World-class procurement and the National Oil Company opportunity

By Bennett West and David Traylor

Recently, many National Oil Companies (NOCs) have embarked on a journey to become more global in scale externally, coupled with a drive to become more efficient in their operations internally. In just the last six months there have been several large scale initiatives that characterise the evolution (or revolution) of the NOC into an operating model more closely resembling that of an International Oil Company (IOC). This revolution of sorts is creating a new class of NOCs: the International National Oil Company.

Certainly there are obvious hypotheses about why NOCs would undertake such an exercise.  Firstly, becoming more nimble and internally efficient would undoubtedly lead to upstream operations benefiting from faster exploration and production of first oil. Additionally, efficiency could lead to better return on capital in traditionally challenged business segments such as downstream operations. Finally, NOCs are recognizing that evolution is necessary to compete as a destination for world class talent, by creating the right operating model, including the ability to develop human capital. 

Creating a reasonable governance structure to provide the framework for decision making that can capture market opportunity is of critical importance to this evolution. Likewise, internal infrastructure, such as process efficiency, and a more robust use of information systems are likely to yield large improvement opportunities. One functional area that fits into this opportunity set is the area of procurement. As hydrocarbons become more difficult to extract and markets become more global in nature, there is a compelling case for NOCs to be able to react swiftly in order to capture value. These changing market characteristics require NOCs to forge new relationships with their key suppliers and partners to deliver exceptional value and create competitive advantages. As NOCs often have a broader agenda than just commercial success, the ability to create value with procurement becomes a key lever in the quest for international competitiveness. 

Based on Deloitte’s experience with several NOCs, there are clear sets of tactical improvements under the umbrella of procurement transformation that would create the impact needed to move organisations swiftly towards the efficient operating model concept. This procurement transformation journey would be very similar to major initiatives undertaken by most (if not all) of the IOC organisations in the last decade.

The Procurement Opportunity

When it comes to the procurement function, it is certainly unfair to generalize, but many NOC organisations would fall into a functional maturity segment that are best described as having “traditional” procurement approaches.  Whilst every organisation is different, many NOCs are following processes that may be more typical of an IOC, pre-procurement transformation. 

When consideration is given to the procure-to-pay process, suppliers tend to witness very traditional tender processes in action.  Most communications are paper based and much of the proposal process is focused on the procurement structure itself versus the actual requirement being procured. Decision-making processes tend to take a very narrow view of value versus total cost, normally resulting in a commercial selection of the lowest price. From a supplier perspective, this process may seem very opaque with little ability to increase the total value; this opaqueness may be further increased with a lengthy and complex governance and approval process. Finally, the often fragmented nature of the holding company framework of many NOCs prohibits the organisation from putting forward one face to the supplier market.  As an example, suppliers often receive very similar requests for proposal from NOC operating companies, suggesting little to no internal market-facing coordination.

Many NOCs may ask themselves:“why change the traditional procurement model as it has worked for the last 20 years?” Fair enough, but the next twenty years will in no way resemble the last twenty.

Capturing the Opportunity

The journey for the NOC organisation is no less complex and challenging than for many IOC procurement transformation initiatives - and may prove to be even more challenging. The concepts and components, including strategic sourcing, procure-to-pay process improvements, capability building, total cost of ownership (TCO), and supplier relationship management (SRM) are built on common foundations. However, given some of the characteristics of these organisations, the implementation of these concepts may require some nuanced planning and execution.

Strategic Sourcing and TCO

Strategic sourcing concepts focus on creating stronger relationships with suppliers, and view the concept of procurement as an exercise in total value versus that of a low price competition. The implementation of such concepts will require viewing the market as a place where the organisation and the associated supplier partners can jointly create value through an end-to-end process view. There has been a tendency by some NOCs to view the procurement opportunity as a set of individual transactions instead of reaching out to the marketplace with the full spend profile. Traditionally, in the recent past, more focus has been given to following the process of procurement instead of capturing the total “offer” that was being shared with the potential supplier partners in the marketplace. Although in certain spend categories, the NOC entities are the leaders in the global marketplace, it is not clear whether the value has been captured with that leading spend positioning. To capture the strategic sourcing opportunity, NOCs will need to break out of the individual transaction mode and look across businesses to understand the total value that they are bringing to the marketplace.  This will require breaking down some organisational barriers that may be well outside of normal procedure for these companies.  It will also require a view of spend that will allow rigorous analysis of the total offer, something that may require manual intervention or offline tools to capture.  

