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Thursday, 02 October 2014 21:07

Joint Shared IT Service Delivery in E&P

Written by  Nishant Shah

Most of the medium and large exploration and production (E&P) companies today leverage shared services and outsourcing as a means to reduce cost and drive efficiencies in delivering basic information technology (IT) infrastructure and software services. At the same time, smaller E&P companies have struggled to see similar cost and efficiency gains. While the emergence of cloud-based infrastructure, platform and software services has the potential to change this, unique needs of the industry, such as remote locations, mobile computing and asynchronous processing power requirement for simulation, require a more customized approach to IT service delivery. Instead of continuing to source internally and through third-party service providers, we suggest that smaller E&P companies with similar basic IT service requirements and geographical footprint explore the option of setting up a jointly governed, industry-specific IT service utility.

The concept is not unheard of in the energy industry. Competitors have frequently joined hands to achieve common objectives through advocacy groups, alliances and joint industry projects (JIP). Objectives for such collaborations have included influencing government or regulatory policy, risk sharing on mega projects and advancing cutting-edge research through information sharing. The underlying principle across all of the collaborations is the sharing of scarce resources to achieve common objectives. The same principle can be applied to the delivery of basic IT infrastructure and software services for mutual benefit.

Why Does it Make Sense?shah-graphic1

Basic IT infrastructure and software services account for a substantial portion of IT budgets for smaller E&P companies. These services are generally not a source of competitive advantage and are primarily a cost center for businesses. Sourcing through a shared IT service utility will not only provide short-term cost benefits, but it will also allow these companies to build a more agile and flexible IT organization that supports sustainable and profitable growth over a long period.

Economies of Scale

With combined buying power, companies will be able to negotiate better pricing with equipment suppliers and service providers. This will have direct and immediate impact on the bottom-line through reduction in IT expenses. This will also reduce cost of longer-term investments in IT infrastructure.

Focus on Strategic Priorities and Differentiators Joint sourcing of basic infrastructure and software will allow IT organizations to focus more resources on strategic business priorities. They will be able to invest time and resources on capabilities that create and maintain competitive advantage through improvement in operational metrics, such as real-time data acquisition and transfer from the field to the back office and lowering drilling cycle time and cost. Instead of focusing on keeping the lights on, IT staff and leadership will be in a position to partner with other business units and help them improve productivity of people, equipment and financial capital.

Highly Scalable Operating Model

Considering the volatile nature of commodity prices, E&P companies, especially smaller ones, need to have an agile and scalable operating model. IT service utility with usage-based costing will position IT organizations to quickly scale-up or scale-down service capacity based on business need. This will also help transform the IT cost structure by moving towards a higher variable cost and lower fixed cost operating model.

Keeping up with Technological Advances Combining limited IT resources with other companies will allow everyone to keep up with technological advances that help improve productivity and reduce cost, especially in areas where technology is advancing rapidly, such as mobile computing.

Improved Quality of Service

IT organizations will have an opportunity to streamline and standardize processes, as well as position trained dedicated staff to provide services where lower volume may not have been allowed previously. This, combined with the establishment and enforcement of service level agreements (SLAs), will help IT organizations improve the overall quality of service to business units.

shah-graphic4Pay for What You Use

Usage based costing and pricing can ensure that companies are only paying for their usage of the shared resources. It will also reduce unit cost and help increase utilization of shared resources, including staff, processing power and bandwidth.

Which Products and Services are Good Candidates for the Proposed Approach?

Scope of products and services is only limited by the level of cooperation among stakeholders. It can include any IT product or service that is not considered to provide a competitive edge.

Key Examples

  • Data center service procurement and administration, leveraging one of the colocation data center service providers
  • Computing infrastructure procurement and support (Servers, PCs, mobile computing devices)
  • Network and communication infrastructure procurement (WAN/LAN, IP telephony, last mile internet and data networks, wireless field communication)
  • Core application procurement, administration and support (Email, office productivity applications)

How is This Model Different from Other Cloud-Based IT Services?

While the concept of shared resources is not different from that of existing cloud-based managed IT services, the differentiating factor is that the suggested operating model focuses on the unique needs of smaller companies in the E&P space. As outlined above, the scope of products and services need not be limited to traditional cloud-based products or services.

Considering the larger scope, current offerings in the marketplace are fragmented across multiple vendors/service providers and require management overhead, which reduces the overall value. In addition, they are not customized to meet the unique needs of the industry, like last mile communication. The proposed approach is akin to jointly developing and managing an IT service delivery organization.

shah-graphic5What About Data Security?

Most organizations routinely host proprietary data in colocation data centers. They also engage some of the same vendors to outsource application and infrastructure development and maintenance services based out of the same vendor premises. Over time, organizations have become more comfortable with this approach and have devised processes and governance structures to ensure that data security is not compromised. The same concepts and practices are applicable in this context.

