Determining and Appreciating Value

A Thought Experiment

Here’s a thought experiment for you. In front of you, there are four boxes exactly one cubic foot in volume. One contains a cubic foot of iron costing $100, one contains a cubic foot of wood costing $10, one a cubic foot of water costing $1, and last contains feathers costing $0.10.

Now try answering the following question:

• If you need something that is one cubic foot in volume, which one would you pick?

It should be a fairly straight forward choice. Now here are some supplemental questions.

• If you need to make a fire, which one would you pick?
• If you need a heavy weight, which one would you pick?
• If you need to quench your thirst, which one would you pick?
• If you need to make a pillow, which one would you pick?

Each answer should lead you to a different choice. Simply put, the more information you have, the more appropriate you choice is.

I realise that the example I have just given may seem a little trite, but when we have multiple options that can solve the same initial problem (that being 1 cubic foot in volume), unless we start to ask some supplemental questions, we just tend to go for what seems to be the most obvious solution to us.

We select OUR preference.

“We lost it on price”

In the oil and gas sector, there are many different possible solutions to any one particular problem. That means that there is almost no right or wrong way of doing something. Everything will have its own set of merits and associated costs. It is all down to how much people are willing to pay for the benefits that a particular solution will deliver.

Think of your local Corner Shop. They typically have a variety of products for sale, but they tend to be at a slightly higher price when you compare them to the larger supermarkets.

“We lost it on price” is a phrase that is often heard and used too many times as an excuse.

Yes, it is hard to sell a product at one price when someone else is offering the same thing at a lower price. So, what price did you need to be at? If the answer that is giving is anything other than “the lowest”, then you did not lose it on price. You lost it on something else: VALUE.

Your local corner shop should not be able to sell anything at a higher price, if it was just down to price. You can buy identical products elsewhere for less. But they are just around the corner, and you can walk there. You don’t need to take the car or face the queues at the checkouts.

The reason Corner Shops can sell stuff at an elevated price is that, in addition to the product itself, they offer convenience. It’s all part of the package. Their value proposition is that you can just come and pick up something that you could get for a lower price elsewhere, but do you want to?

The reason why people will be prepared to accept higher price from one suppler compared to another is that they are prepared to pay a certain premium for the additional benefits that they will receive from doing business with that supplier. 

And these benefits can be both tangible and intangible.

If you think of a motor vehicle, a tangible reason to pay a premium may be to have an improved gas mileage so the running cost is lower. A more intangible reason would be the car’s ride comfort or safety record. A very intangible reason would be how you think you look driving it. But they are all perfectly valid reasons, and experienced car sales professionals know exactly how to communicate those reasons.

The same applies for process equipment.

But do we have a good appreciation of the variety of reasons that someone may decide to pay a premium, and how much of a premium would they be prepared to pay?

“Advantages and Disadvantages”

If you type the phrase “Advantages and Disadvantages” into a certain popular search engine, it will tell you that there are over 77,700,000 results.

There is a strong temptation when looking at different process technologies to focus on the advantages and disadvantages that one offering has compared to another. This is all very well, but what is an advantage in one scenario, may not be in another. In fact, it can very well be a disadvantage.

For example, gold has the advantage of being valuable to own, however it has the disadvantage of being expensive to buy. But if you are in market for buying something valuable, have you thought of buying diamonds instead? Now, the advantage of being valuable has just been eliminated, as has the disadvantage of being expensive.

To further explain, let’s consider two different technologies for removing oil from produced water; A separator tank that relies on gravity for oil-water separation, and a deoiling hydrocyclone.

It is perfectly possible to develop up list of advantages and disadvantages that each technology has, but doing so really misses the point.

Yes, separation tanks are typically large and heavy. That could be a disadvantage compared to something that is smaller and lighter, but not if space and weight are not an issue.

Deoiling hydrocyclones are smaller and weigh less, and better at removing smaller oil droplets. That would be an advantage over something larger and less efficient, but if you need residence volume for any reason, like pump rundown protection, it ceases to be an advantage, and actually becomes a disadvantage.