Total Cost of Ownership (or TCO) is another such area of opportunity. There is a fundamental challenge with the “lowest bid” procurement methodology.  By disaggregating the “commercial” from the “technical” bid, significant value may be missed when viewing the offer as an end- to-end procurement exercise. By focusing on the lowest bid selection after meeting some minimum hurdle of technical criteria, NOCs may be selecting a bid with the lowest initial cost but may actually present a higher lifecycle cost across the length of the asset or project life. The value created from a superior technical approach may outweigh any initial price differential however, using a minimum standard for the non price proposal not capture this quantitatively. In an E&P example, the prices of a certain asset must be viewed over the asset life cycle including maintenance and performance as opposed to just initial cost. With the very sizable in fact in some instances market leading spend volumes, an NOC can create tremendous total value by bringing the right offer to the market. Just with the spending scale the business case for these types of efforts would, in many cases, be overwhelming. Reducing TCO by 1% on a $1B spend category is very compelling. The most effective way to capture TCO value is through the reorientation of the procurement process in being more flexible and less “lock step” in the approach to bid and award. Most IOCs have made much progress in this area but there are still opportunities available, given that the TCO culture has been created with significant impact to the bottom line. Such key building blocks exemplify the foundation for many similar IOC procurement transformations.

Supplier Relationship Management (SRM)

Managing supplier relationships - post-contract award - is another area of opportunity for many NOCs. Procurement organisations can create additional value, sometimes in excess of 5%, by actively managing the ongoing supplier relationship. This type of activity can take many forms. One IOC-based example is around the concept of value analysis - or having supplier input into the design / function of the end product being procured. By forging an ongoing relationship and facilitating two-way communication, NOCs can continue to take cost out and create value through the procurement process.

Traditionally, the first step in creating an SRM program is to define the mission-critical supplier relationships across the organisation. This is done by looking down one individual silo at the holding group level whereby perspective is gained on the criticality of the overall supplier relationship. Once these relationships are identified, a small team can work with each supplier to set goals and objectives for ongoing performance management that will yield value to both organisations.

Organisational Capability

The ability to execute and sustain such elements of procurement strategy requires a procurement function that has the appropriate skill sets to credibly deliver both internally and externally to the marketplace. A challenge for the typical NOC will be to create a model of functional excellence in an environment where such competencies and measures are not built into the organisational DNA. This will require the development of a robust set of procurement key performance indicators (KPIs), measurement of those KPIs, and organisational accountability for the delivery against a set of objectives based on these KPIs. 

Some IOCs have used models that have carved out an organisational group responsible for functional excellence. Such groups work very closely with the Human Resources function to understand the current skill set of the procurement staff as well as the key skill set requirements for each procurement role. The procurement functional excellence team then typically develops a roadmap to “upskill” the appropriate staff as well as hire talent to fill organisational gaps in order to create the opportunity for world class procurement. 

Similarly, functional performance management is critical to create organisational momentum for procurement transformation. Significant opportunities remain for organisations to better define success in the role of procurement. Certain savings targets have been established but, in many cases, these targets lack broader credibility outside the procurement function due to non-robust measurement and tracking. Organisations have estimated anywhere from 5% to 15%  procurement savings improvement from having the right skill sets and people executing the procurement process.

Procure-to-Pay Process Improvements

Underpinning any procurement transformation is procure-to-pay (PTP) process improvements.  The ability to execute world class procurement often requires information such as accurate spend data and procurement cost savings tracking. In the strategic sourcing process, many NOC procurement exercises are done in an entirely manual response format; such data points are difficult to extract today. Currently, focus tends to be placed on the adherence to the procurement process manual format. In contrast, most IOCs have gone to an all electronic bidding process with significant use of strategic sourcing support software. This has streamlined the process and allowed for quicker decision making. Communications can be made to all bidders simultaneously and vast amounts of data can be more easily analyzed.  By creating this central repository of information, there may also be significant processing time reductions.  Procure-to-pay process improvements will also go a long way toward improved transparency for key supplier relationships. Any increase into the transparency of the process would help suppliers create more value for the buying organisations. 

Similarly, the requisition-to-RFP process presents a further opportunity. hority, the back end contract closure process will be significantly streamlined. The challenge of being able to secure the right products and services in a tight market is a big one. If an organisation can’t complete a procurement process due to unclear delegation of authority, there will be missed opportunities. This means competitors are capturing the best deals or cornering scarce resources in tight supply market.

In Summary

NOCs are poised to capture tremendous value through transformation of the procurement function. With the sheer size of most NOC external spend, even a relatively minor impact would create a compelling business case. This is a journey that leading IOC organisations have undertaken and if there is a true desire on the part of NOCs to evolve their operating models, the procurement space should certainly not be overlooked.

About the Authors

Bennett West is a principal at Deloitte Consulting LLP (United States) and leads the U.S. Energy Supply Chain and Downstream Oil and Gas practices, having completed a significant portfolio of projects in both the U.S. and the U.K. in Refining and Marketing. His experience includes projects with many global oil and gas organisations, including several national oil companies. Contact Bennett in Chicago at bewest@deloitte.com or +1.312.486.3461.

David Traylor is the National Oil Company market leader for Deloitte Touche Tohmatsu and also serves as a partner at Deloitte & Touche LLP (United States), specialising in the development and execution of business strategies, asset optimisation, and risk management for the oil and gas industry. He is a registered professional engineer with 30 years’ experience in the upstream, midstream, and downstream sectors of the oil and gas industry. Contact David in Dubai at dtraylor@deloitte.com or +97(4)369. 8989.

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