Refining the Oil & Gas Industry with Procurement Automation

Oil and Gas firms had a rough ride in 2014; the oil price dropped to below $50 USD a barrel, salary freezes were implemented and thousands of staff members were laid off. As the purse strings of oil and gas producers tighten, the importance of controlling costs and managing spend become ever more apparent. In order to succeed in the changing oil and gas environment, firms need to first understand how to get more from the money they spend (enter procurement). Listed below are a number of the key areas that oil and gas firms are likely to focus on over the coming 12 months. Also outlined is the critical role that procurement functions can play in helping their organization to achieve success in these areas.

Providing sanity checks on savings targets Cost savings became paramount for oil and gas firms when oil prices started to fall. As revenues dried up, saving money became the most effective way to maintain consistent profitability. Organizations are now frantically scanning supplier analytics to find opportunities for cost savings that had previously gone unnoticed. Categories that have been untouched for years are now directly under the savings microscope. While this presents a huge opportunity for procurement teams to show their worth, it’s important they work closely with senior management teams to set realistic and achievable goals. Some firms have earmarked aggressive 10% savings figures across production costs for 2015. However, when you consider that the production costs of major oil companies have increased by half over the past five years, these targets don’t seem entirely reasonable. By working cross-functionally with senior management and presenting opinions and insight supported by solid data and evidence from a spend analytics platform, procurement teams can generate detailed action plans that highlight important areas of realistic and achievable cost savings. In doing so, the function positions itself as a strategic business asset.

Removing complexity Over recent years, the planning process in the oil and gas industry has become increasing complex. Organizations are now less nimble than they were during the industry’s big growth years of 2005-2008. However, lower oil prices have naturally brought productivity improvements back into focus across the industry. In order to react quickly in this changing market, oil and gas producing organizations need to remove unnecessary complexities from their processes. With margins tightening, getting the right information to the right people at the right time will be critical to the success of oil and gas companies during 2015 and beyond. From a procurement point of view this means rethinking legacy systems and processes and potentially replacing them with integrated end-to-end technology and analytics solutions. A truly integrated source-to-pay system will ensure transparency across operations and provide people with access to critical decision-making tools at the exact moment they are needed. If procurement is moving away from being viewed as a tactical resource towards a strategic business partner, it needs to empower its people and its organization with information.

Planning for change Oil and gas price cycles are shortening; a commodity that used to shift price gradually is now seeing prices fluctuate daily rather than over the course of months or years. In the past, planning strategies for these fluctuations were largely reactionary. However, the increased price volatility for oil means firms now need to consider scenario planning. Firms should consider their position and potential courses of action based on what they believe they can achieve across different oil price bands. For scenario planning to be successful, procurement engagement is critical. Low oil prices may result in companies electing to stall or slow down projects. Similarly, a high oil price might see a significant ‘ramp up’ in activity. These events obviously have serious repercussions for the company’s supply base, and procurement teams should be proactive in implementing solid supplier management processes to subsequently address these changes. Implementing a solid supplier management process will ensure that your relationships with critical suppliers remain strong throughout periods of change. Furthermore supplier management software can facilitate innovation within a supply chain. By working collaboratively with your suppliers, you make your operations more fluid and responsive to change.

Reducing staff numbers It’s inevitable that in times of testing economic conditions and decreasing profitability, firms will look to cut head count as a means of reducing overall costs and maintaining profitability. Similar to operational complexities, organizational complexities in the oil and gas industry have increased greatly over the past decade. Many now believe there are simply too many layers within oil and gas firms’ organizational structures. Senior executives at many leading firms have already started implementing headcount reduction programs with a direct focus on corporate staff. In order to avoid the fate of our colleagues in other functions, procurement teams need to convince management of their worth during these testing times. Being able to present reliable information around the successes and potential opportunities that lie within the procurement sphere is the only way of ensuring the ongoing strength and security of your team. Defending the effectiveness of your team is easier if your case is fully supported by hard data that can be directly linked to organizational success. Again tools like spend analytics, contract management are your allies here as they allow you to identify strategic sourcing opportunities that will help to strengthen procurement’s case as a protector of profitability in these challenging times. While there are many challenges within the industry, the opportunities for the procurement function remain great. As oil and gas providers see the potential in uncovering costs saving opportunities and maximizing the value out of each dollar they spend as a means of protecting profitability, the procurement function is set to become an even more vital cog in this machine.