09 Jan ERP’s future in a digital oil and gas world
Oil and gas companies have invested hugely in their enterprise resource planning (or ERP) technologies, but what is the future for these big backbone core systems in an increasingly digital world? This is the first in a multi-part series that will get under the covers of ERP systems and how they will evolve.
ERP arrived in the 1990’s
In case you’re new to the industry (and that would be highly unlikely given the slowdown in hiring these past 36 months), oil and gas companies, led by the super majors and the majors, adopted ERP systems, particularly SAP (a German software product) as a solution to cost and productivity pressures in the mid-late 1990s (and to address a then technical concern called Y2K).
Back then, commodity prices were down dramatically and opportunities for cost reduction and productivity improvements had dried up. Analysts, me included, were also forecasting considerable uncertainty in how existing systems (largely custom built critical mainframe systems) would behave as the clock clicked over to the year 2000 from 1999 (the Y2K problem).
Almost en masse, the oil and gas industry adopted ERP systems as a way to address both issues – cost improvement and Y2K problems. ERP systems replaced dozens of incompatible bespoke solutions, unmanageable reporting, expensive mainframe systems, multiple databases, and a hodgepodge of system interfaces and Excel spreadsheets.
Oil and gas was not alone in electing to entrust its core business processes to ERP. The public sector, consumer products, financial services, education, healthcare and manufacturing, were all dealing with similar issues. As a result, SAP was selling 60-70 new US installations per month in 1998 and 1999. Ah, those were the days.
The ERP life after Y2K
Over the past 15 years, most big oil and gas outfits have found the lure of ERP overwhelming. Key attractions include scale economies and lower overall cost, not to mention other hard to measure values like agility and responsiveness.
Today, the largest oil and gas companies are now highly reliant on ERP systems to handle the finances, the billings, the purchases and payments, the payroll, the reporting, the inventory, the supply chain and the assets.
It hasn’t been all roses and sunshine. Indeed, surveys frequently show that ERP has failed to meet business needs. Why is that? There’s no one reason, but many related challenges:
- Implementations may not have taken full advantage of ERP’s available features when implementation teams made arbitrary scope choices.
- Sometimes, business users could not bring themselves to change how they conducted business to match the capabilities of the ERP solution, and elected instead to modify the ERP system to match the business.
- Governance structures (the committees and sponsors who make the decisions on business IT investments) may not have vigorously enforced preference to exploit their ERP investment.
Today’s oil and gas IT landscape
What do you encounter today if you visited an oil and gas company and their IT technology environment?
- A heavily modified ERP solution that is costly to maintain and upgrade
- Hundreds or thousands of additional solutions beyond the ERP suite, particularly in operations, subsurface and capital projects
- In the largest oil and gas companies, there will even be multiple ERP solutions at work
- Lots of piecemeal integration software that tries to keep databases synchronised, common data consistent and interconnected processes aligned
- A pervasive use of Excel to help glue processes and systems together
During the all-too-frequent mergers and acquisitions in the industry, the costs to rationalise ERP and other IT solutions are so overwhelming that the companies set aside this problem for another day, except that day never really arrives.
An oil sands company once described their environment as gridlocked because of the complexity of all the one-to-one live connections. Another oil company executive described their systems environment as like a 1700’s quilt from rural New Brunswick. Each little square, representing a system selected by some independent committee by a divisional VP, might be perfect on its own, but the whole thing taken together is pretty ugly.
Another company told me that to learn the systems and processes in one of their core business areas takes as much as a decade. That learning curve is too long for the incoming generation of workers.
ERP solutions have not stood still
ERP technologies have been evolving at their own frenetic pace during this same time, which adds to the oil and gas challenge in figuring out what to leverage and what to ignore.
In the years after Y2K, the principal ERP vendors acquired dozens of solutions and technologies to round out their product offering. Oracle and SAP have both been very acquisitive. SAP appears to purchase a company every 6 months, including such well known technology companies as Ariba, SuccessFactors, Concur, FieldGlass, Business Objects, Sybase, and Hybris.
In SAP’s case, it’s hard work to keep its technologies current on a half-dozen separate and incompatible database solutions, including those of its competitor. This is an ever increasing cost burden. Some of these acquisitions are even written using competitor’s programming language, forcing the company to nurture software development talent for its competitor.
ERP not well positioned for digital
As margins fall in the industry, the relative costs of ERP systems rises, and with it the scrutiny of the customer. Cost improvements are hard to achieve because ERP systems were designed for a world that no longer exists. They predate many of the most important developments in digital:
ERP systems were originally designed for a desktop (or laptop) world, and desktop computers that required a big screen and a mouse. The trend is clear, however that in the future users will interact more and more with systems using smart devices and tablets, and less and less at desk stations.
It seems a quaint notion, but the basics for ERP were laid down before the internet came into wide use. Internet-driven security, browser interfaces, screen rendering, and the user experience were not considerations at the time ERP was invented. Vestiges of the original design impedes the fluidity of ERP in an internet world.
ERP systems were designed for an era of expensive memory and disk storage. Their internals are structured to optimise the trade off between compute cycles, memory and storage. But these costs are all quickly falling to zero, while people costs continue to rise.
ERP systems design assumed that the owner would provision all the necessary computer infrastructure (machine rooms, networks, disk farms, back ups) internally. Cloud computing hadn’t been invented. Today’s users are completely accustomed to computing in the cloud.
The traditional ERP revenue model, per user license for a dedicated heavy-use desk user, are no longer fit for the future, as more users are casual, mobile and light.
Fast Forward to 2017
Today’s oil and gas company faces an existential pressure to achieve a step change in cost and productivity but typically has hundreds of separate and incompatible systems, a big ERP investment with lots of modifications and work arounds that is costly to maintain, difficult to change and not really made for a digital world.
The ERP providers are themselves anxious to evolve their products to reduce the cost of ownership and take advantage of the incredible potential of digital.
This means a fundamental rethink of the internals of the technology to remove the constraints imposed by formally scarce compute resources. It means fully integrating all the acquisitions and rationalising all the databases. It means incorporating functionality for those parts of the business (typically oil and gas operations) that have not been part of the ERP world.
And it means basing the technology on all the digital trends that Moore’s Law is propelling forward (cloud, mobility, analytics).
ERP’s next big evolution
SAP has made the call and has undertaken a dramatic overhaul of their solution and are starting the decade long migration of the installed base.
For some, it will be a demanding and difficult journey. But as one of my close friends, a climber who reached the top of the 7 highest peaks on the seven continents, once told me, never describe the pain of the climb because no one will want to go on it with you. Instead describe the view from the top where you can see the curvature of the earth.
Well, the future will be dramatically better than the world today. Time to get climbing.
The next article in this series will look a little deeper into next generation SAP.