Remote IT-enabled (RITE) services can significantly improve earnings and return on capital expenditures.

Unyielding market pressures force the industry to seek new avenues to improve return on capital expenditures. These pressures are brought about by the imbalance between production growth rates, revenue volatility and increases in costs, especially labor. These in turn are exacerbated by constant changes in business focus, an increase in competition at a global level and the speed of change, compounded by an aging workforce (Figure 1).

Remote IT-enabled (RITE) services, with the ability to generate highly effective business models, will be a significant contributor to improving a firm's return on capital expenditures.

RITE services

RITE services involve managing outsourced business processes and services that are delivered over public or private networks to help clients improve business performance. This definition implies RITE services are delivered over networks and involve the use of information technology (IT) for business effectiveness.

Many major global companies have embraced RITE services, and KPMG expects the RITE services industry to exceed US $600 billion in 2005.

Benefits
RITE services can magnify the power of cash by delivering considerable benefits in cost advantages with immediate savings. RITE services also can turn fixed assets into variable expenses by shielding companies from the vagaries of highly volatile market conditions, especially downturns. In the RITE services business model, fixed assets get converted into variable costs, and shedding these is easier than reducing fixed assets. And when RITE partners are on opposite sides of the globe, productivity multiplies because production becomes a 24/7/365 process.

RITE services also provide economies of scale when available knowledge is shared for several uses, thereby reducing average costs per use. Economies of scope are obtained when explicit knowledge is reused in activities and processes across different uses or users. For both economies of scale and scope, the higher the number of uses or users where codified knowledge is reused, the higher the benefits potentially obtained. And economies of knowledge are obtained when knowledge sharing leads to knowledge combination. Codification in one domain raises the returns of codification in complementary domains; and codification of knowledge creates redundancy to improve coordination at interfaces between activities.

Firms can use RITE services to leverage growth, magnify the value of a firm's assets and improve its competitive edge and the ability to respond to changing market forces, said John Hagel III in "Leveraged Growth: Expanding Sales Without Sacrificing Profits."

Darrell Rigby and Chris Zook in "Open Market Innovation" wrote, "Companies that collaborate with outsiders on their R&D reap a higher percentage of their total sales from new products than companies that don't collaborate."

Application

The focus of outsourcing noncore analytical and administrative activities (Figure 2) has been on discrete, cohesive tasks that belong to contiguous departments within oil companies - drilling, well construction, rigs and other equipment, seismic data acquisition, payroll, IT and other such functions. These activities and tasks could be easily identified, carved out and outsourced to the industry's service firms.

However, two additional sources and opportunities exist for improving return on capital expenditures:

* noncore knowledge activities that reside in the day-to-day activities of the high-priced core professionals, such as project administrative services, software support and maintenance services, network management services and plant operations optimization; and
* noncore activities at oilfield service and engineering and construction companies, in contiguous departments as well as in core professional areas, including services for accounting, IT, project administration, software development and support, operations monitoring and control, customer support, CAD design services and others.

Examples

Scicom, an independent company based in New Delhi, India, focuses on high-end software support and development for the oil and gas industry. Its expertise in visualization and data management across multiple platforms and frameworks not only finds applications in seismic interpretation, data processing, drilling, geology and production but also in medical imaging and semiconductor testing industries.

"Scicom has the talent, specific domain knowledge and secure processes and infrastructure to deliver sophisticated solutions rapidly, at the lowest cost, at significant savings. Their value propositions were so compelling that we quickly went from pilot to a long-term, goal-driven relationship for maximum savings and improvement in productivity," said Dr. Vik Rao, vice president of Halliburton Energy Services.
"Scicom delivered quality solutions on schedule, with processes and methodologies that turned distance into a nonissue."

Energy Virtual Partners (EVP), a Houston, Texas-based company is another example of a RITE services firm managing assets for the oil and gas industry. In this case, EVP's applications free vital resources to focus exclusively on core assets while effectively exploiting all properties in a customer's portfolio, thereby optimizing shareholder value.

Many engineering and construction firms, such as Bechtel and Jacobs Engineering, have captive RITE services ventures focused on cost reduction and improved productivity.

In these instances, RITE services are outsourced to organizations that have technical, communications and other capabilities similar to, if not greater than, client organizations.

Other industries

Thanks to its software export infrastructure, India is emerging as a prominent location for global RITE services. India is a powerhouse in software exports with estimated revenues in excess of $7 billion in 2002, according to a Reuters report, growing to about $50 billion in 2008, under estimates by the Institute for Development Policy and Management at the University of Manchester in "Software Exports from India." India's export of RITE services (excluding software services) to the United States is expected to grow from about $250 million in 2000 and $870 million in 2001 to $4 billion by 2005, according to KPMG.

India's biggest strength is its huge supply of high-quality, low-cost engineers. Each year, India graduates 220,000 engineers. The average wage is $12,000, with a doctorate commanding up to $30,000 a year, about one-fifth the amount possible in the United States. Some companies that have shifted research work to India report savings of up to 60%, Manjeet Kripalani wrote in a Business Week article titled "Calling Bangalore: Multinationals are making it a hub for high-tech research."

US and European firms have set up remote operations in India, including such global giants as Texas Instruments, Intel, Oracle, Microsoft, Motorola, World Bank, Citibank, GE, Conseco, American Financial Group, AIG, British Airways, AXA, Aetna, Ford Motor Co., Cisco, SAP, Nestle, Philip Morris and Eastman Kodak.

When Jack Welch was at the helm of General Electric, every operating and strategic plan review required operating units to include plans for RITE operations in India. Using RITE services is a long-term strategic initiative at GE. General Electric Capital operates centers in India. In addition to running call centers, GE Capital performs RITE services for other GE companies.

The next phase is the emergence of independent low-cost RITE service organizations such as Scandent, headquartered in the Netherlands. Scandent has developed innovative RITE processes, such as project administrative support services (PASS), successfully implemented at a major automotive firm in the United States. PASS can be applied in the oil and gas industry to significantly increase productivity of project staff, with impact on costs and schedules.

Implementation

The transition process to RITE services is not without challenges. However, the industry has deep experience in outsourcing and project management. Managing RITE services to deliver savings over the long term requires the same methodologies and rigor with which the industry excels.

The transition to this low-cost alternative must be accomplished in a phased approach, with the goal of achieving the maximum savings over the long run. Table 1 provides a framework for developing and managing transition to RITE service companies over multiple phases.

Maximizing value

Recent studies suggest productivity gains in a production network (or value chain) are maximized when companies are willing to collaborate in unique ways, often achieving advantages by sharing resources, knowledge and assets.
Jeffrey Dyer, in "Collaborative Advantage: Winning Through Extended Enterprise Supplier Networks," wrote that the leanest, best performing value chain usually wins. He added the success of a production network involves:

* designing the boundaries of the firm or the "governance profile" of the production network;
* dedicated assets;
* knowledge sharing; and
* long-term relationships.

A combination of these factors enables companies to deliver impressive results, outperforming loosely integrated production networks.

Combining Dyer's factors of success with the phased approach would deliver increasing cost reductions over time (Figure 3).