Supply chain operations are the Achilles heel that many oil and gas companies often don’t even know they have. In my last piece, an op-ed published by Supply Chain Management Review, I made the case that given the challenges these companies are facing today, we can no longer afford to sweep oil and gas supply chain challenges under the rug.
It can be hard to fathom how companies remotely piloting deep-sea drilling operations a mile beneath the surface in South America from an office in Houston are still managing vendors with paper tickets and Excel sheets. But in a way, it makes perfect sense. The biggest players in oil and gas have deep benches of smart, highly skilled people. The reality is, supply chain operations have never been a priority.
The time has come for that to change.
A wave of M&A moving through the industry, spurred by macro pressures, is shining a spotlight on supply chain operations. If there’s one thing that really brings into focus the friction and inefficiency baked into most operators’ supply chain processes, it’s the incredibly complex challenge of integrating an acquired company’s operations seamlessly into an existing structure.
Restructuring. Right-sizing of teams. Systems integrations. Updating of contracts and master service agreements (MSA). It’s so easy to see the mountain of work following an acquisition as just painful and messy, and—especially when it can be outsourced, albeit at a not-insignificant cost—it’s no surprise that there’s been little focus on how to improve, let alone overhaul, the process.
But acquisitions can be a huge opportunity, not to simply migrate acquired teams onto existing processes and systems, but to improve the very processes and systems themselves to maximize both short- and long-term results.
Inside ‘shale merger mania’
Consolidation momentum in the industry has been building steadily since spring for companies of all sizes, prompting Forbes to weigh in on the “shale merger mania” trend. Falling rig counts, rising regulatory costs and increased competition for limited pipeline capacity are just some of the factors behind the big shift toward consolidation.
Permian Resources’ recent acquisition of Earthstone Energy; Chevron’s agreement with PDC Energy; Exxon’s acquisition of Denbury; and EQT’s acquisition of Tug Hill: the list goes on and will continue to grow over the next 12 months to 18 months.
While companies go into these deals expecting return on investment (ROI) from offsetting acreages and consolidating both physical assets and in-house operations, they can be blind to the ROI opportunities related to supply chain operations. When seen through the supply chain lens, there are three keys to maximizing the ROI on any acquisition and reducing the pain inherent to the process: moving quickly, successfully integrating systems and creating a Single Source of Truth (SSoT) for all supply chain related costs.
Speed is of the essence
Like any investment, most acquisitions are predicated on an outlay of capital upfront, based on a projected rate of return over time. The day an acquisition closes, you have the output of two companies with none of the cost savings associated with successful integration.
Just as the operation can’t stop producing barrels during this time, it's also accepting added risk—of delays, accidents, invoicing inaccuracies, the list goes on—due to vendors working on outdated MSAs, different compliance and insurance standards, as well as different systems from project management to logistics, invoicing and payments.
That's why it's imperative to complete vendor migrations at speed.
But vendor migrations aren't the only thing. The same way you never get back the lost money after a production stoppage, the returns you miss out on every month as an integration process drags on are returns you won’t ever get back. Lost returns exponentially reduce your ability to leverage, over time, the new asset you’ve purchased.
This means that the speed at which the acquiring company can go from closing to full integration is a force multiplier for future growth. Less risk, greater operating efficiency and increased profits even three months earlier can change what is possible down the road.
The imperative and opportunity of systems integration
During an acquisition, the collective view is that the rock is good. Companies know how to bolt on assets and sell physical products to deliver ROI. But everything downstream, including supply chain operations, is almost seen as a necessary evil. Operators don’t tend to allocate cost savings to the supply chain management function. Usually it’s a more straightforward calculation: reduced headcount, consolidated systems and increased buying power will save millions.
But there are all kinds of costs that hit an operator’s profits and losses during integrations. For example, most oil and gas companies leverage a series of disconnected tools to manage their supply chain operations: a tool for procurement; for invoicing and payments; project management; vendor data; contract negotiation and execution; and logistics.
After an acquisition closes, multiply all of this by two. And then by say, 400 to 1,000+ vendors who now need to be onboarded and moved over to the tools and systems leveraged by the purchaser. It’s a Herculean effort that can take years. During this time, it’s twice as hard to get a clear picture of performance across both companies’ joint operations.
It’s twice as hard to do everything, until the integration of systems and processes is complete.
At the same time, this integration challenge provides a huge opportunity. Companies that choose the right mix of tools, and move with urgency, have the ability to actually improve the efficiency of their operations companywide. To go from reactive to proactive, and turn a problem into a positive.
SSoT for supply chain operations
The tangled web of systems and tools, combined with the complexity of managing vendor lists in the hundreds (if not thousands), has rendered it difficult and time-consuming to monitor spend and manage a growing list of vendors to meet both niche and just-in-time needs across a large oil and gas organization’s operational footprint. The question is, do you really need all of those platforms and systems?
Perhaps the biggest opportunity afforded by M&A—beyond removing duplicative systems—is to meaningfully consolidate systems in a move towards an integrated SSoT for supply chain operations.
With an SSoT, vendor onboarding time can be drastically accelerated (think two weeks or less versus four months to six months), thanks to streamlining of processes and systems. Contracts, diversity data, HSE ratings, compliance documentation, scope of work, invoicing and payment data: They’re now all in one place, which means no more logging into three or four systems to piece that list together.
An SSoT can house everything for an acquiring organization, including the standards it requires across its vendor base. And perhaps most importantly, operators who are able to get to this end state can then unlock rich data from every corner of their operations, and a network of suppliers that can be consistently built up over time.
Building the M&A roadmap
In the coming months, the headlines will be littered with new acquisition announcements. Oil and gas companies have a massive opportunity—and an obligation to shareholders—to make the most of their investments in the space.
There is no area where the complications and complexity arising from an acquisition are more keenly felt than the realm of the supply chain and everything it touches, from operations to procurement, legal to logistics.
Company leaders are focused on getting a certain number of barrels out, and delivering value to shareholders. And rightly so. But what they can miss as a result is the amount of people within their organization who are doing jobs unrelated to those (worthy) goals—and unrelated, in fact, to their own background, skill set and job description.
There are entire supply chain or accounts payable teams that are dedicated to running down invoice disputes. And there are engineers, project managers and other employees with highly specific skill sets who end up tasked with things like negotiating MSAs and tracking whether or not certificates are up to date.
Supply chain has long been under-prioritized and solved for reactively, instead of proactively. But to maximize ROI and minimize the inherent risk associated with every merger and acquisition, we all need to be taking the issue seriously. The first step is acknowledging the problem itself.
Once we do so, the companies that move with speed to make one stronger entity out of two have a massive opportunity to not only integrate systems but consolidate them into a SSoT for their supply chain operations. Those that have the courage to rip off the Band-Aid and innovate beyond the disparate mix of systems and processes that make up today’s operations will realize the ROI from today’s acquisition sooner. They’ll also be ready to move even faster and more efficiently when the next one comes along.
Adam Hirschfeld, vice president of sales at Workrise, is an industry veteran who worked in field operations and project management before shifting to leadership roles focused on business development in the labor project management space.
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