What Our Industry Can Learn From Amazon
The industry is changing! Big oil is getting the proverbial beatdown from every angle possible. Companies are facing bankruptcy, lower to negative margins and supply seems to have become a beast all of its own due to the horizontal drilling and fracing technology revolution of the past 10 years.
We have entered into a different business environment in the sector and many companies that serve those within it will either change or face destruction. We are in a different culture now, one that is far away from the big brick and mortar structure of decades past. Why buy things you need or want from a company that has built huge facilities and support structures when their are lower cost options that offer the same, if not improved technology at a lower cost? In our industry, there are many options for reliable MWD, LWD, Motor and drilling tool technology out there. Decades ago, a company such as ours would find the best deal on a technology and purchase assets from these manufacturers to build assets of our own to use on clients projects. The technology may or may not be fit for all applications, but we would be forced to sell it to clients for the sheer fact that we need to utilize our assets before a 3rd party is considered. Now that we have purchased assets, we must expand, build or lease, a facility. We must hire experienced technicians and engineers to oversee the management of these assets and increase our administrative workforce to manage those in which supervise others. These costs add up to increased burdens on service companies and only lead them to the inability to drive down costs for the client, and are now forced to increase the costs for products and services to pay for extensive overhead.
New World Business Vs. Old World Business
We are now moving into a new world post worst downturn in the history of the industry and the old guard of service companies believe collectively that we will be able to increase day rates as soon as oil reaches $70, $80 and $90 dollars per barrel. They are eagerly waiting for this in order to turn back the clock and recover lost profits from the recent downturn. This is a huge mistake and will soon be the death of many in the sector as this is only wishful thinking and largely based on previous cycles in our past. It's just not going to be this way in the future. I believe that we have entered into a new world of business, one where the inefficiencies of the past will no longer be tolerated. The old days of redundancy and complex organizational structures with non-essential personnel within an organization can no longer be effective. Multiple VP's globetrotting around in jets, sales representatives taking clients Heli-skiing and on $50,000 African safaris is a thing of the past. Executives with multiple mansions, ferraris and inflated million dollar salaries will only add to the inability for companies to conform to the new way of doing business within the new markets. These excesses will no longer be available for those who wish to continue business in the industry and survive as long as they are not diversified into multiple sectors. Simplified management structures, reduction in employee burden rates, elimination of redundant systems & procedures and elimination of non-essential personnel for completion of a project are the only way forward. Clients in the future will be demanding even lower prices no matter what the price of oil is. The only companies to survive in the service industry will be those that can simplify their structures and find unique ways to manage their resources within the market. This will require a distinct focus on a structure that has less non-essential personnel in order to perform a single job.
Service companies not achieving simplicity, lower operations costs, lower maintenance and repair costs, lower manufacturing costs, etc.. might as well close their doors now and save themselves a lot of pain. Sure....companies should always search for better technology, but not if it costs 2 or 3 times the cost of current technology available. We are far into the well manufacturing stage of exploration evolution. Low cost solutions for the successful and reliable completion of a project is the only way forward. Complexity may lead to efficiencies in the future, but only if it takes fewer human resources to manage the process.
How Is THis Related To Amazon?
Amazon is a hub for you to get exactly what products you want, when you want them without all the additional costs of redundancies. How is this done and what do you mean? Amazon doesn't have to manufacture, create a facility, nor employ engineering teams to sell you a flashlight. Amazon can supply you with access to many manufacturers of flashlights and ensure you get the flashlight you need by utilizing the power of their vendor accounts. Customers drive the demand for the best products by reviews of the products based on their performance, reliability, quality and value. Amazon can control costs due to leveraging the power and resources of the flashlight manufacturer. This way, they can offer the best products at extremely low prices. Where does my company fit into this new world and how can I ensure its survival? Janel Energy Services was built to do exactly what Amazon was built to do. Provide manufacturers of MWD, LWD, Drilling Tools, Mud Motors, Bits with a single place to showcase and distribute their products, and a platform that would manage their use properly to the given application. Janel Energy Services was built to ensure that the customer receives access to the correct technology for their application and that it is utilized to its full potential and purpose without the high cost of brick and mortar facilities to support it.
