Oil and gas organizations are embracing servitization and leveraging technology to increase profit margins and core service offerings.
In general, as the macroeconomic situation takes a turn for the worse in a given industry, changes are bound to happen at a faster pace than when times were good. A new and leaner industry will certainly emerge from the current downturn, and with the innate ingenuity of this industry, who knows what the results will be. For sure, the oil and gas industry will find new ways to use technology as an advantage to become profitable even at a “new normal,” as oil prices are likely to settle at a much lower level than what they have been before.
The servitization of oil and gas service companies
Now I would like to address the servitization of oil and gas service companies. Up until 2014, the industry operated with high oil prices, a high level of activity, high wages and the service companies weren’t too worried about their incoming project portfolio, their ROA and their ROCE. Their margins were high and the demand was even higher. In the past two years, however, the operators have made cuts in all aspect of their investments, their headcounts, their projects and maintenance activities. The price per barrel is half of what it used to be prior to 2014.
Now in 2017 and going forward, the service providers are looking to technology to reshape and enable new forms of contracts, improving their margins and offering their core services by differentiation through technology. The sooner the industry can offer new business models other than the traditional day rate, for example, the more likely it is that they can engage their customers in a more attractive business model than the current, for both parties.
Technology’s role: digital first
The right software platform is the key to succeeding with enabling new business models, and especially software that helps you tie together your people, your processes and your business ambitions. When digitalizing your assets at the same time, the opportunities that come with adopting an asset performance strategy is very much what the oil and gas industry is required to do, considering the diminishing margins. But, you know you can’t offer new and innovative contracts without changing your ways and having a software platform that enables this transformation.
There is no doubt that emerging and innovative technology both enables and forces a change in the business models of the oil and gas industry. This is what servitization is really about, though. Going from one business model to another, rent versus buy, or selling a service versus selling a product. Diminishing margins forces traditional organizations into new routes to improve efficiency with the intention of retaining a larger portion of their income. Those that can adapt to the new normal are the ones that will be the stayers in the industry. These companies are the ones we now see, and they are able to take a new approach to their business model and change the paradigms for how things are done.
Why change is important and what you must do next
No one claims that oil and gas companies are slow to adopt new technology. As a matter of fact, the case is quite the contrary. The industry has been at the forefront of making use of innovations to locate and extract hydrocarbons in a safe and efficient manner. However, the work processes and systems supporting these have not necessarily undergone the same attention, and “the way we do things around here” is still the way things are being done in many places, many years later. Not changing is potentially an expensive and cumbersome way of operating, and with the maturing availability of new technologies, companies are likely to consider how they can better utilize tools to work smarter and improve efficiency, while at the same time offer services through different contracts.
To do this, you have to know the availability of your company’s assets and be able to trust that you have control of your offering. Are you offering your service “by the hour?” If you are, you had better know the condition of the assets for which you base your services off of.
To use information technology to improve your operation is not new, and without systems, you are unable to operate. To digitalize your assets is not new either. It has been done for decades – for tracking, knowing condition and automating activities that originally would be manual. What is new is that more companies realize it without considering “digital first.”
Five themes enabling servitization
Andy Neely of Cambridge University talks about five key themes to enabling servitization from a product perspective, but these may as well be relevant to a service industry that is forced to increase change their business models:
1. Get inside the mind of your customer’s customer. Understand what is value to them, so you can better help your customer create value for their customer.
2. To understand you need deep relationships. Ask yourself are we really close enough to our customers.
3. Seek to balance control and collaboration in the ecosystem. Not everyone needs to control or create an ecosystem. Sometimes you have to accept you are part of one and the best you can do is seek to influence it. Think about creating win-win-win across the ecosystem to drive change.
4. Learn from your experience. Codify and share it.
5. Think about solutions. SKF has created solutions factories where they can work with customers to solve their problems. Using your own ideas and technology collaboratively with the customer is a great way of getting inside their minds and building a deep relationship with them.
To learn more about servitization and the five key drivers of this trend, read my new white paper, “Servitization: How it’s fueling change in the oil and gas industry.”
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What strategies can be put in place to mitigate the challenges of servitization?