Commentary: Finding agreement between “frenemies” — oil field services and integrated oil companies

By Vikas Mittal

Recently, I sat in on two meetings. One involved the executive vice president of a major integrated oil company and the top members of the sales/business-development team of an oilfield service company. The other involved the executive vice president of sales and marketing of an oilfield service company and more than 20 exploration managers of a major integrated oil company. The discussions were very revealing, especially in light of the recent dip in oil prices. A wide range of topics were discussed — pricing, technology, service, on-time delivery, procurement, safety and relationship management.

Despite overtones of agreement over the needs and demands of the integrated oil companies versus those of the oilfield service companies and vice versa, these discussions had undertones of disagreement. What is the root of these disagreements? How can they be addressed? Five systemic issues need to be sorted out to bring both sides into closer alignment.

Project versus product focus: Whereas the integrated oil company team is typically project-focused, the oilfield services supplier is generally product-focused. Thus, in most cases you have a sales lead or business development person from the supplier interfacing with members of a project team within an integrated oil company. The oil company team has few opportunities to fully understand the capabilities and partnering abilities of the supplier. The supplier team has few opportunities to immerse itself in the project. Thus, bidding on selective parts of the project precludes the supplier from creating true value, especially in complex projects requiring high levels of consulting and advice.

Customer value versus shareholder value: Suppliers want to create customer value through innovation, new products and total cost reductions over a long time period. Oil company project teams are more focused on creating shareholder value — which typically means maximizing the project’s net present value return, now. Thus, lowering costs — short and long term — becomes a driving factor in the decision process. Very quickly, the entire discussion becomes a race toward lower pricing rather than a race toward creating the best project that is viable for the long term. Even when suppliers have knowledge that will increase the long-term value of the project, they become focused on “winning a project” based on pricing.

Service before versus service after: Both sides recognize the importance and value of after-sales service in the form of consultation, advice, on-time repair and so forth. Yet service resides within the sales and business development team at most suppliers. The team at the integrated oil company, on the other hand, may be looking for a service package that can outlast the team and span the entire project duration. Mechanisms that promote such a long-term service paradigm are needed. For vendors, it means closer cooperation among sales, operations and the after-markets team. For oil companies, it means understanding the importance of after-sales service and being willing to pay for it.

Standardization versus innovation: One way to lower industry cost is to standardize specs across projects and companies and within the whole industry. Might standardization force suppliers to become less innovative? Will the quest for standards root out the desire for differentiation and thus stifle innovation? The answer is not clear, but it cannot be either standardization or innovation. While some aspects of a project and a product could be standardized, others aspects need to be nonstandardized. Without a continual conversation among key team members and involvement and support from top management within an integrated oil company and the vendor, the right conversation will not happen or endure.

Relationships versus transactions: Despite the desire to have strong relationships, current industry processes promote a transactional approach, especially when each bid is large. The larger the bid, the more important the role of procurement. Even if the supplier has a key account management team, there isn’t a way to manage the interface with the entire project team within the oil company. Over time, suppliers develop some understanding of the projects and may even develop deep relationships with a few key people within the oil company; they do not get a deep, detailed, sustained and prolonged exposure to all aspects of a project. Thus, opportunities to truly collaborate and develop a sustained relationship with a project do not bear fruit. As the project team changes, it falls on the vendor to re-educate and acquaint the new members.

The energy, oil and gas industry has a major opportunity to embrace a new paradigm for closer cooperation between the integrated oil companies and their vendors. By gradually changing processes, the approach that people take to the relationship, and weaning themselves off the price panacea, frenemies can become true friends.

Vikas Mittal is the J. Hugh Liedtke professor of marketing at Rice University’s Jones Graduate School of Business.