ADVANTAGES
There are many distinct advantages to running future businesses in this fashion. By working to eliminate inefficiencies such as:
- Repair & Maintenance Facilities
- Redundant Engineering Staff
- Redundant Technical Support & Analysis
Repair & Maintenance Facilities
Most manufacturers of commonly used MWD, LWD, Drilling Tools & Mud Motor technologies already have facilities in all major operating regions around the globe. For one to build a facility and not utilize facilities that already exist would only increase the amount they would have to charge in order to supply their customers with the products and services required to complete the project's objectives. It would increase logistics of inbound and outbound products and increase administrative costs to maintain facility. Does the average person who buys the flashlight from Amazon care where the facility is in proximity to their own? No... They only care that the product is high quality, reliable and performs as expected. As long as Amazon ensures that the product is received as expected and when expected, the customer will be happy with the product or service. In this new business environment, service companies and their vendors will need to team up in order to provide efficiencies needed to drive costs down for their customers in order to remain profitable. Sharing facility space, transportation costs, administrative tasks....it all matters.
Redundant Engineering Staff
Would Amazon need to staff a full time engineer for flashlight design along with the flashlight manufacturer? No....Amazon would only increase its employee burden rates along with overhead, likely with no realized benefit for the consumer. This would only increase the costs that Amazon would need to charge for its services in order to remain profitable. In the directional drilling industry, manufacturers of MWD/LWD, Drilling Tools & Mud Motors all have staff engineering resources. These resources are rarely utilized to their full potential as the old way of doing business is to build one's own engineering team to support its fleet of tools. Often times these engineers can provide the identical support, if not better, than traditional hired resources. A service company only needs to seek out the resources for assistance in order to truly benefit from their capabilities. By effectively including these resources and allowing them to achieve their full potential for our business, we can achieve a better level of efficiency by not taking on additional burdens of engineering employees. If our vendors are already taking on the employee burden for engineering, why would we need to do so as well? This is low hanging fruit in the industry and is something many companies miss today. Just go to Tolteq, Evolution, Compass, GE, Wenzel, Tomahawk, Renegade, Downhole Tools International, NOV, Stabil-Drill, Schlumberger, etc.. and ask their engineering staff how often a directional drilling company asks them for assistance with an issue. The answer may surprise you!
Redundant Technical Support & Analysis
Seven years ago I noticed a growing trend while visiting my customers offices and headquarters. More and more of the major operators were hiring ex-directional drilling managers & technical experts from service companies to assist them with directional drilling activities, technical support, remote operations center management, and directional drilling project analysis. Several of these companies had hired engineering technicians (recent petroleum engineering graduates) to assemble, analyze and report on drilling activities in real time or once daily. These support mechanisms were pulling KPI's and preparing reports for operations engineers on an ongoing basis. More often than not, I found myself face to face with someone who had spent the last 5-7 days preparing the same exact data that I had been pulling and analyzing over the same timeline. Now, this in essence is a great thing. Service company and operator aligned in the same direction and on the same page as far as analyzing KPI's while searching for drilling efficiencies to optimize drilling operations and procedures. More times than not, there were situations where there was a disconnect on exactly what should change in order to optimize and often was the case that I had wasted hours of work to find out that the operator would not listen to my suggestions and analysis over their internal resources anyway. This became a clear and apparent waste of resources for us as we were pouring out money in time for our technical staff to provide the customer with data and analysis that wasn't being used. These technical resources for this level of analysis are not cheap in our industry. People with experience and capabilities to look analytically at drilling KPI and derive a solution for optimizing a drilling program come at a cost. The cost is absolutely worth every penny as long as the information they provide is utilized and not wasted. As years passed, I understood that operators had advanced their internal resources to the point of not requiring as much analysis from the service side. Several operators had their own remote drilling operations centers that were fully staffed and assisting real time with their rigs. So why have redundant operations centers? Why have conflicting analysis and redundant reporting? If a client is small and doesn't have these resources on staff, then it makes absolute sense to provide technical analysis and support at a higher level as part of our products and services, but if the client is larger and has their own staff for this purpose, it is far better to provide them with only the minimum they require of your company. This can provide a service company with an efficient cost model that can give a customer everything they need and nothing they don't, all while keeping rates low for the client. Amazon follows a model such as this. They only staff the resources required to provide their customers with support through the processes without redundancy.
