Oil and Gas Buyers Are Hungry for Innovation and Collaboration

This report outlines energy operations services clients’ experiences and preferences and is based on the interviews with service buyers conducted during the HfS Research Energy Operations Blueprint research process. The Energy Operations Blueprint looks at business process outsourcing, information technology outsourcing, and engineering services across the oil and gas value chain areas of upstream, midstream, and downstream, and cross-value chain BPO and engineering and ITO services.

This Point of View analyzes and reviews how the buyers in oil and gas companies across the Energy Operations Value Chain (see Exhibit 2) experience a market that’s evolving toward more business-outcome focused, flexible, and collaborative services, and how service providers are meeting the needs of oil and gas clients.

Exhibit 1: Study Demographics

Source: HfS Research, 2017, sample size 17 oil and gas executives

HfS has outlined services in the Energy Operations Value Chain, covering exploration, development and production, transportation, refining, distribution, and marketing and retail (see Exhibit 2).

Exhibit 2: Energy Operations Value Chain

Source: HfS Research, 2017

How Energy Operations Buyers Look at Their Service Providers

In 2016, the oil price reached lows of under $30 per barrel. Now the price of oil has rebounded to around $50 per barrel. In a world of high oil prices and cash abundance, most oil and gas companies let inefficiencies exist. Now there is a strong imperative to find new efficiencies, optimize production, decrease capital needs, and take advantage of data. In 2017, the name of the game for oil and gas still is: Figuring out how to operate in a “lower for longer” environment and be profitable with the oil price between $45 and $55 per barrel. This means fixing the basics and leveraging new technologies by investing in digital transformation and new operating models. Oil and gas executives expect their service providers to play a role here, bringing more efficiency into processes, fuelling innovation, implementing new technologies, and preparing oil and gas companies for a new era.

Outsourcing and automation are key levers

As the focus of the industry continues to be on cost reduction, production optimization, and operational efficiency, automation and outsourcing are two principal levers available to the industry. Oil and gas executives are forced to have a good look at their strategy. In the 2016 Blueprint we noticed leaders asked themselves these key questions:

• What is the core of our enterprise?
• What do we need to do internally that differentiates us from the competition?
• What parts of our processes can we automate?
• Can we outsource what we can’t automate?

In 2017, the effect is noticeable in the priorities of oil and gas executives, the expectations they have of service providers, and the emphasis on automation in engagements. Now, new questions are added:

• How do we speed up digital transformation?
• Who are the right partners to drive digital transformation?
• Who are the credible innovation partners for us?

Buyers’ perception of service providers is becoming more strategic
A pivotal changing dynamic in the market is how buyers look at their service providers. With the renewed focus on outsourcing as a lever to deal with the pressures in the volatile business environment, oil and gas clients tell us they look beyond labor arbitrage and see service providers as an extension of their organization. They want deeper relationships with their providers and to forge stronger ties between internal and external staff. They look at their service provider(s) to help the organization become more flexible and scalable, ramping up and down in the cyclical business of oil and gas.

Proactive innovation
Service buyers HfS interviewed during the Blueprint research process expressed a desire for more proactive innovation from their service providers. Clients want their service providers to be innovation partners, driving new ideas and engaging on all levels of the client organization.

Partnerships
No one company can deliver all the services and solutions required for the transformation the oil and gas industry is going through. In the digital age, breaking down silos, creating end-to-end processes and information flows, and unleashing the actionable insights derived from advanced data analytics are critical imperatives for survival. We see this in the convergence of operational technology (OT) and information technology (IT) and by the increasing role of digital platforms across the value chain. Partnerships are therefore becoming a decisive source of value and competitive advantage for oil and gas companies, service providers, software vendors, and original manufacturing equipment providers alike. Partnerships, alliances, and joint ventures form the foundation for the Brokers of Capability role and engagements focused on collaboration and innovation.

Client communities
Service providers that organize client communities and events to facilitate knowledge sharing, peer connections, cross-client and cross-industry learnings, and new idea generation. Clients value these communities tremendously and say they help improve their relationship with the provider. Service providers have an opportunity to cater to these needs even more, making themselves more indispensable to clients who are often struggling with questions around digital technology, intelligent automation, creating new business models, and leveraging advanced analytics. Oil and gas clients are particularly interested in learning from their providers’ experiences in other industries, who have gone through similar transformations and are perceived ahead of the curve.

As-a-Service delivery is rapidly becoming the norm, but As-a-Service pricing is lagging
In their quest to become more flexible and agile, buyers are warming up to As-a-Service delivery and engagement models. Reduced capital requirements, focus on business outcomes, and plug-and-play services are attractive, but over half of engagements still start off with an FTE, time and material, or fixed price model with the intent to introduce more transaction or outcome-based pricing during the duration of the contract. Hybrid contracts are seen in 20% of contracts. Service providers show an appetite to experiment with As-a-Service pricing models, especially in new engagements or when new technology is involved.

Innovation is rapidly becoming a hygiene factor
Service providers are expected to incorporate innovation in services and constantly bring the cutting-edge of technology to the client’s attention as the focus shifts toward the capabilities that extend clients’ operations. 

High Satisfaction with Account Management, Responsiveness to Feedback, and Use of Technology

We asked reference clients about their satisfaction on seven criteria pertaining to account management, responsiveness, and integration of customer feedback, the application of technology in the engagement, the level of industry-specific expertise the service providers’ talent has shown, proactivity, innovation and collaboration, and commercial model innovation.

Exhibit 3: Ranking of Satisfaction Level with Seven Key Client Criteria in Energy Operations

Source: HfS Research, 2017

Exhibit 3 shows satisfaction is highest with the way providers use proprietary and partner technology in services, the responsiveness to and integration of customer feedback, and the quality of account management.

Where Providers Can Step on the Gas

Oil and gas executives would like to see more proactivity, innovation, and collaboration in engagement and new commercial models from their service provider.

• Proactivity: Particularly in introducing new ideas and innovations to clients, bringing in potentially value-creating concepts from other industries, and identifying improvements in the engagement.
• Commercial model innovation: The economic environment created a new level of interest to bring down capital expenditures across the industry, and As-a-Service commercial models lower the CapEx requirements for buyers. Providers have introduced more flexibility in service delivery and contractual arrangements and they combine industry expertise, consultative capabilities, technology leadership, and consistent delivery. Commercial model innovation is an area where both service providers and buyers are interested in new contractual constructs, but there is a level of hesitation to introduce new As-a-Service, on-demand, and commercial models at scale.
• Innovation and collaboration: As buyers look at their service providers more strategically, evolving the engagement to true partnerships with a collaborative approach is a key step in the direction of being strategic partners. Another key aspect is innovation, in new technology, in solving sticky industry challenges, and in speeding up digital transformation journeys. Buyers express satisfaction with the direction service providers are moving; more strategic, more proactive, more collaborative, and more innovative. But they can’t get enough of it, and they encourage providers to become even more innovative and collaborative as quickly as they can.
• Industry talent: The value of deep industry domain expertise in energy operations is resonating through interviews with clients. Clients are becoming much more demanding in the type of roles and skills they want to acquire from service providers in energy operations processes. The ability to attract, retain, and develop domain talent is seen by buyers as a key ingredient for a real oil and gas practice. Providers showcase excellent programs for energy operations talent development and we see very serious efforts to meet future demand for talent in the industry.

Bottom Line: Oil and gas executives look at service providers to be an integral part of their transformation journey and to bring not only operational efficiencies but also deep industry expertise and capabilities and step up to the plate to be innovation drivers.

HfS Premium Subscribers can access the 2017 HfS Blueprint report on Energy Operations here.