Over the last few months, JWN has been spending a lot of time with suppliers in the oil and gas industry listening to what’s on their minds.

Overwhelmingly, we’re hearing that pricing continues to be a critical issue. Through 2015 and 2016, producers have pushed for significant pricing cuts.  In an oversupplied market, it’s a buyers’ market and we have experienced a rapid race to the bottom. The result: almost every single publicly traded oil and gas supplier has cited pricing as a key issue impacting margins and business results. Many suppliers are not earning a return on capital and recognize that this is not a sustainable situation.

It’s clear that there are few ways to avoid the request for continuing pricing concessions.  Costs are an existential issue for producers and they are doing everything they can to address it. And producers have made it clear that they are prepared to move business away from suppliers who are not prepared to come to the table. However, suppliers should not assume they are inert and unable to influence the situation. Proactive steps can help a supplier to regain some ground.

A useful example is the action of auto suppliers during the 2008-2009 recession. Auto industry suppliers were placed under tremendous pressures by the automakers and major Tier 1 suppliers to cut prices.  Those suppliers were successfully able to claw back their margins.  These pressures are similar to those faced by oil and gas suppliers today.

It is obvious that companies with the lowest cost structures are best positioned to remain profitable despite pricing cuts. Cost reduction needs to be a priority for every supplier. We are not going back to pricing from 2009-2014.  However, there are a few approaches that suppliers can take to influence pricing outcomes:

  • Developing creative pricing models: Many options exist such as risk sharing agreements, lower rates for faster payment (time to cash), and results-based fees.
  • Pricing with incentives or penalties: Suppliers can introduce attractive pricing based on specifying customer actions that improve efficiency for everyone. So often the producers’ own actions impact the costs to deliver services. Rigorous metrics and revenue assurance practices can allow suppliers to collect back-end fees from customers.
  • Sales force training: Salespeople are often “deer in the headlights” when faced with aggressive demands for pricing concessions. Sales teams need to be prepared with positioning, analytics and data to defend prices. Too often sales people are “relationship people” who are good at being liked. They are less capable of navigating procurement and clearly explaining why your services are not the cheapest but provide far greater value. 
  • Deal governance: What processes do you use to define pricing? How do you make pricing decisions? Too often we’ll sweat every line of operating expenditures, yet we’ll concede 15 points of margin in a hallway conversation with a sales rep. Yet every dollar of pricing gains flow straight to the bottom line.
  • Marketing communications: Marketing is often considered to be a discretionary expense to support growth initiatives. However, leading players can improve their pricing outcomes by deploying messages prior to reaching the negotiating table. Examples include:

Presenting differentiators: When all service providers are deemed to be equals, the lowest price bidder will inevitably win.  If players can successfully communicate differentiated value such as technology advantages, there is an opportunity to charge higher rates than competitors and still win.  The Canadian oilfield services industry is full of companies that have invested millions in technology and then they fail to spend a few thousand dollars telling the world about it. Buyers also need to be reminded of criteria such as technology, time, safety, track record and capability to execute. Often the biggest costs are associated with choosing the wrong supplier.

Collaboration opportunities: Many suppliers lament that customers are not engaging them in collaborative discussions around value generation beyond pricing concessions. There are often innovations or smarter ways of operating that have massive cost structure impacts. Marketing can often communicate compelling opportunities in advance. It’s often impossible to introduce these types of opportunities at the negotiating table.

Service and supply companies have assumed that their sales people are delivering these messages. Evidence would indicate that more proactive steps are required to communicate and tell your story.

None of these options are silver bullets. However, a thoughtful approach to pricing can reduce the magnitude of the cuts and can help turn the corner.

Bemal Mehta is senior vice-president, energy intelligence with JWN Energy.