Expansion And Retraction
Ask any service company management and they will tell you that it is almost impossible to retract a business that was built for running 50 jobs down to running 5. So goes the cycles of our industry and the pains we endure to remain in business. The problem, or pain we feel is in the retraction and not generally the expansion phase of the business. While there are more than enough growth pains one can endure, they pale in comparison to the agony of retraction. Why does retraction hurt so much? Facilities, assets and staff. These are 3 of the major pain points a service company deals with upon retraction and loss of market share. It makes perfect sense to minimize one's exposure to these risks as much as possible. If we were able to reduce this risk down to a single main point of pain, such as staff, then would we not be able to handle a retraction better? Of course we would. Having unutilized assets sitting in unutilized facilities can be the death blow to many companies in a market environment such as this. In the past, companies would just reduce staff and wait out the downturn in order just to pick back up within the next 18-36 months. Rig activity will be assured to hit record levels again right? We will soon be able to increase our day rates to get back to 30%+ net margins while still operating under an inefficient model right? This may have been the case in the 1997 and 2008 downturns, but what many service companies fail to understand is that it will not be this way in the future. What our future holds for operators is a very different picture than before. Cost efficiency will no longer be limited to times of strife and low commodity prices. Cost efficiency is the new norm within our market, embrace it or get out of the business. In this post oilapocalypse era of our age, operators will be forced to remain efficient no matter what the price of oil reaches. The technological advancements of horizontal drilling and fracing have resulted in requiring less active rigs required for more asset production. There is no need anymore for 2000+ drilling rigs in order to supply North America, or the world for that matter, with the amount of oil or gas required to sustain its demands. Less rigs means more focus on drilling efficiency and productivity. More attention to cost and ensuring controls for remaining ultra-profitable during times of higher commodity pricing. Expansion and retraction of service companies in this new era of business must be done differently.
Ahead Of The Curve
It's not always cool to be ahead of the curve of something. You are often thought of and referred to as "crazy", "stupid", "out of the loop", etc.. Even though I have found some operators to be receptive and welcoming to the idea and concept, many are still unable to connect the dots. This is an awkward position for anyone to be in. My entire goal is to provide the same identical service as they are using today at a lower cost, sometimes 30% lower. I have been encouraged as of late to forge ahead after some really good and intelligent conversations with operators who understand the model and need for the industry to change its model. I find that often they were not exactly educated on our process or business structure and therefore believed that the old model was the best model, and there was simply no other way for us to reduce operating costs or improve other than a shiny new technology. After taking some time to explain what problems we are facing in the service industry and what solutions are available to correct these, the response has been extremely positive and they can see where the model can provide them with years of low cost/high quality services no matter the rise in commodity prices. Through working actively with select manufacturers and providers of MWD, LWD, Drilling Tool & Mud Motor technologies, we have secured access exceeding capabilities of the larger directional companies, without the excessive overhead and cost to maintain. Select vendors have understood where the industry is going and have agreed to long term contracts to keep costs controlled in order to provide operators with a unique option amidst a global commodity price crisis. Vendors of these products are much alike the vendors of products that sell actively on Amazon. They understand that while they will get lower retail for their products, they will sell them in greater quantities from a single source. This will reduce costs of creating multiple brick and mortar retail outlets and therefore reduce the amount of overhead they will have. Many larger directional service companies understand the trend and are slowly altering their age old business models in order to compete and survive in the market. Many will move too slow and never achieve the change in time and will fail. Within the last few months, our company has been approached by multiple directional companies that have historically never rented or leased their technologies in the market. They have approached us and requested to be our, "MWD wing" or "Sole Mud Motor Provider". Why this change in your strategy we asked? Their response was inline with what we knew all along. The retraction and future forecast for the industry have forced them to search for a different way to do business in the future.
Tool rentals look more appealing than unutilized assets sitting in their facilities. 30% of the market, is better than 0% of the market.
Employee burdens are far too great for us to continue at lower day rates. Our excessive overhead has led to cutting field staff and operations management wages to the point of collapse.
It's far too troublesome to deal with operators than it is to rent tools to a service provider.
These are all answers I received when asking why the change in strategy. These events along with my past and current involvement in discussions with operators has only strengthened my position and strategy for building my company. We remain confident that the model will prove to be the new standard at which all directional service companies will be forced to follow into the future. Will we get it right the first time? Probably not....like everything that is a success, it takes several failures to get there. I have already struck out with many operators that didn't agree or understand the model and failed to realize the ultimate value. While choosing to stay with their current provider may have given them some hope and perceived reduced risk for the future, it is only a matter of time before their provider will be forced to raise their costs to support their age old business structure of big brick and mortar. At that same time, we will not only be going in the opposite way as far as operating costs, but gaining market share and being able to actually reduce our rates for our customers. We believe alike Amazon, that we need to build our customer base doing what we do and then we will be the market leaders for everyone else to follow.
Stubbornness
"We are stubborn on vision. We are flexible on details." - Jeff Bezos | CEO Amazon
Being stubborn on vision has never been a problem for me. Once I get my head wrapped around the idea and structure, there is typically no way I will stray from its design or purpose. We know that building Janel Energy Services for the sheer reason of being the lowest cost directional service provider in the industry was going to be a hard sell. Most operators will believe that if you are lower cost, you are lower quality. This is not true as long as you are appropriating your capital in the right places. We know we need to be strong and endure some hardships in order to break through in the industry. This will require us to be stubborn on our vision. Flexibility is something we have no shortage of as well. We are ultra flexible and have utilized this mindset and structure to work alongside our vendors to achieve new and innovative partnerships that will revolutionize the value proposition for our company.