While it is appropriate and relevant to ask questions about data security, organizations need to be careful not to use the answers as a red herring to obstruct change.

Has This Been Done Before?

While it is difficult to find examples with identical operating models in the IT world, other industries have leveraged similar approaches to provide a utility service to multiple organizations. Some well-known examples include Depository Trust and Clearing Corporation (DTCC) and payment service providers like Visa and MasterCard, which started as jointly-owned utilities for financial services industry.

Who Would Manage It?

While it is not the intention of this whitepaper to discuss potential legal considerations, the operating entity will most likely need to be set up as a separate legal entity with partial ownership of participating organizations. The entity can have its own management team or it can be turned over to a service provider. In either case, participating organizations will have a strong say in setting the overall goals and principles that outline the framework for day-to-day management of the operations.

Where Should You Start?

Taking on a change of this scale is never easy, nor is it straightforward. There will be additional details, questions and concerns that will have to be addressed as the idea moves from concept to reality. Having a structured and phased approach can help an organization identify and address questions and concerns at an appropriate stage in the transformation process.

We recommend a five stage process to take you from strategic assessment to operationalization.shah-graphic2

Stage I: Align

The first step in the process is to engage with key stakeholders, including the company’s senior leadership, to discuss the concept and get buy-in to explore in more detail. Sponsorship from senior leaders and key stakeholder alignment is critical considering the transformative nature of impact on the IT organization as well as delivery of IT services to business units.

Key questions to address during this stage:

  • What the key goals and objectives are we trying to achieve?
  • How much time and money are we willing to spend to evaluate the concept?
  • What is the acceptable timeframe for benefit realization?
  • Are there any legal issues that must be considered prior to moving forward?

Stage II: Assess

Internally, this includes assessment of the current state of IT to create a catalogue of infrastructure and software services that IT organization currently provides. These services need to be categorized based on the generic proprietary nature of the service. The objectives are to create a short list of candidate products and services, and to develop associated business case. This should be accompanied by the creation of a baseline of the current environment and identification of key performance indicators (KPIs) for tracking realization of benefits.

Externally, this includes engaging with other interested parties and aligning with them on strategic vision and objectives.

Key questions to address during this stage:

  • Does the business case justify moving forward?
  • What are the criteria for identifying products and services in scope for this initiative? (Security, cost, performance, risk)
  • What is the overall governance framework and structure?
  • Who are the key internal and external resources needed to manage this initiative?
  • How will participating organizations share the operating cost and capital expenditure?
  • What does the benefit realization roadmap look like?

Stage III: Design

The first step in the design process is to create a legal framework to operate the joint entity, followed by definition of scope and creation of a governance plan for operating the joint entity.

Once the governance structure is in place, create a detailed design of the future state environment, including SLAs and metrics to capture usage for in-scope services. We recommend using a pilot approach to minimize risk and establish a strong operating model prior to transition of critical services.

Key questions to address during this stage:

  • Which services and products will be in scope?
  • What product or service is an appropriate pilot?
  • What are the key KPIs and SLAs to monitor performance?

Stage IV: Transition

This stage involves implementation of the future state environment and migration of the in-scope services from the internal IT organization to the new entity. This is akin to post merger operation integration or lift-out and may also involve the transition of internal IT staff to the new entity. Transition plans need to ensure that there is minimal impact on business units.

Key questions to address during this stage:

  • What is the transition plan and timeline?
  • Who will manage the day to day operations?
  • Will it be outsourced to an external vendor?
  • Will internal IT staff be transferred to the new entity?
  • What is the internal and external change management and communication plan?

shah-graphic3Stage V: Measure & Optimize

After the transition is complete, there should be periodic measurement and analysis of KPIs and service level metrics to ensure that promised benefits are being realized and SLAs are being met. This can be implemented as part of a continuous improvement program. Across all the stages, a comprehensive change management and communications plan must be implemented to mitigate the risks inherent in such types of transformation efforts.

Conclusion

Evolution of the IT Operating Model Innovation in IT is not just limited to breakthrough advances in computing infrastructure and the adoption of emerging technologies. IT organizations can also innovate by creatively leveraging technology to optimize the IT operating model. Joint IT Service Delivery is a great example of the kind of forward thinking IT organizations should embrace in order to become true partners to their business counterparts.

Nishant ShahNishant Shah is a senior manager at Enaxis Consulting. Shah has more than 12 years of experience and specializes in operating model implementation, process improvement and regulatory compliance. Shah previous held positions at Tech Mahindra and PwC. He holds a bachelor's degree in engineering from LD College of Engineering - Ahmedabad and an MBA from the Indian Institute of Management – Ahmedabad.