As the downturn recedes, a newly resurgent energy industry must be rede¬signed to thrive in a volatile global market. No matter where a company operates in the broad energy value chain, evolving technology, an increasingly interventionist regulatory framework and an historic economic malaise are combining to increase vol¬atility, decrease predictability and challenge traditional business structures.

Traditionally, energy investments are long-term and deploy large amounts of capital to build fields that will produce for decades with a (fairly) predictable return. This model, which generally assumed constant economic expansion, worked well for the most part, and the industry was able to weather periodic economic declines and exogenous, usually geopolitical events.

Today’s energy market is very different. Technologies like fracking and innova¬tive geophysical exploration methods have opened up new sources of supply but also introduced volatility. This technology-driven disruption has coincided with the decision of state-controlled energy companies worldwide to balance their budgets on energy revenues, often creating a “death spiral” of prices in a saturated market where they believe they must choose between domestic unrest, national security and price stability.

National fiscal and monetary policies are also impacting markets. Unlike prior dis¬ruptive periods in the industry, which were characterized by perceived supply constraints, today the energy industry is confronted by over-supply and constrained demand. As tech¬nology continues to advance, and efficiency regulation improves energy consumption/unit of GDP, oil and gas companies must reinvent themselves to be “faster-better-cheaper” with¬out jeopardizing their commitment to safety and environmental stewardship.

This shift puts U.S. E&Ps in a new posi¬tion, in which their role as “swing pro¬ducer” challenges conventional thinking and requires reimagination of business structures, investment practices and relationships, from employee to investor. Business practices must evolve throughout the energy ecosys¬tem—E&P, midstream, downstream, manu-facturing and services—to flex and be able to quickly control margins, manage costs and create fine-grained business adjustment capabilities to react in near time and capture dynamic market opportunities.

The relationship between the U.S. dollar and crude oil prices has strengthened over the past year.

Faster-better-cheaper principles

Getting to a new model for the industry isn’t easy, but it shouldn’t be overly difficult for small to midsized companies, because the market reset is driving down prices for assets and services— eliminating some players while forcing others to rethink current prac¬tices. In some cases, the leaders of these com¬panies have spent their entire careers in an industry their grandfathers created, and they are struggling to move beyond layoffs and cold-stacking of gear as the sole mechanisms for market adjustment. Massive companies, for their part, are continuing to shed assets and people, as they remain both protected and encumbered by their political and economic significance, their structural complexity and scale.

How will the winners in this race to create more nimble, cost-effective players operate? We see four major areas of structural/opera¬tional innovation:

Small core/high competence structure. Successful companies will be characterized by “small core/high competence” models where a core of professionals manages and controls service providers that operate at their direc¬tion. While many companies currently control costs by using outside contractors, especially in oilfield services, they also often have ded¬icated internal teams (e.g., accounting, land management and labor management) that can be acquired and managed as needed.

The rise of the cloud. Over the past decade, companies have been increasingly looking to affordable, quick-to-deploy, off-premise tech¬nology solutions to decrease their total cost of ownership and provide a variable cost owner¬ship model for information services delivery. Today’s solutions are tremendously powerful and are bringing sophisticated capabilities like enterprise performance management to smaller companies, giving them sophisticated tools and capabilities much earlier in their life cycle.

Plan-measure-adjust culture. With the requirement to adjust quickly comes the need for fine-grained data and the discipline to use it. Developing a culture based on active plan¬ning allows companies to make adjustment decisions based on real data and models that provide multiple scenarios.

“Frictionless” operations. Many processes in the energy industry are still done manually. In contrast, industries with similar challenges have embraced automation and technology to improve costs and gain insights.

Small core/high competence structure

The model of the integrated “holistic” energy firm is a tremendous burden through¬out the life cycle of small to midsized com¬panies. From initial funding through exit, the task of creating all of the operational and infrastructure capabilities consumes expensive capital and replicates what, in many ways, are nondifferentiated “commodity” services.

Investors have confidence in the intellec¬tual/operational track record of company leaders because of their prior demonstrated achievements. Many of these leaders are technically excellent but lack the experience or interest to scale and operate a business. This often leads to tactical decisions about investment, structure and more that create inefficiencies or obstacles to scale.

Many executives think ancillary operations are a distraction from the core mission of their company. As a result, they don’t manage these areas for cost effectiveness or business impact. In the “small core” model, companies own the essential intellectual, strategic and opera¬tional resources needed to execute, but make a conscious decision to “virtualize” or augment themselves through strategic and transactional partnerships that deliver key resources.

Perhaps the most significant impact of this change is in the skills core executives need. Rather than managing a permanent staff, they manage transitional staff or service contracts, something they may not have the skills to do successfully. The changing nature of labor means that one of these core competencies is the ability to create and manage a multifac¬eted labor and services strategy.

