David A. Gray Director
David A. Gray has over 35 years in upstream oil & gas. He has deep operational experience with over 20 years in executive management roles with oilfield service...
Product Development Portfolio Optimization in the oilfield is more critical than ever. According to this year’s DNV GL Industry Outlook report (Jan 2018), R&D investment for Oil and Gas will increase in 2018 for the first time since 2014. Will the industry apply the same rigor and discipline to the increased R&D investment as has been applied to organizational cost cutting and operational efficiencies? Over the past ten years over $100 billion has been invested to develop new technology for the Oil and Gas market; can anyone estimate the return on that investment?
Significant changes have been implemented in the Oil and Gas value chain as we have negotiated the most recent adventures on the oil price roller coaster. Based on falling oil prices and reduced rig counts, the market for Oilfield Services has contracted by over 40% from a high of over $450 billion in 2014 (Spears); R&D spending dropped accordingly. Now, mid-year 2018, oil prices are up, rig counts are up, and projected spending is up. According to the DNV report, senior executives are committed to strict cost controls and a “permanent new discipline in the industry”. It will be interesting to see how this “new discipline” is applied to R&D spending. Will we go back to the familiar practices of technology development with little or no strategic alignment – unclear objectives, little market understanding and minimal discipline in “Go-No-Go” decisions? Or will we apply time-tested strategic principles including a robust business case, understanding competitive pressures, and tying investment decisions to the achievement of strategic objectives?
Time will tell as we move forward in this uncharted, “permanent new discipline”, environment. In our experience, oilfield service companies can benefit greatly from the application of increased discipline when managing the R&D investment as a structured portfolio. Like a financial portfolio, an R&D portfolio should have strategic goals, be diversified, and have a balanced long-term/short-term approach. Too often, technology and product development decisions are not reviewed with a strategic lens or with any level of business case scrutiny – perhaps due to the perceived complexities and uncertainties involved. There are a few concepts, that when applied in a consistent manner, provide creative perspectives on the R&D portfolio so that improved decision-making is possible. This practice is commonly referred to as product development portfolio optimization.
Revenue from new products and return on the R&D investment can be increased dramatically. Often, just the discipline of defining and quantifying target markets, resource requirements, expected timelines, and project goals serves to reduce time to market based on focused project action plans and reduced project creep. In the next few sections of this paper we will explain these concepts, provide insights on how to apply in the oilfield service company environment, and discuss the multiple benefits that can be obtained.
The oilfield services industry is a complex environment. Those of us that have survived the industry expansion and contraction for over 30 years may take it for granted. For others, an analogy might help to explain. Take the major oilfield service companies and place them in the aviation industry. To compete, they would be responsible for all phases of the value chain:
Given this level of complexity, it seems clear that there will not be one strategic imperative that guides product development portfolio optimization. There will always be competing goals and objectives. Decisions can be improved by providing transparency, consistent evaluations, and multiple perspectives on the R&D projects underway. The goal is to maximize the expected value of the portfolio and find the proper balance between rigorous evaluation and encouraged innovation.
The critical issue for any management team – How to prioritize activities across all the important projects? Prioritization is needed to focus limited resources on the most important projects and create speed. This effort creates a dilemma – How to achieve strategic focus along with balanced diversification needed to maximize return?
To rationalize these competing goals and optimize the value of the R&D investment, a robust portfolio evaluation process with timely updates is required; simple methods fail to capture the true, relative value of the contending interests. In our experience, the following steps are required for product development portfolio optimization in our dynamic environment:
This concept is useful to define the various layers of analysis:
Each project should be evaluated, and compared to other projects, as to its value in addressing any of these goals. A relatively simple scale along each of these dimensions can be used to score the relative value of each project.
Disciplined economic analysis of project costs, projected revenues/profitability, and timing will provide a reasonable NPV, Payback time and ROI that can be compared to other projects assessed in a similar manner. In some cases, sensitivity or probabilistic analysis will provide better insights as to the potential value. From a portfolio view, a consistent, objective methodology is needed to provide a relative value comparing one project to another.
In addition to the strategic filter and economic analysis, other typical criteria used to rank projects are market size, development cost, technical risk, commercial risk, timing, and availability of resources. This methodology is fairly well defined – choose the relevant criteria, weight the criteria, score the projects, then sort the list by the highest rank to determine priorities. This simplistic effort will provide a ranked priority but does nothing to address the required portfolio diversification.
Multiple product development portfolio perspectives provide a way to balance out the competing goals and strategic interests. Here are some common perspectives that have been found useful in fueling project ranking discussions.
|Corporate Perspectives||Division Perspectives|
Perhaps the most useful outcomes from a robust portfolio optimization process are the insights developed from the rich, often heated, discussions during the portfolio review sessions – reviewing the consolidated data, questioning the assumptions required, and visualizing options for the project mix under various scenarios. The objective of these sessions is to review updated information, evaluate new project proposals, evaluate various potential portfolio scenarios, and reach consensus on the best path forward. We have seen passionate discussions during these review sessions but having objective data to work with certainly drives improved decision-making and creates value for the organization.
Endeavor Management can assist oilfield companies in many ways to develop a robust portfolio management process:
To learn more about our portfolio optimization methodologies, please visit our oil and gas page website or speak with one of our experienced industry advisors.
We may be at a significant cross-roads in our industry. Will we apply a “permanent new discipline” to our R&D investments – as we have in our operational cost controls? Or, will it be “business as usual” for the oilfield and we go back to wishful thinking in our choices for R&D investments? Many industries have made the transition and are enjoying the benefits. Adding strategic rigor to the R&D portfolio review takes time and effort but certainly can be worth the effort to get the better projects through the pipeline faster.