Cost Savings For Services… Pricing vs. Processes
Customers looking for cost savings on services related purchases can save $100’s or $1,000’s with price relief or process improvement. Which one is more likely to have a greater impact?
If a customer has not addressed process improvement in their operations, it is suggested that 90%+ of the time process improvement will beat the cost savings of pricing relief.
My company is an oilfield services provider. With the recent downturn in the industry, we have been meeting with customers for the past six months discussing a variety of concerns, chief among them is pricing. Other than pricing the other question that is being asked by many of our customers is, where are cost savings available? Our experience shows us that in an industrial process such as drilling a well or installing a pipeline, that process improvements tend to lead to real cost savings as related to services vs. products. Yes, customers can and will get some price relief in the current oilfield environment, but the really significant cost savings can be found in process improvements. Or it can be stated another way; most services are people intensive, so people tend to mean billable time. Fewer movements/time, means process improvement. Or it can go the other way. If you are receiving a lot of change orders, meaning more movements and therefore more time needed, then right sizing processes can lead to long term savings, because the correct work is being performed once vs. multiple times.
Now our services are not a large line item in the overall scheme of an AFE for a D&C budget for oil or gas well. By the way, most wells contain oil & gas just in case you are not in the O&G industry.
Our company is an expert at what is does and what I see in our customer base is that there are many people engaged in the process to complete projects. What we encounter are many changes which will always occur, but ~25% of it is waste and raises our cost to our customer and that is not always money well spent. If costs per project are excessive then only 8 projects get completed vs. 12 projects and maybe only 8 months’ worth of work vs. 12 months get completed. I believe both a customer and service provider would prefer to complete all the projects timely and on budget.
Three simple suggestions for process improvement as related to services are:
1. Scope of work;
- Is it clearly defined and correct?
- Does everyone (customer & service provider) fully understand the scope of work?
- Meet all of the customer’s needs?
- If the scope of work established meets the customer’s needs.
2. Change orders; this is one way to reflect on processes.
- How many? Change orders increase the cost to the customer.
- Why? Changes to customer’s needs…change the scope of work.
3. Business reviews; are you meeting regularly with your service providers to review the project results and tweaking processes?
We have used these simple steps to engage our customers in any environment, good or tough, and they have proven to be successful.
Written by Parrish A. Salyers; Director – Business Development, UELS, LLC.