Contract management is a fast growing software category, not only in oil and gas, but across industries. According to research from Goldman Sachs, the global contract management software business is expected to top $3 billion by 2005—driven by a desire to computerize buyer—supplier relationships. In another survey, PriceWaterhouseCoopers forecast savings of 2% of total spend by leveraging contract automation to eliminate inaccuracies and non-compliance.
Digital Oilfield has interviewed a cross-section of operating companies, and found that professionals face several challenges relating to contract management. Poor visibility can mean that the managers of contracted work may not have access to the terms and conditions of the agreement, or even the most recent copy of the contract. Even when a company has a documented contract approval process, the chain of approval may be incomplete. This exposes the company to ‘maverick’ contracting, increased risk and expense. Historical data about the supplier relationship is often ad hoc, anecdotal, and limited to recent memory. Without such information, contract professionals may not get the best possible deal for the company.
Many oil and gas contracts have complex terms and conditions, with triggers for obligations on the part of the supplier and the operating company. This can lead to the ‘sign and forget’ syndrome, as there is no practical mechanism for ensuring delivery and sign-off. Even straightforward items such as pricing are not always communicated and verified because of complex, manpower-intensive processes.
Good contract management promises the oil and gas industry great opportunities for value recovery. Over 60% of an operator’s spending comprises complex services like drilling, well services, field operations and plant and maintenance. Purchase of such complex services cannot be automated through a straightforward purchase-order process. A lifecycle contract-to-invoice reconciliation process is needed. Line-item price reconciliation for complex services becomes a high value opportunity within a contracts management initiative.
An operator may have 100 contracts with a single supplier—some with multiple pricing scenarios. Service companies also provide key personnel working in hazardous and difficult working conditions. Third party compliance to required safety and training certification becomes an important part of contract management.
Suppliers benefit from electronic access to the contract system. Ideally a supplier should be able to electronically signify that an obligation has been met. Messaging and warnings in the case of upcoming deadlines should include suppliers. The simple capability of accessing contracts from anywhere in the organization will allow for negotiated corporate savings. New contracts can take advantage of terms negotiated in other business units or departments. Our research shows that line-item price compliance can bring savings of 5% of total E&P spend.
We found many oil companies were evaluating RFX tools (Request for Information, Request for Proposal, Request for Quote, etc.). In industries where a high number of bids are processed annually for purchases of high volumes of standard components, electronic RFX tools generate substantial ROI. In oil and gas, however, the industry has been moving away from “bidding every job” for some time. There are several reasons for this.
Consolidation has lead to a reduced number of global suppliers. The industry has adapted to this with a move away from repeat bidding cycles to longer term contracting with negotiated discounts. Sourcing of new suppliers on a continuous basis isn’t required. Most major oil and gas companies do not consider price as the main driver vendor selection. Safety, the crew’s experience, maintenance record and technological capability are uppermost.
Low hanging fruit
We believe that the real ‘low hanging fruit’ of computerizing the negotiating and contracting process should first focus on repetitive manual processes and on non-integrated processes that make it difficult and time consuming to execute effectively. Labor intensive reconciliation of contract pricing against incoming invoices would certainly lend itself to computerization. The resulting capture of incorrect pricing is a real cost saving opportunity.
Organizational gaps or non-integrated processes (organizational ‘white space’) also present opportunities for software that provides automated and standardized workflows and connectivity. Software that helps close these gaps and improve collaboration can provide not only large cost savings, but also the opportunity to mitigate risk associated with non-compliance.
Contract management is a growing technology that is being adopted in the oil and gas industry. Benefits accrue from cost reduction (process automation and price reconciliation), improved corporate controls (standardized processes and auditability), risk mitigation (ensuring contract compliance), and improved supplier performance. The unique challenges of the oil and gas industry in turn present unique opportunities for automation and process improvements that ultimately drive an impressive ROI.
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