The value of IT for the oil and gas industry

Over the past decade IT has become increasingly more relevant to the success of global oil and gas companies. Continued growth and competitiveness require companies to deploy best-in-class applications that enable core business operations/support functions and that build service capabilities to run IT systems.

The value of IT for oil and gas companies is not commonly understood since expectations can significantly differ across segments. Upstream views IT mainly as an enabler to find and develop new reserves, minimize production losses, and reduce operational risks. Downstream expects IT to support and drive efficient manufacturing and supply chain operations. Reliability is the common expectation across all segments where IT systems can help prevent and contain the risk of catastrophic events. Expectations can vary significantly across these segments when it comes to IT cost.

FIGURE 1. The IT value triangle emphasizes the importance of striking a balance among three critical sources of value. (Images courtesy of A.T. Kearney)

As such, oil and gas CIOs find themselves facing two major strategic challenges: aligning business stakeholders around a common understanding of the value of IT and ensuring cost efficiency. Successful CIOs explore ways of defining and delivering upon value expectations, which include a disciplined approach to cost.

IT value triangle

A.T. Kearney’s IT value triangle framework addresses the perceived and real tradeoffs among sources of value and helps drive stakeholder alignment on the CIO agenda.

The IT value triangle emphasizes the importance of striking a balance among three critical sources of value: business enablement and innovation, cost efficiency, and reliability and quality (Figure 1). Building the CIO agenda around these dimensions helps IT organizations extract the most value from IT.

• The business enablement and innovation dimension emphasizes what IT needs to do to build and operate systems to enable business operations and offer new capabilities that drive competitive advantage;
• The reliability and quality dimension focuses on optimizing the lead times for new capabilities and on-time/on-budget delivery to ensure high levels of service availability, data integrity, and quality. This dimension also includes IT mandates that ensure compliance to standards and safety of oil and gas operations; and
• The cost-efficiency dimension centers on establishing an optimal cost-to-serve model where the key cost drivers are running and maintaining IT systems and the investments needed for delivering business capabilities.

FIGURE 2. CIOs can find new efficiencies by restoring balance among the three critical value dimensions.

There is a widespread belief in the industry that there are deep tradeoffs between cost efficiency and the other two dimensions of value, but in most cases the tradeoffs are more of a perception than reality. Many clients have demonstrated that they can improve cost efficiency while delivering on value expectations across the other two critical dimensions.

IT cost-efficiency agenda

A significant opportunity exists for oil and gas CIOs to “leap” to a new efficiency frontier (Figure 2) by restoring balance among the three critical dimensions of value and placing a greater emphasis on establishing an IT cost-efficiency agenda.

Executing an IT cost-efficiency agenda begins with an enterprise IT value assessment to identify and prioritize opportunities that shape a multiphase program through the implementation of the three primary levers.

Rapid external cost reduction takes advantages of external IT spend opportunities that do not result in significant tradeoffs between performance and cost. External IT spend can be more than 60% of an oil and gas company’s IT budget. A programmatic approach including spend consolidation, direct negotiations, benchmarking, contract restructuring, spot audits, and rate card enforcements can drive a 5% to 10% cost improvement within a year.

The organizational realignment lever focuses on opportunities to streamline operations and the governance model across IT functions. This lever can be difficult as it implies headcount reduction and changes to the current organizational structure. Such challenges are compounded for decentralized oil and gas companies where duplicate and shadow IT organizations exist. C-level sponsorship, best-in-class organizational models, and a rigorous approach to identifying core capabilities/assigning ownership across IT organizations are critical for this lever to be successful.

The game-changer lever fundamentally changes the way IT operates through transformational initiatives. Game changers are CIO-driven and can alter the IT organization structure, supporting processes, infrastructure, and vendor engagement models simultaneously. Cost efficiency can be a critical output, but the focus is a step change in quality and reliability of the underlying services. Cost benefits are achieved by driving greater operational integration, consolidating and centralizing the IT structure, and optimizing the supplier engagement model. Game changers can be challenging to execute and can result in near-term change management issues for the IT organization. But done right, with solid stakeholder support, game changers can move all sources of value and define a new efficiency frontier.

Of the three levers, the rapid external cost reduction lever is the easiest and fastest to implement. It is important not to lose sight of the other two levers, which span across internal and external IT spend. Successful implementation of all three levers can help the CIO achieve significant short-term and sustainable long-term benefits. In one instance a global oil and gas company was able to execute all three levers in succession to achieve a cost improvement of more than US $100 million and higher service levels.

FIGURE 3. In this assessment of enterprise IT spend, value creation is charted vs. ease of execution.

Managing change and sustaining benefits

Value created through the successful execution of the levers outlined above can be easily eroded if the levers are not accompanied by actions to manage change and sustain benefits over time. Managing change is no easy feat and requires a coordinated global program to align stakeholders, drive initiatives, and track and demonstrate value creation. Sustaining benefits can be equally as difficult. Failure to sustain benefits destroys the return on investment. CIOs need to align the operating model and establish supplier governance programs to sustain and realize the full potential of an IT cost-efficiency program.

The IT value triangle highlights the importance for CIOs to balance sources of value from innovation, reliability, and cost efficiency. Client projects have shown that improved cost efficiency can be achieved without sacrificing business value expectations. Executing an effective IT cost-efficiency agenda through a combination of rapid external cost reduction, organization realignment, and game-changer levers can help overcome the perceived value tradeoffs and yield significant productivity gains. Success will require strong sponsorship to drive and mandate change and establish proper governance models to sustain benefits.