The GE Oil & Gas acquisition of Baker Hughes will create tremendous opportunities for new GE, the existing regional or specialized oil and gas services companies, and the companies yet to exist. The U.S. Justice Department required GE to spin off its Water and Process Technology Division. The creation of a new company generates new opportunities. Regional and specialized services companies competing against the new Goliath will find themselves at a competitive advantage. Going forward, they are competing on agility and responsiveness with one less Goliath in the oil patch.
Newly created and current regional players will be ripe for success. But why?
First, company spinoffs continue to outperform the market. The Guggenheim exchange-traded fund CSD focuses on investing in six to 30 month-old spinoff companies. CSD has outperformed the S&P 500 by almost twofold in 2013. Spinoffs provide a unique opportunity for a company to start fresh. The new company’s executives are no longer under the directives of the mother ship and often experience a sense of optimistic liberation.
Second, regional players are more agile than the massive Goliaths in the market. The regional and specialized players can quickly respond to customers’ needs, slipping in as the replacement service provider. The larger company GE Oil & Gas staff may find themselves encumbered with checking their every move for compliance with the new corporate handbook.
We have worked with spinoffs and specialized service companies to achieve outstanding results by focusing on the following five core principles:
A new spinoff or specialized service provider aiming for success will simplify business practices and eliminate waste. Targets for simplification include back office administrative tasks. Simplifying budgeting and reporting is usually the first target to reduce any unnecessary administrative burden on operations.
In practice: We helped a large oilfield services spinoff eliminate more than 100,000 hours per year by overhauling the legacy budgeting process. The fallout was an elimination of more than 100 reports and spreadsheets containing mounds of CYA data.
In the immediate term, the spinoff organization typically has no choice but to use the former parent’s ERP environment under a transition service agreement (TSA). Moreover, the specialized services company systems are fit for operational purposes instead of fit for the often bureaucratic parent. One of the first priorities is to shed this expense as quickly as possible by moving to a fit-for-purpose ERP.
In practice: A mid-sized oil and gas spinoff was under a $10 million per year TSA agreement for ERP and systems support. When the spinoff implemented an ERP that closely reflected their business needs, the cost was less than half of the annual TSA support fees. The new ERP annual administrative support cost was less than 10% of the TSA annual fees. The return was realized in less than one year.
The newly appointed spinoff executive team is positioned to handpick management. Typically, the former parent company will attempt to slough off dead weight and move poor performers into the spinoff organization. Do not allow this to happen.
The specialized services companies have an opportunity to handpick talent from the newly merged Goliath. Highly talented engineers and sales professionals often find the new larger bureaucracy is not for them.
In practice: The shrewd spinoff executive team from a newly formed chemical company resisted the pressure. The spinoff CEO and CFO halted the random assignment of employees and began an intentional selection process for management positions. The spinoff was marketed as an avenue for people to be a part of something new and exciting. Positioned properly, the best and brightest can be attracted to the spinoff.
GE Oil & Gas has an opportunity to gain global market share, but the new company must go through some level of realignment of people, processes, and technology to remain lean and nimble.
Combining two organizations always involves the integration of two different organizational structures. The priority is setting the structure of operating units.
In practice: A global oil and gas drilling company merger allowed our client to examine the differing corporate structures and pick the best of both. The company completely reorganized global operations. Following the change in operations, the finance, human resources, and information technology functions followed suit. A 30% reduction in general and administrative costs was achieved, and the company outperformed analysts’ profitability expectations.
A merger creates an opportunity to streamline and simplify business processes. Rationalizing business processes should start at the corporate office.
In practice: We worked with one of the largest energy company acquisitions and helped the company completely overhaul the planning, forecasting, and reporting processes. The new process cut thousands of hours out of the planning process and reduced the mountains of reports by 50%. Operations could focus on execution instead of never-ending corporate planning meetings.
For GE Oil & Gas, regional specialized players, and the spinoff companies that result, the months to come will be an interesting time. Make the most of the coming opportunities.
