In the first half of this decade, with oil prices far higher than they are now, energy companies invested massively in new projects. Throughout the country, many companies began drilling in earnest, with the lure of high oil prices driving the quest for corresponding profits. In order to finance these efforts, capital-hungry ventures turned to banks and private-equity firms for the necessary funding. At the time, these firms were willing and able to lend vast sums of money, as the investments appeared to be based on ever-increasing (or at least stable) energy prices.
“There is likely a huge consolidation wave coming in the energy sector. IT professionals and consultants should be preparing for significant opportunities during this transformation.”
What happened? As we all know, oil plummeted at the end of 2014, and energy prices remain stubbornly depressed to this day. Many companies that made money in the boom are now deeply unprofitable, and are relying on debt to remain afloat. As business continues to slow, time will eventually run out on available credit facilities. Inevitably, many of the companies with weaker balance sheets will either have to merge with peers and find massive synergies, or, frankly, face potential insolvency.
As a result, many analysts are expecting a huge wave of defaults. For example, ratings agency Fitch recently reported that they expect up to $70billion of defaults in energy and materials companies this year. This will create increasing pressure on the banking industry, which will be forced to potentially recognize enormous losses on its loan portfolios. As the default pressure builds for the financial sector as well as the energy companies themselves, more and more enterprises will choose the option to merge and synergize in order to survive. At the same time, the stronger entities in the sector will likely take an opportunistic approach to finding quality assets at bargain prices.
What is the impact on IT?
As the threat of default pushes many companies to execute strategic M&A transactions, the corresponding aftermath will create a potentially historic wave of integration and consolidation work for IT professionals both within, and outside of, these companies.
Listed below are some of the potential challenges and opportunities in the coming integration and consolidation wave:
Combined enterprises will need applications that will share data and processes. The result will be focused effort in integrating disparate applications to piece together holistic operational and reporting processes necessary to manage the newly-combined entity.
Application Consolidation and Rationalization
For some applications, integration will not be an option; they will need to be rolled into other, larger apps or rationalized completely. When this happens, work will be needed to identify the impacted process areas to develop workarounds or implement new modules in the remaining applications to address requirements in the affected areas. In other cases, applications that may offer redundant functionality in a combined entity will need to be rationalized completely.
Business Intelligence, Dynamic Reporting, and Report Distribution
Another potential opportunity lies in the BI area. In some cases, applications cannot be integrated or rationalized, and yet consolidated reporting will still be required. When this occurs, companies will need a robust approach to developing Operational Data Stores where data can be identified, mapped, consolidated, and then reported and distributed. On top of the required Extraction, Transformation, and Loading processes, users will need (and expect) not just consolidated reporting capabilities, but also dynamic reporting on demand, with adjustable user inputs. And, of course, all of it will need to be delivered seamlessly to any mobile device.
In order for IT to keep up with surging demand, self-service capabilities will need to become a key component of IT strategy. When the demand is so overwhelming, IT will need to show users how to get what they want, without IT becoming a bottleneck. Simply put, there won’t be enough resources around to meet the needs of the business, so IT leaders will have to think far outside normal paradigms to provide solutions in a timely manner. One of those solutions will be self-service where it makes sense.
Cost Rationalization and Reduction
Cost rationalization and reduction will be a center point of all IT actions during the transformation process. Business leaders will expect synergies (cost savings) and IT will have to not only deliver all of the capabilities listed here, but do so while actually reducing IT spend. This will require everything from re-negotiating with strategic vendors, to identifying redundant headcount. Payment terms, internal rate of return, and cost of capital will become even more prevalent in the IT lexicon. While IT leaders typically do not have to think in terms of cash flow, in this environment, they will quickly realize every dollar counts, and cash spending limits will require even more attention.
As companies merge, the infrastructure will also have to be assessed and consolidated, not just to save cost, but to enable cross-platform applications to operate effectively. Also, similarly to applications, the hardware will have to be consolidated while keeping all operations fully functional, which will present additional challenges during the transition period.
Project and Portfolio Management
PPM teams will face enormous challenges, since the combined entities will not only have their current projects to manage, but an entire new set of priorities will emerge related to the consolidation. If that isn’t enough, new leaders with new priorities will complicate the decision-making process for investments, leading to potentially conflicting projects to manage.
Governance and Methodology
Governance conflicts will need to be remedied, as different organizations will have different procedures to manage work. Procedural conflicts will cause problems when attempting to execute transition projects, therefore, governance and decision-making will need to be aligned to get the work done on-time and on-budget.
There is likely a huge consolidation wave coming in the energy sector. IT professionals and consultants should be preparing for significant opportunities during this transformation. Companies that successfully execute this strategy will likely emerge as the primary beneficiaries when energy prices rebound. As this cycle progresses, IT will become an even more critical component of corporate strategy, and will be a primary lever in determining the eventual winners and losers in the industry.