TODAY’S OIL AND GAS executives are at a
crossroads. With an unstable global economy
and increasingly volatile oil prices, chances are
you’re being pressured to significantly reduce
costs in as many areas as possible, including
headcount, capital projects, and indirect spend.
However, while some cost cutting is necessary, overly aggressive actions can backfire,
Fortunately, many executives are discovering and embracing
more balanced solutions, such as auditing third-party contracts
for compliance. In the end, this forward-thinking approach is
improving efficiency, transparency, and earnings—without compromising future company success.
FACING DOWN MARKET CHALLENGES
Though the US economy has steadily recovered since the global
recession, the oil and gas industry has tumbled by nearly 70% over
the last two years.
Revenues of upstream oil and gas companies have dropped by
50%, major oil operators have lost $424 billion, and service companies have shed $110 billion, according to a recent Bain & Company
And the instability is hardly over. Oil prices are still half those
of just two years ago, and various other market issues loom, from
sub-par global economic growth to rising production costs and
regulatory burdens. As a result, 50% of oil and gas companies now
report worsening financial prospects, compared with 20% last year
and 10% two years ago, according to a 2016 Deloitte survey.
RESIST THE URGE TO AGGRESSIVELY
CUT COSTS AND HEADCOUNT
Faced with this mounting wave of market challenges, many executives are considering cost reductions as a way to sustain business
growth and viability.
However, while some cost-cutting is sensible, some executives
are making dramatic and potentially damaging reductions. For
instance, executives slashed more than 250,000 positions in the
last two years, and they cut capital expenditures by more than $200
billion in the last year alone, according to the Bain & Company
Meanwhile, other executives are avoiding the pitfalls of intense
headcount and capital expenditure cuts by looking for savings in
another industry area—the supply chain.
With the size and technical nature of today’s oil and gas projects,
companies require extensive support from third-parties. And with
greater spend and more complex contract terms comes the potential to identify greater efficiencies as well as missed cost
Aggressive cost-cutting can backfire
So, executives are exercising the right to audit their third-party contracts and validate actual performance against agreed-upon terms, most commonly with the assistance of an independent contract compliance auditor.
With the intricate nature of contracts—especially those with
non-hydrocarbon parts, materials, and services vendors— periodic audits are helping executives verify compliance with
negotiated terms and standard operating procedures. Also, they
are improving efficiency, transparency, and internal controls
as well as uncovering significant overbillings, unused funds,
and other savings opportunities.
REDUCING PROCUREMENT FRAUD RISKS
In addition to achieving time- and cost-savings, executives are
auditing their contracts for another reason—to reduce the financial, operational, and reputational risks associated with
In the last year alone, the Association of Certified Fraud
Examiners estimates that the typical oil and gas company lost
5% of its revenue to fraud, and it took an average of 18 months
for fraudulent behavior to be detected. Further, governments
have responded by increasing scrutiny, regulation, enforcement,
and penalties, which have led to major financial punishments
and public relations disasters.
And the risks don’t stop there. As cost-cutting has accelerated
and oil prices have remained low, the pressure to maintain
production levels has led some suppliers to prioritize demand
and revenue goals over adherence to corporate policies and
REDUCE RISK AND COSTS WITHOUT
Ultimately, contract compliance audits are helping executives
to strengthen their company’s supply chain—and financial
performance. In fact, companies achieving strong supply chain
performance are experiencing a 7% to 26% greater compound
annual growth rate (CAGR) than the industry average, according to a recent Accenture report.
Instead of focusing on extreme job cuts, shelved capital expenditures, or aggressively renegotiated supplier contracts, forward-thinking executives are helping soften the blow of today’s market
challenges by looking at the other side of the cost ledger. By partnering with a dedicated, independent contract compliance auditor,
they are gaining the insight needed to maximize third-party ROI
and realize short- and long-term company success.
Bill Adams leads SC&H Group’s contract compliance and audit
services practice. He specializes in performing contract compliance
audits that produce greater transparency, trust, efficiency, cost
savings, contract strength, and accountability.