Just looking at advantages and disadvantages forgets one very important factor when doing an evaluation: NEED.

Process solutions need to be exactly that: Solutions. If you are not solving a problem, then it is going to be very difficult to convince people that a particular technology has any merits.

And it is seldom that you are dealing with one specific need. It is normally the case that you need to fulfill a variety of needs for a variety of people.

Process engineers have their set of needs. Project Engineers have their set of needs. Supply chain has its set of needs. The accountants have their set of needs. The Project managers have their set of needs. It works all the way up the food chain. And let us not forget the needs of the people who actually have to operate the equipment once it is installed. Their needs should be considered as well.

“Gold is more valuable than water, unless you are in the desert and dying of thirst”

Rather than look at the advantages and disadvantages of a product or offering, it can be a great deal more productive to look at the features that it has, and how those features deliver benefits.

The benefits do need to be real, but they can be both tangible and intangible. (I examined the possible sources of value in greater depth in my previous article “A Discussion on the Different Types of Value”).

Exactly what is it about a product or service that delivers the value? Chances are it is not just one thing, and chances are that there is more than one potential benefit.

In order to do this, it is necessary to have very good hard look in the mirror and examine what it is that is being offered. Products are services have many different features which can deliver benefits, but if everyone else have the same product with the same features, it’s a pretty even race. And hence you are into a price battle, where lowest wins.

But just because things are done a different way doesn’t mean that they deliver on value. A car with red paint would still be the same car if it was painted yellow. The paint colour on a car is a feature, but it isn’t normally a real differentiator. However it can still be a selection criterion, and thus it is important to consider.

The more important features are the ones that are true differentiators, the ones that no-one else has, or no-one else is able to offer.

Identifying which features are the ones that you want to give most headlines to is not always a straight-forward task. The features that sales and marketing people may consider to be important may differ significantly from those that engineers or managers consider to be important. It is usually a group effort, but it can be done, and there are experienced specialists out there who can help facilitate that discussion. I been in sessions that have gotten quite animated.

The output from these sessions is extremely useful. It shows exactly how a product or service elevates itself above those that are available elsewhere in the market. It is no longer a "me-too" scenario.

And finding out that a product or offering has no true differentiators is not the end of the world. At least you now know it and that you will be in a price war. That is you will be, unless you are able to do something to change the product into something new, or combine it with additional offerings that allows you to offer something that is unique and different and, most importantly, brings added value.

Where people quite often go wrong is that they still have that voice in the back of their heads telling them what makes the product or service valuable to their company, rather than what is of value to whoever will actually be using the product or service.

That voice needs be told to stay silent.

The evaluation needs to be from a customer perspective only. You need to put yourself on the other side of the table.

But value does work both ways. If a customer is receiving products or services that deliver value to them, but there is no return value back to the provider, then there is no real value in the provider doing business with that customer.

Leveraging the Value

Once the features and benefits have been identified, it is not just the conversations, the in-person discussions and meetings that are important. Web pages, product literature, presentations all need to concentrate on the features that have the greatest potential benefit and hence can deliver the most value.

But all of this only identifies the potential benefit.

To really deliver the value message, there needs to be an understanding of exactly what pain points the customers are experiencing and determine how a particular solution or offering will address them.

Some things are easier than others to quantify and identify a financial value. Others are less tangible but that shouldn't stop anyone from raising the question. If I go back to cars again, Volvo have made a point about their safety record. Products or services that deliver HSE benefits are great, but it would be necessary to explain what it is about a particular product or service that allows you to claim that it can deliver a superior benefit over competitive products or services. If everyone can deliver the same HSE benefits, then we are back to "me-too" again.

And there is no point focusing on something if the person you are talking to isn't interested in it. For example, it is all very well talking about how a particular technology can reduce something like chemical consumption (and therefore cost), but if the company or person that you are talking to doesn’t have chemical consumption as one of its performance metrics, it might be that you are not spending your time wisely.