The nature of the labor force is changing radically in the U.S. In a 2015 report, the U.S. Government Accountability Office (GAO) found some startling statistics around the increasing use of “contingent” labor. In 2006, 35.3% of employed workers were contingent vs. 40.4% in 2010. This reflects a continued desire on the part of companies to engage specialists directly when needed and contract for commodity services. In some cases, the unit cost of these services is higher than the cost of a similar employee, but the increased flexibility they provide for scaling the labor supply up and down as well as the ability to quickly shift for a different specialization or competence provides tremendous cost savings and service improvement opportunities.

For many companies, this transitions labor discussions from a classic employment-oriented, “HR” view of labor management to one of legal compliance in the supply chain, in which the way people are engaged is extremely important to pre¬serving the value of the transitional engagement approach. For those who have grown up develop-ing skills in conventional labor management, this creates a need for re-education and process and policy innovation to preserve the legally required characteristics of contingent labor. Additionally, the aging of the energy workforce has resulted in gaps that will be difficult to fill in a resurgent industry, and Millennial replacements see work as having a very different importance in their lives as they seek balance.

The ability to flex the talent engagement structure requires a clear break between stra¬tegic labor sourcing, strategic partnerships and commodity talent acquisition. For example:

--Exploration professionals with a great deal of knowledge about a basin may be retained in a project to evaluate that spe¬cific basin or set of properties and be let go when that effort ends.

--A “first purchaser” may contract with a transport and midstream storage com¬pany to handle all of its pickup, delivery and storage, and the transport company may use independent truckers and lease tank space in a region to meet changing customer requirements and delays in new customer engagement.

--An E&P start-up may contract with a third-party provider of accounting services and outsource the entire organization, with ser¬vice pricing based on well count to reflect changes in operational load. They may source the system through a cloud provider to avoid expensive on-premise infrastruc¬ture and facilities and add employees to monitor and administrate the platform.

The small core/high competence model creates a business that can rapidly adapt to changes while delivering focused excellence in the areas that are strategically important to its success. By focusing on engaging high-quality, cost-effective services that can be rightsized for changing needs, companies provide the struc¬ture in which market chaos and volatility create opportunities, not obstacles.

The rise of the Cloud

Business information systems are another area where technology has enabled new ways of working, delivering flexibility, affordabil¬ity and decreased time to value for what tra¬ditionally have been risky, capital-intensive projects. Over the past decade there has been a realization that the actual cost of a system is in the multiyear total cost of ownership, which generally has included a large upfront sum to buy and implement the software, fol¬lowed by an annual maintenance cost and ongoing operational services costs to manage and administrate. Cloud computing is the next step in a progression that goes back decades, where expensive computing platforms were accessed remotely and timeshared. Today, with the availability of secured internet capabilities and the massive rise of internet-enabled mobile devices, Cloud solutions provide affordable, first-class systems with easy accessibility and a security footprint far exceeding that of most companies’ infrastructure.

Cloud systems have made plain what sys¬tems folks have known for years: The custom¬ization of systems and processes adds time, cost and risk to these investments without actually delivering improved processes and business performance. Most companies define their leading practices based on what they do today, usually a process set that was defined by the current system. Companies spend bil¬lions every year customizing solutions to more closely match the processes and practices in use, creating systems that do not drive process improvement and often end up costing more. In addition, few energy companies have a truly differentiated competence in technology per se, although they have likely developed a com¬petence in their technology stack, due in most part to the level of management and mainte¬nance that is required by their customization and integration.

Cloud systems can deliver on the promise of process improvement and cost effectiveness, but only if they are closely managed during implementation with the philosophy that “no customization will be made to the provided system unless it is required by a statutory, regulatory or contractual requirement that can¬not be otherwise managed.” However, in that approach there are significant savings, as the five-year “Total Cost Of Ownership” graphic shows. This was developed recently for one of our energy clients looking at ERP solutions. Over the five-year life of the system, costs were reduced by about half, a considerable amount. Further, this approach argues for investment in people—in training them to make the best use of the tools provided in order to overcome objections to change. Cloud systems provide the ability to right size the costs of commodity information systems capabilities and redirect that investment to differentiated technologies and partnerships that move in a company’s stra¬tegic direction.

Cloud systems can deliver on the promise of process improvement and cost effectiveness, but only if they are closely managed during implementation with the philosophy that “no customization will be made to the provided system unless it is required by a statutory, regulatory or contractual requirement that can¬not be otherwise managed.” However, in that approach there are significant savings, as the five-year “Total Cost Of Ownership” graphic shows. This was developed recently for one of our energy clients looking at ERP solutions. Over the five-year life of the system, costs were reduced by about half, a considerable amount. Further, this approach argues for investment in people—in training them to make the best use of the tools provided in order to overcome objections to change. Cloud systems provide the ability to right size the costs of commodity information systems capabilities and redirect that investment to differentiated technologies and partnerships that move in a company’s stra¬tegic direction.

