both the cost and time involved in every project, and properly scheduling the right people at the right times.
Big picture thinking
Understand the true cost
There is a difference between the price and the cost of doing business. Oil and gas service and supply companies that focus solely on price when choosing a supplier may be sacrificing quality, security and even profitability.
If you can show your customers you truly can't go any lower on your price, they are more likely to accept this and work with you. That said, it takes a certain type of customer—one that is genuinely invested in the future of the industry—to appreciate your position, so make sure your sales team is focused on finding the types of customers you'd like to work with. To do this effectively, you may want to have them focus on targeting management or the owner(s) of a prospective company, rather than the procurement team. And above anything else, make sure you've created an environment where your sales team knows it's okay to turn away potential customers that are solely focused on price.
Think long term
To achieve success in a sustained lower-for-longer oil price environment, you need to think long term. You can encourage this type of thinking within your organization by clearly defining your company's values—and staying true to them, even as your strategic plan shifts.
This type of forward-thinking approach will undoubtedly require patience—and a willingness to walk away from customers that are solely focused on price. That said, by planning your projects farther out— and building more strategic procurement strategies, improving your cost plans and establishing longer-term, more efficient partnerships—it will be easier to swallow a short-term shrink in margins.
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