As an industry, oil and gas is no stranger to volatility. For decades, companies in the service and supply sector have survived—and thrived—despite a constant cycle of pendulum pricing and bottom-dollar bids.
But as oil and gas prices continue to remain low—leading to fewer projects and rising job losses—it’s clear that change is on the horizon. To succeed, it’s no longer enough to sit tight and wait it out. It’s time to get creative.
To help unearth this creativity, Grant Thornton and JWN asked 25 senior executives, from various service and supply companies, to attend two roundtable discussions in Calgary and Edmonton in the spring.
The purpose of the discussions was to address the top challenges facing the industry—and explore steps to overcome them through collaboration.
The executives agreed that, to effectively make the transition into this new era of oil and gas, the industry must work together. Companies must look beyond traditional cost-cutting options—efficiency improvements, mass layoffs and leaner operations—to find more innovative ways to grow their profit margins. Two ways involve fostering new, inter-business relationships and taking steps to strengthen communication with customers and suppliers.
No company is an island
In an industry as competitive as oil and gas, collaboration may, at first, seem unnatural. But upon further exploration, it’s evident that there are plenty of opportunities for companies to strengthen their operations, cut costs and propel the industry forward by partnering with complementary service providers.
Strategic alliances take a variety of forms and can solve numerous business issues. Whether you’re looking to increase profit margins, expand your service offerings, reduce prices or free up cash flow, there likely is an arrangement that can work for you.
As an example, combining fixed cost centres with a complementary service provider—such as offering unused space in your shop or sharing equipment or other resources—can help you reduce overhead costs. Alternatively, consider teaming with a company who services a similar clientele. Together, you can expand your service offerings or leverage each other’s networks, giving you access to new markets and customers—while making more extensive offerings available to both customer bases. This type of arrangement can also reduce inefficiencies and price—and potentially improve margins.
Strategic alliances can also reduce the expense associated with job bidding wars. A competitive and lengthy bid process not only drives margins down, but can delay a job’s start date. Joint bids can alleviate these inefficiencies and allow jobs to run more smoothly.
If cash flow is your primary concern, consider gifting a poorly performing division of your company to a strategically chosen competitor in exchange for a percentage of revenue they gain from it. Not only can this help you eliminate the costs associated with running such a division, but it also creates goodwill within the industry.
While a strategic alliance may not make sense for every business, it’s an example of outside-of-the-box, collaborative thinking that can move businesses forward in a lower-for-longer oil and gas era.
Putting relationships first
Customers will continue to demand lower prices—especially if the market remains depressed. That’s why it’s essential to adopt an honest and open customer communication strategy early to strengthen customer relationships.
When given some context—and an explanation of where you, and your prices, are coming from—forward-thinking customers will often work with you to come to a mutually beneficial arrangement. These customers understand the benefits of trustworthy suppliers—and their actions indicate they want to help the industry move forward.
That said, you have a role to play in ensuring your book of business is made up of these understanding customers. You need to clearly outline your expectations in any business arrangement—and be willing to take a hit or walk away should the situation call for it. To foster strong customer relationships, you also must put your customers first—treat them like partners and innovate with their needs in mind.
Reach out to them regularly so you understand their business needs, and constantly try to uncover new ways to help. Tailor offerings to meet their needs or, if you provide a service that a specific customer isn’t yet using, have processes that let you identify and fill these needs.
If you can’t offer the lowest prices, consider offering other incentives to encourage good customers to stay with you. This can include providing a slight price reduction in return for additional business, or offering credits they can apply to future projects. You may also want to set up a master service agreement or subscription-type model that grants customers monthly access to your services in exchange for regular payment.
Above all, treat your suppliers the way you’d like to be treated. If a customer asks you for a price reduction, avoid appeasing them by pressing your suppliers for further reductions. Instead, take a team approach. Acknowledge the value of having a loyal supplier base to rely on—and don’t be afraid to say “no” to overly demanding customers.
A new beginning
Conducting business the way it’s always been done isn’t going to work in an era of lower-for-longer oil prices. To succeed in this environment, organizations must collaborate to find new, innovative ways to get ahead—setting the foundation for a healthy industry for years to come.
To uncover more ideas on how to do this, download the latest Grant Thornton article, Building a culture of collaboration: Redefining best practices in the O&G industry.