INFORMATION INDUSTRIALIZATION: digitizing business relationships for energy companies
Large-scale uncertainty, regulation and shifts in the competitive landscape are placing enormous pressure on energy firms’ existing operating models. In this article, Rashed Haq discusses an approach for “information industrialization” to help energy companies more effectively compete and thrive: harnessing modern information technology and adopting lean operating principles to create integrated, inter-company workflows across the energy value chain.
The energy markets have experienced large-scale uncertainty over the last five years, driven by the dichotomy of a dramatic increase in supply from shale and renewables, and declining demand. Unprecedented midstream investments have created infrastructure changes, and the competitive landscape is shifting for traditional and non-traditional players caused by supply changes, regulation and new opportunities. The arrival of nimble competitors is eroding the revenues of established players, while stronger marketing and trading arms from midstream or downstream players are also altering the competitive backdrop.
Technological advancements, such as the adoption of consumer technologies in the corporate world, are driving the commoditization of big data, analytics and infrastructures in the cloud. At the same time, mobile apps are creating higher user expectations for enterprise applications to be more accessible, intuitive and responsive.
With an existing model that no longer operates efficiently, energy companies must transform the way they operate their businesses to deal with these unprecedented changes. A key problem is the high cost and inefficiencies each company must endure when building its own platform of processes and systems for functions that do not create a competitive advantage. Similar to the banking industry, energy companies need to undergo a transformation of their own by leveraging shared platforms, or business utilities, across companies that improves both inter-company communications and efficiency in order to thrive over the long term.
This transformation, referred to as “information industrialization,” is the use of technology innovation to fundamentally improve efficiencies across an entire industry. It replaces manual processes and paper trails with the sharing of information and resources in a digital environment to drive efficient division of labor and growth for all participating organizations. This is not unlike the automobile industry’s transformation in the 1950s when parts manufacturers were organized as separate companies to serve multiple carmakers.
Harnessing Technology for Business Flow Integration
Business utilities are at the core of the information industrialization movement in numerous industries. These utilities are designed to carry out business functions for multiple companies, because there is no strategic advantage for each company to do these business functions themselves.
One example is payroll in the United States: a significant percentage of payroll is processed
through a few providers, such as ADP, because their services are much more cost effective than if each company were to set up its own payroll processing function in-house. Whatís more, the quality of the service and the additional features that ADP offers are more advanced and extensive than companies would be able to justify developing internally. This is largely due to the fact that ADP can leverage economies of scale by serving multiple companies.
For energy companies, business utilities can provide operational and transaction management services in which certain functions and associated infrastructure are moved outside of the company and into the utility to handle. The simplest case for leveraging business utilities is one in which communication between two companies is required. The different types of communication are:
- Vertical communication: between customers and suppliers, e.g., nominations sent from shippers to pipeline operators
- Horizontal communication: between peers, e.g., netted trade confirmations
- Star-like communication: with pooled interdependency rather than linear dependency, e.g., Brent, Forties, Oseberg and Ekofisk (BFOE) trading window in the North Sea
Many companies are already using outsourcing and software-as-a-service (SaaS) models. Outsourcing is an allocation of specific business processes of a company to a specialist external service provider, eliminating the need for companies to allocate staff to perform some or all aspects of the function internally. SaaS is a software distribution model in which applications are hosted by a vendor or service provider and made available to a company’s employees over a network, typically the web.
But business utilities go well beyond outsourcing and SaaS models by providing a resource-sharing information system and all associated processes. They link multiple firms that may be peers, or customers and suppliers, to carry out a common function by facilitating the efficient exchange of information. Participating organizations share the cost of expensive assets such as IT systems and leverage the economies of scale by consolidating the process execution. Business utilities perform transaction processing and reporting, for example, by providing only the necessary data from companies’ internal systems through automation—particularly information that needs to be exchanged, such as nominations, confirmations or invoices.
Business Utilities for the Energy Industry
Business utilities for the energy industry can connect information among producers, traders and asset operators. The business utility platform depicted in Figure 1 connects shippers and operators to exchange data across the energy logistics value chain. In this example, a trading organization connects to the business utility to send trade confirmations (to be sent to counterparties), and once scheduling is done, it forwards all nominations for all modes of transport. These will be sent to the respective operators, such as pipeline, terminal and rail companies or marine vessel companies. Their confirmations come back through
Similarly, any associated inspection or agent nominations are sent to and received via the utility. Finally, invoices from each service provider are passed through the business utility back to the trading organization. This connects multiple companies across the value chain through a single network to efficiently exchange the information necessary to perform multiple business functions. In essence, the utility operates as a data exchange that receives information and disperses it to where it is needed, when it is needed.
Some of the advantages of leveraging business utilities, as described above, are enhanced operational processes and increased user efficiency, and hence, more timely availability of information. Because the utility is a shared resource, there is higher overall efficiency due to economies of scale and elimination of duplicate systems. This also gives each business the potential flexibility to increase or decrease costs based on business volume (rather than headcount, IT system investments, etc.). Over time, improved efficiency and access to timely information can lead to further benefits, such as improved supply chain with reduced holding inventory.
At the same time, business utilities can present a number of challenges. Primary among these is the complexity of change management, which requires an understanding of inter-company processes and technologies as well as the ability and willingness to make necessary changes in the B2B workflow. This happens when there is more than one autonomous decision-maker and any change decision requires collaboration between the business utility and its customers.
Taking the Next Step
The energy industry is primed for business utilities. Industry-wide utilities are already emerging and will accelerate over the next decade to provide specialized services to help energy firms make the transformation. Business relationships across producers, traders, consumers and asset operators already exist, but with much of the information exchange happening point-to-point and often manually.
Similarly, the necessary technologies such as reliable bandwidth, cloud-based infrastructures and data security already exist. The next step is the transition of traditional relationships into digital interactions, without requiring every company to build its own infrastructure and processes—particularly when it doesn’t offer a competitive differentiator.
The information industrialization of energy firms is a multi-dimensional effort that must start at the executive level and flow throughout the firm, encompassing relevant departments and functions. Each company needs to validate that the benefits of business utilities outweigh the costs. Open discussion of the perceived versus actual benefits and costs is needed to address misconceptions about the strategic value of the business utility. Additionally, successful implementation of a business utility will require agreement by all companies on standards, business practices and processes around what information needs to be shared, and the invested equipment and human resources.
At the organizational level, support from senior management is essential for cross-organizational readiness, since adoption will require a fundamental cultural shift. Energy companies embracing information industrialization may need to establish a key role within the company to help drive and maintain transformation: a senior executive whose main focus is to implement the vision of an industrialized organization. This Chief Industrialization Officer (CnO) would have C-suite sponsorship, strong operational experience and the business acumen to effectively work across the lines of business, operations and technology functions while breaking through organizational silos with ease.
Leveraging modern technologies to digitize business relationships through information industrialization makes sense for energy companies because the benefits outweigh the costs. In an era of unprecedented change, the time is right for firms to work together to develop and capitalize on the benefits of business utilities, which will help improve their own returns and make them more agile.
is Vice President and Lead for Analytics & Optimization for Commodities at Sapient Global Markets. Based in Houston, Rashed specializes in trading, supply logistics and risk management. He advises oil, gas and power companies to address their most complex challenges in business operations through innovative capabilities, processes and solutions.