Plan-measure-adjust culture

“You can’t manage what you don’t measure.” Often this piece of wisdom is ignored by exec¬utives, who may view the dis¬cipline of being a data-driven enterprise as constraining, or whose operational executives are not familiar with its prac¬tices and technologies. Critical intelligence, whether from pro¬duction systems, machine-to-machine monitoring, accounting or elsewhere, is the intelligence behind the faster-better-cheaper enterprise. Traditionally, the solutions that informed execu¬tives were disparate and discon¬nected, leaving each part of the business to optimize as best it could but the overall enterprise moving forward in a disjointed and sub-optimized fashion. Adopting a culture of plan-measure-adjust creates a shared infor¬mation base for fine-grained decision-making. The essentials of this approach include:

Democratization of information. Informa¬tion should be collected from and pushed down to the lowest level possible consistent with responsibilities. This movement down requires the ability to deliver the appropriate data to the right person at the right time. It also requires the ability to manage by exception and to call out the anomalous conditions or trends.

Standardization of information. A challenge for many companies is standardizing the level at which information is planned, collected and reported. A discontinuous approach to informa¬tion makes its acquisition and use more expen¬sive while delaying its availability and visibility for action. If team members don’t all agree on the measure, they will never agree on the action that should be taken. Standardization allows companies to focus on a shared set of key per¬formance indicators that are critical to achieving the goals of agility and affordability, and, when coupled with the small core/high competence model, creates the framework in which ser¬vice partners can be objectively measured and managed.

Timeliness of information. The best information is pointless if it cannot affect an outcome. Historically, most information has been delivered so far after the event that caused an issue that decision-making is like driving by look¬ing in the rear-view mirror. Successful operational agility comes from looking forward, having vis¬ibility into events and performance measures so quickly that reactions can affect this month’s performance, not next quarter’s. A company that wants to operate and invest more effectively will quickly learn that “what happened” is important, but “what will hap¬pen” and “how can I make it happen” are critical, especially in a volatile energy industry.

Focus on analysis. In most companies, the ratio between the time spent acquiring, align¬ing and manipulating data and doing actual analysis is out of balance. We estimate it to be about 20:1, which means that intellectual assets are being mis¬used and misallocated to low-value and expensive activities. A focus on analysis requires infor¬mation rationalization across the company but frees high-end resources to apply their skills and judgement to improve perfor¬mance. It also creates the information basis for the effective use of third-party services that can perform complex analytics tasks on large data sets without having to build and maintain an internal data scientist capability. Historically, the capabilities to do this were limited to CFOs with multimillion-dollar Financial Planning and Analysis (FP&A) budgets or operations executives with discrete teams focused on delving into the data. However, faster-bet¬ter-cheaper demands these services be afford¬able and available; in fact, some companies are making them highly variable by using Cloud systems that are only turned on when a specific job or inquiry is taking place, or Cloud services that will process a specific inquiry or analysis job individually and just bill for that service.

The road ahead

Operating a company in today’s evolving energy industry requires new skills, partners and perspectives. It demands a commitment to agility, whether to protect margins in a down¬turn or seize opportunities in a bubble. The new energy industry is based on establishing trusted relationships with others who are excellent in their domain and committed to service.

Applying the simple question of “how can we do this better, faster, cheaper?” is the beginning of a conscious change in thinking and operation. For many of our clients, this drives a strategic program of transition, asking for honest assessments of the strategic value of every function and making a choice about how to get the best service at the best price, with the greatest flexibility and fastest response to changes in the business.

So, how do you embrace the principles of faster-better-cheaper in your organization?

Develop a plan. For many companies, the easiest starting point is nonstrategic services like IT or back office accounting, where there is some commoditization of services today and existing trusted third-party providers to
minimize transition risk. The plan will likely take at least 18 months to execute and will require an executive sponsor to enable the required changes in the organization.

Test and adjust. Each step will provide new information about what works for your company; one size doesn’t fit all. Breaking the transition into a series of projects with measurable expec¬tations will help you understand the value being created and the additional changes that may be needed. At each step, institutional confidence grows and additional changes can be made.

Manage the change. People and their resis¬tance to change will be the greatest obstacle in the process. For many, the skills required for them to operate in their role will be a chal¬lenge; for others, the visibility into their perfor¬mance that the culture of measurement creates is a source of great discomfort and distrust, while others will be threatened by the willing¬ness to co-source and outsource for “noncore” capabilities.

The energy industry is being challenged by technology, globalization, regulation, envi¬ronmental sensitivity, low-performing global economies and an aging workforce to recreate itself and operate faster-better-cheaper. This new state is not a destination. It is in fact the adoption of a new mindset, one of constant innovation in a journey to improved asset performance, shareholder returns and profit¬ability. It accepts that change is inevitable and embraces the dynamic, innovative mindset of “exploration,” and translates that into every facet of the energy industry and its support¬ing ecosystem. It creates a new model based on collaboration and a commitment to service that transcends transactions and embraces the opportunities of disruptive technology and business practices.

Andy Roehr and Roger Burks are principals with WG Consulting LLC, Houston, a consult­ing firm focused on the broad energy, services and manufacturing industries in North Amer­ica, Europe and Asia.