Long Term Thinking
Once, when asked about Amazon’s revenue growth, Bezos couldn’t even remember the exact growth percentage, something rare for a CEO. When asked why he didn’t know, he said:
“I’m thinking a few years out. I’ve already forgotten those numbers.” - Jeff Bezos
Long term thinking has been the cornerstone of Amazon's strategy. Most discussions within our industry center around the question, "What will change within the next 3 years in directional drilling? I often see this as a missed opportunity to ask the question, "What will not change within the next 10 years in directional drilling?" I can build a successful business on something that will remain stable in time. For example, I know that operators will want high performance results at low prices, now and in 10 years from now. This allows us to remain confident that our strategy is solid and we can be assured that we will be successful far into the future. If we remain long term strategy minded, we will be able to look past current failures to sell based on the lack of acceptance in our business model.
Obsess About Customers
Alike Amazon, we’re not competitor obsessed, we’re customer obsessed. We start with the customer and we work backwards. When you work backwards, you start with the customer and their needs and problems. This is the opposite of what most companies do, which is: they think up ideas, build a product, and then see if customers like it. We focus on providing exactly what our customers need and providing nothing they don't. Why would we go and build a remote operations center, if our customers already have one themselves? Why would we go and hire and expensive drilling analyst only to find that our customers have 3 of them on staff already? These are the inefficiencies that drive operating costs up for the customers. If we remain obsessed about our customers needs, we often find that a "Product Champion", "Technical Drilling Analyst" & "Remote Operations Staff" are often not required to deliver ultimate value in the service.
“If we can arrange things in such a way that our interests are aligned with our customers, then in the long term that will work out really well for customers and it will work out really well for Amazon.” - Jeff Bezos
This could not be a more truer statement. For us, this means we must align our interests in such a way that our interests are aligned with our customers. "Well...we are doing this when we build an engineering team and technical drilling support team to support the client's drilling activities, just like they are.", you may say. But does this mean you are truly "aligned" with them, or copying them? If you are building a team to replicate work done by theirs and you raise your internal costs in the process which results in you raising your rates for services to remain profitable, are you truly "aligned" with your customer? You would be better served researching exactly what your customers will need over the next 5-10 years and obsessing over delivery of that. It will most likely be drilling directional wells with continuous improvements while keeping your costs low. There can be many arguments made either way, and I will be the first to say that having a technical drilling expert on staff can assist with improvements and drilling efficiencies. The point I am making is that service companies often hire these resources without first discovering the capabilities and technological knowledge of staff that may be accessible on the customer's payroll. Where one could have possibly reached the same efficiency by utilizing existing resources bought and paid for by a client, one buys and pays for their own therefore increasing overhead costs in the process. This leaves most companies obsessing over themselves and not their customers.
Two Pizza Rule
Amazon believes in a “two pizza rule” for teams, meaning that the groups should be small enough to feed with only two pizzas. This generally works out to about 5 to 7 people in a team. This system works well because typically when a team becomes larger, it becomes more inefficient and therefore less productive. I believe this to be very important in any business strategy, especially in our current day and age of the commodity rollercoaster and global uncertainty in our market. There is no more room for waste in our industry. Creating larger teams of people involved will only create waste and cost inefficiencies that will erode the bottom line of any service company. What does this mean for us? It means thinking outside the box for new ways to structure our business internally. The days of structuring our company to the mold of past companies are long gone. New organizational structures with multiple duties and or tasks are required to remain lean and efficient.
Never Stop Experimenting
“If you double the number of experiments you do per year you’re going to double your inventiveness.” - Jeff Bezos
If you ask most CEOs, they’ll tell you that experimentation is imperative for their business. It’s how new innovations are born and how they stay competitive in the market. Automotive companies have concept cars; food companies experiment with new foods and flavors; retail companies experiment with placement of products and store atmosphere; drug companies are built on experimentation; tech companies have “labs” like Google Labs; and many high performing companies, like Google, allow their employees to experiment. Even sports teams experiment with new plays and/or players. Experimentation is everywhere and is always happening. I believe we are following this concept at Janel very intently. We encourage and support experimenting with new processes, technology, organizational structures, pricing models and software systems. We are consistently searching for advanced ways of delivering the most value to our customers through any means necessary.