Outsourcing, consultants and dog food

Oil IT Journal editor Neil McNaughton wonders why oil and gas corporations are outsourcing mundane tasks to expensive consultancy firms. He reflects on possible hidden agendas behind the outsourcing fad and asks if consultants ever take their own medicine - and focus on their own ‘core business.’

Although the oil price has been in the mid $20s for a while, oil and gas companies around the world are pursuing the business strategies that evolved during the last downturn. One facet of this activity is that sooner or later, many folks who thought that they had an oil company job for life, now find themselves ‘outsourced’ with a brand new employer. I don’t personally have too much of a problem with this, having been ‘restructured’ myself a couple of times in my career, but I have been puzzling over the business model that underlies the outsourcing philosophy.

Stock options

Recently, outsourcing offerings come from top-flight management consultancies located in marble-clad buildings downtown. The management consultants are rather different beasts from other oil and gas service companies. Many companies perform de-facto outsourcing doing things like seismic processing, tape transcription, core analysis and so on. But most of these outfits aren’t located in the marbled downtown buildings - they are more likely to be somewhere out in the sticks, on a industrial estate. Generally speaking, the folks working for these companies, while making an honest living, are less likely than their consultant peers to have six figure salaries and stock options coming out their ears.

Market capitalization

So my recent puzzling has been along the lines of - how does the top-flight management consultant manage to a) pay its employees quite a lot, b) pay its shareholders sometimes substantial dividends and c) to ‘leave’ value - in the form of a market capitalization - inside the company.

Irrational exuberance

Where does this money come from? Barring short-term ‘irrational exuberance’ from investors, it can only come from the client. Paying top dollar day rates may be justified in some circumstances. Take the case of the company auditor. Companies will pay a huge premium to get the approval of an internationally-recognized top firm. This is justified if the top-firm label virtually guarantees the fidelity of the accounts. The big accounting firms - at least in this context - generate cash from goodwill. Hence the catastrophic destruction of Anderson’s value in the aftermath of Enron.


The management consulting business leverages goodwill in a similar fashion. At face value, these organizations develop and apply new theories as to how improve business by generating more revenues or by cutting costs. As you all know there has been a lot of debate recently on the legitimacy of a consulting outfit auditing the accounts of its clients. It is held as self evident by just about everyone except some of the more reticent consultants themselves, that advising a company on how to run a business and auditing the same company is a manifest conflict of interests. The recognition of this is leading management consultancies to separate their consulting and audit functions with more that just the ‘paper walls’ of yore.

Bottom line

As long as you are talking about an activity that is going to affect the corporate bottom line in a big way, then the overhead of the marble clad building, the consultant’s stock options, the shareholders’ dividends and expectations of future capital gain may be justified. But what about more mundane outsourcing activities closer to home - like scanning reports, loading workstations and copying tapes? It seems to me that the ‘natural’ homes for these thankless tasks are the specialist companies located on industrial estates - much along the lines of the seismic processor. Such outfits will hopefully generate a modest amount of excess cash - but their business model is not exactly that of the cash-cow consultant.


What I can’t figure is where the SAICs, the Schlumberger-Semas and the Accentures lie in this space. Particularly as they all associate the outsourcing of rather mundane tasks with cost savings to the client. I can’t quite square cost cutting on already low-value activities with the business model of a top six (five? - who knows...) consultancy.


Just as the consultants are being forced into separating auditing from advising I wonder whether there isn’t a case to be made for separating advising from execution. Maybe the consultants should be eating some of their own dog food and reflect on what is and what is not their own ‘core business.’

Hidden agenda?

Or maybe there is another agenda. One ugly possibility is that consultants are used as a staging post in post merger down-sizing. Farming the redundant folks out to an outsource partner is more elegant than outright firing. Alternatively, as one anonymous industry source told me recently, “The whole outsourcing thing really reflects oil companies’ management refusal to fund internal IT adequately. This has pushed IT managers down the outsourcing path - but they are doing it to prove to management what the true cost of running IT support really is. Management is in for a shock.”

Poor ROC?

I’m not quite sure if this next bit really fits in, but one of the consultants’ claims over the last couple of years is the ‘poor return on capital’ of oil and gas companies. This is often cited as a reason to outsource, merger or whatever is the latest fad. I was therefore amused to see that oils made three of the top ten European companies as measured by added value in a recent survey by the UK DTI. Multi-merger, outsource crazy BP made the N° 3 slot with some € 36 bn added value in 2001. But pipping BP at the post is (until recently at least) merger-averse, ‘what’s outsourcing?’ old-timer Shell at a tidy € 40bn.

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