The recent downturn in the energy industry has a great number of companies scrambling to cut costs, cut staff and do whatever they can to hold on to existing business. The number of projects that have been cancelled or put on hold in the oil & gas industry over the past few months is unprecedented. Owners and producers are slashing capital budgets and announcing massive layoffs – reducing staff by the thousands. On the service side, Contractors and EPCMs are not only facing project cuts and fewer new opportunities – they’re also facing demands from their clients to apply significant reductions in their rates.
It’s times like these that can really separate companies that are well run and strategic in their operations, versus those that are not so well run. The past 5 years have been fat times for the energy industry with high oil prices and new technology generating new opportunities. Year over year record profits have made oil & gas the economic engine for much of the world. Businesses small and large have been able to feed off that momentum; and achieve success without having to concern themselves with long term strategy or operational efficiency. We’ve come across many companies whose revenue model has relied on an inefficient labor force billing as many hours as possible to their client. They’ve expressed a lack of interest in adopting a software product like 4castplus because it would make them too efficient and result in fewer billable hours. This of course has had us scratching our heads wondering how they can justify deliberately billing non-productive hours – and moreover, how it is they can compete against companies who do strive for excellence and provide a higher quality service and product to their client?
Since the crash in oil prices, it’s not that surprising to learn that it’s just those companies who are struggling the most. Their business model has had them carrying a disproportionately high staff count to execute on projects. So with this market downturn, they’ve had to cut staff by as much as half in some cases; and this puts them in a very precarious position. First of all, the market has suddenly become a lot more competitive, as there are the same number of companies bidding on a fraction of the projects. Secondly, these companies are having a hard time taking on new business with a reduced staff, since they’re approach is so labor-intensive and inefficient. Thirdly, with lower charge-out rates, their profit margins have been significantly diminished.
Regardless of the business model in the past, now is the time for strategic thinking about the future. Chances are, most organizations in the oil industry are experiencing a lull in activity right now. As scary as this might seem for some companies, they need to view it as an opportunity to improve. The past 5 years has been a bit of a bubble for the energy industry; but now they need to look at ways to be more efficient, lean, productive and competitive. For all we know, the fat days are gone – at least for the moment – there’s no point in being paralyzed with inaction. Time to move on with a new approach.
We’ve been surprised at the volume of companies that have been coming to us in the past couple of months with a desire to up-their-game in how they do business. They see technology as a critical enabler for them to be more competitive and provide a superior product & service. Their message to us is, “In the short term, we need to be more efficient with a reduced staff. And in the long term, we want to be ready for when the market returns.” Nobody’s going to accept the status quo anymore. The industry is demanding more.
On the flip side, we’ve also been surprised at some of the deals we had underway that have been put on hold because of ‘current market conditions’. Spending cuts that have short-sightedly included cutting strategic organizational improvements. Improvements like software that delivers a substantial ROI. This is disappointing to us of course – not just for us, but for them too. I hate to judge, but I can’t help thinking that they’re just running scared. Either that, or they just weren’t prepared. They didn’t anticipate any market fluctuations and didn’t save for a rainy day. We all hope that this is little more than a short term reactionary move however, and life will soon carry on with everyone accepting the new normal.
There’s a good chance you don’t agree with me, or maybe you do. Either way, I’d be happy to hear from you if you want to comment on this or any other thoughts.