But if there are savings to be made in a particular area, it would be advantageous to find who is responsible for that area and have the conversation with them.

There are also tools that can be developed that can enable the more tangible cost benefits to be quickly calculated, provided that there is access to valid input data. It can be a very convincing argument if a client’s own data can be used to demonstrate the potential savings.

But it is necessary to have a good understanding of where those savings lie.

In my previous value article, I gave the following example of how costs are not always incurred how they are initially perceived.

“Think of the cost of a simple cartridge filter element. Now think about all the associated costs of replacing that filter offshore. There are costs associated with purchasing, onshore transportation, port charges, offshore, manpower offshore (for unloading, permitting, replacement, & lifting), return transportation, disposal charges…The list is quite extensive. Now ask yourself whether or not the cost you paid for the element is the actual cost of installation. Sometimes paying a little more upfront on something that lasts longer makes more economic sense from an overall perspective”.

The Cost of Ownership

There has been a trend within industry in general to try to standardize everything as much as possible, to eliminate the differences, in order to make buying more straight forward. 

But there has also been a trend to look not just at purchase price but pay more attention to the cost of ownership. Not just CAPEX and OPEX.

I'll go back to cars yet again.

If you are planning on buying a car and have a high annual mileage and want to own the vehicle for a number of years, then you might be tempted to spend a little more up front to get something that has a high efficiency engine, knowing that you will get your money back on fuel costs.

If you are only planning on owning the car for a couple of years, or you don't plan on driving that much, maybe fuel economy will not play as big a factor in your evaluation.

And if you only need to drive ever now and then, you might consider renting a vehicle or even getting a taxi.

Similar factors apply to process equipment and services. Paying a higher upfront cost only makes sense if you are going to see a worthwhile return on that investment. And if you cannot explain how that works, then it is unlikely that it will ever be part of the evaluation process.

The economics of process equipment ownership vary not only with what type of facility that is under evaluation, but also the speed at which hydrocarbon production from that facility can be realized.

One project with which I was involved was trying to decide between two oil treatment options. The first solution had both savings in capital cost, of around $1 million, and in operational expenditure, that would result in a cost reduction of around $1 million per year. However, the alternative solution would result in production being achieved 4 months earlier. Even though the oil production rate was only 5000 BPD, at $50 per barrel, this resulted in early revenue of $30 million in those 4 months. This clearly trumped the CAPEX and OPEX savings of the first option.

The understanding of what value a solution brings, and the communication thereof, is vital if business is to be developed and grown.

If the solution provider does not understand and explain to the purchaser the value that their particular solution brings, then please do not expect the purchaser to make that evaluation for them. They will certainly undertake some form of evaluation, but it probably won't go the way that you would want it to go.

The Thought Experiment - Redux

So let's go back to our original thought experiment, but let’s make a few changes

What if our four boxes contained some flowers, some chocolates, a fruit basket, and lastly a bottle of wine, and they all cost the same.

You need to pick one that would make a good gift for someone. Which one would you pick? (I know which one I would like, and you probably know which one you would like, but we are not buying for ourselves)

All of them are perfectly reasonable choices, but each option has different potential tangible and intangible value.

To make the right choice, you would have to know who the gift was for, what they liked, what preferences they had. In short, you would have to know who you were dealing with.

It is no different with the oil and gas industry.

Or any industry for that matter.

About the Author: Marcus Sprenkel has over 30 years Oil & Gas Process Industry experience, including international assignments South Africa, Brasil, Dubai, and the USA, designing, engineering, commissioning, and trouble shooting oil, gas, water, and solids treatment systems.

Over the past 12 years, he has developed materials and training that allow co-workers and customers an understanding of the potential value associated with products and services available as part of his job function. He has also developed and delivered training that allows the students to understand the concepts associated with value selling and the principles therein.

He graduated from the University of Nottingham, England, with a Masters degree in Chemical Engineering in 1990. In 1997, he became a Chartered Engineer (C. Eng), and was awarded a Fellowship of the Institution of Chemical Engineers (F. I. Chem. E.) in 2018.