“What do you do when the price of a barrel stays below 42?” a CIO’s Survival Guide to Long Term Low Oil Prices
Exploration and Production Companies as well as Midstream companies of all shapes and sizes are having to adjust to the realities of Long Term Low Oil Prices (LTLOP) . Participants in the oil market have been hoping and wishing that the prices would rebound quickly. However, it does not appear that their desired price adjustment is going to happen any time soon.
The Chinese economy is not ramping up demand, and the middle east countries are not doing anything to reduce supply. So, that means that the producers continue to over supply to the market. In fact in January of this year the IEA concluded that oil markets faced the prospect of a third successive year when supply will exceed demand by 1 million barrels per day[i].
But what can the CIO or a Senior Director of IT do about this? They are expected to deliver IT service so that their organizations can keep producing in the most the effective way possible. However, in today’s environment they are often being asked to slash budgets. Staff, Industry specific applications and hardware all cost money. You can’t just cut all the expenses overnight by 25 – 50% because the CFO says so and expect that the level of service will continue unchanged. Systems put in place when the price of oil was $100 or $150 per barrel have become rooted in the daily business processes and can be difficult to remove, change, or replace with cheaper alternatives. Unless, your organization is going to head back to using only spreadsheets and power point for everything there will be switching costs to consider.
So what can the IT leaders of these companies do to help their companies get through this period of low price oil?
First, your organization must begin to ask about the value add of the high cost applications they are currently using. Do they still make sense in today’s world of lower priced oil. Does the company have the economies of scale to justify their continued use? Are there cheaper alternatives available? Has your organization considered the alternatives, if they haven’t why not?
If your organization has high cost applications that the business feels are still mission critical in spite of the low price of oil, will the software vendor cut you a deal if you agree not to stop using their products? Alternatively, does the vendor or one of its competitors offer a cheaper cloud based version of the software? If they do, is it possible for you to implement and employ that solution at a lower cost and still provide the required functionality and service?
If the organization is in the unfortunate position of being required to reduce staff, have the IT departments taken the time to revisit their license count? Many of the new organizations that popped up as the price of oil was on the way up, never expected the price to drop as it did. These organizations may not have the business processes in place to quickly reduce the license costs as head count gets trimmed back. Make license count analysis a priority as your organization trims its head count.
Begin looking for ways to move IT infrastructure into the cloud. It is possible to use cloud based IT infrastructure providers to reduce IT spend. If it is not mission critical data or information of a highly sensitive then there may be significant savings found in the cloud.
Look for ways to outsource business processes and IT responsibilities. If accounting, human resources, and most importantly IT are not your organization’s core strengths then look for various ways to outsource those tasks. There are cheaper ways to do it that do not involve sending all the work to India, China or the Philippines. Onshoring here in North America or even Nearshoring in Latin America can provide a huge cost savings but also keep the work in a US time zone. That can be critical to maintaining high levels of end user support and satisfaction.
[i] Cooper, Amanda. “IEA says oil market may ‘drown in over supply’ in 2016, Reuters.com http://www.reuters.com/article/us-oil-iea-idUSKCN0UX0VJ (accessed March 11, 2016)
- On April 1, 2016