Cost Insights
by PowerAdvocate

Intelligence for energy companies seeking a data-driven approach to cost management

[Interview] PowerAdvocate's O&G Team on Cutting-Edge Cost Reduction

December 9, 2016 at 2:26 PM / by James Wagstaff & Jayme Mendal

The Oil & Gas Supply Chain & Procurement Summit recently interviewed PowerAdvocate's Oil & Gas team on some of our favorite topics: cost reduction, fact-based negotiations, vendor efficiency gains, and market data. Read on for a discussion on the topics that keep us, and the O&G Supply Chain teams we work with, up at night.

Featuring

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James Wagstaff, Vice President – Oil & Gas, PowerAdvocate
Jayme Mendal, Senior Director – Oil & Gas, PowerAdvocate

What trends in demand are you seeing from energy sector clients in terms of supply chain performance needs?

Jayme Mendal:

A key need we’re seeing from our clients is access to better data on which to base their decisions. For example, there are two broad categories of information that our clients are seeking.

The first would be much better and more accurate and reliable information on their own costs – so their internal data. It’s about answering questions at a very detailed level, what’s actually driving cost differences across their wells, across their suppliers, and across their areas of operation.

The second information need relates more to what’s happening in the market and how they’re performing relative to the market. This is more about answering questions like, “How is the market price for well stim or drilling fluids moving relative to our pricing?”

Our clients are trying to figure out how we can ensure that our pricing remains in line with what’s going on in the market – particularly as things begin to turn.

What are the challenges emerging as a result?

James Wagstaff:

What we’re seeing routinely across the industry is a total focus on enterprise cost reduction. It’s not necessarily an emerging trend, but it’s really important by virtue of the fact that markets are difficult to manage. As commodity prices shift, companies need to be able to pivot spend dollars quickly and organize around a new focus, which, for today’s conversation, is really a cost-reduction one.

We’re hearing from the whole industry: Where can we save money? How can we be more competitive in the market? And what are some really creative ways to do that?

Traditionally it’s a role that category management and supply management focused on. Given the importance of cost management in today’s market, as well as the risk of losing some of that momentum because of the upturn, cost management is now comprehensively addressed all the way up to the CFO. Ultimately, everybody has to focus on this requirement.

How have your services improved commercial outcomes for clients in the oil and gas industry?

Jayme Mendal:

I’ll give two examples. The first one is with Spend Intelligence. We delivered a client spend data with vastly improved granularity and accuracy and tied it to their well information. The aim was to help them analyze the cost efficiency of their vendors in a new way.

For example, they took a look at wireline, which is a very high spend category. Historically what our client had done was compare vendors by price. One has a higher price, one has a lower price, and the company makes a decision based on that. The issue is that this approach often overlooks many hidden costs buried in how those different suppliers operate – non-productive time and so on.

We were able to shift the focus from price to total cost and began to analyze what the actual cost was that they paid to a vendor on a normalized unit of measure. In this case it was dollars per completed stage of wireline. The findings were pretty surprising. It turned out that the vendor that was previously perceived to be the least expensive based on their price, was actually one of their highest cost vendors on a per stage basis when you looked at the actual total cost.

As a result, our client made a decision to begin shifting some of their business to another preferred vendor, and that’s expected to yield about three million dollars in annual savings across the business over the coming year. That’s a big win for the company.

The second example deals less with the way that a company looks at their internal data and internal costs, and more about pulling the external market information into their decision-making and negotiation processes.

There’s a client who used cost models and should-cost analysis. They’ve embedded this data and these tools in their process to validate proposed price increases by suppliers. For example, last month, one of its primary OCTG suppliers proposed a three-and-a-half or four percent price increase.

The company took that information, looked at the cost model, ran a should-cost analysis on it, and was able to demonstrate that, in fact, the fair market increase was half that much.

They presented that back to the supplier, which actually accepted this finding because it was rooted in data. In doing so, they avoided about 50 percent of the proposed price increase, which in that case is going to amount to about a million dollars over the next 6 to 12 months.

How has your own business model changed by engaging with clients?

James Wagstaff:

I would just add one piece to that, too. PowerAdvocate works exclusively with companies that operate in the energy industry. One thing we’ve found as a company is we really need to make sure we stay on top of the key trends as they’re occurring.

As an example, if we’re seeing that there’s a particular dislocation in a services market or in a materials market, we need to be able to quickly gather information and develop insight. We deliver that in real time so that our customers, who are on the frontlines negotiating, putting contracts in place, and executing projects, have that information readily available.

In terms of our service model, we are always thinking about how to help our customers move faster when they have, for example, a $100M initiative to drive down cost and need a roadmap and data immediately.

Interview hosted by Jared Haube of the Energy Conference Network

 

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