5 minute read 2 Jun 2020
Pumpjack sunrise

How outsourcing can help oil and gas navigate price volatility

By Jay Fenlaw

EY US-West Tax and Finance Operations Leader

Partner with diverse industry sector experience. Focused on collaborating with colleagues across specialties and geographies to bring all of the global EY organization to our clients.

5 minute read 2 Jun 2020

The benefits of outsourcing are magnified when companies have to offload non-core functions to focus on strategy and survival.

The oil and gas industry faces economic challenges stemming from over-supply and the fallout from recent price wars. Oil prices have fallen by more than two-thirds since the beginning of 2020, a shock that threatens the viability of many oil and gas companies.

The traditional benefits of outsourcing are magnified in times like these. For many oil and gas companies, these dislocations have accelerated the need to scrutinize tax and finance functions to determine whether current state operating models are sufficient for survival and for the future. The path forward is likely to include engaging an outsourcing or managed services provider to help operate these functions, as well as some degree of change around people, process and technology to both weather this storm and prepare for tomorrow. Specifically, there are three areas in which outsourcing (or co-sourcing) tax and finance can benefit your company today:

1. Scalability and utilization

Even in normal times, oil and gas is an industry with highly variable demand. Engaging a third-party provider to operate all or parts of the tax and finance function can be uniquely useful, letting you quickly scale tax and finance resources in relation to the demands of the market. This calibration can be far more optimal than the toggling between under-resourcing and over-resourcing that is so common in the industry.

During expansion (when a company goes after a new play in the field, for instance), the third-party provider can handle the wave of new tax and finance filings typically required. Conversely, during a contraction, you can throttle back on your use of the provider. If your tax and finance functions are fully in-house, you only have the blunt tool of downsizing or searching the talent market to adjust your outlays.

2. Talent optimization and management

Getting the highest value from every employee is crucial, especially in a fast-moving economic environment. But too often, the skill sets of staff aren’t aligned with the work they’re actually doing. If your tax and finance personnel are burdened by data collection and extraction, for instance, they are being sorely underutilized. To improve productivity, you must increase talent optimization.

The challenges of talent management itself are twofold. Oil and gas companies already report they are finding it difficult to attract talent with the digital skill sets that will be needed in the next decade. Capabilities around artificial intelligence, automation, data governance and analytics are becoming increasingly important and can deliver a competitive edge when leveraged wisely.

The second challenge involves retention. Talent tends to scatter when times get tough, and the geopolitical ups and downs for the oil and gas industry show no signs of slowing. It’s no time to be caught short-handed.

Outsourcing addresses both of these challenges, letting you build a talent mix that’s optimal for your operations. You can offload low-complexity work to avoid underutilization and fill talent and competency gaps around emerging technologies.

3. Pace of regulatory and technology change

In addition to the talent and scalability challenges discussed above, every industry faces two massive, fast-moving waves of change to manage around tax and finance functions: the regulatory landscape and technological advances. Oil and gas is no exception.

Legislative and regulatory change continues to alter the tax and finance landscape year after year. Especially during this economic environment, both global and US policies have the potential to significantly impact oil and gas companies’ tax and financial reporting obligations.

Another example, the Organisation for Economic Co-operation and Development’s base erosion and profit shifting program, by itself, is the largest set of changes to the global tax system in a century. Issues around digital taxation and the increasing global interconnectedness of business are also at play. Like never before, compliance and reporting is a moving target.

In this environment, knowledge and competency gaps are rife, even as the demands on tax and finance are increasing. Today, many companies struggle to keep up in the midst of all this change.

And the risks of noncompliance are increasing, as tax administrators step up enforcement. Direct financial damage (fines, penalties) can be severe, but reputational consequences can be particularly damaging.

The pace of change is so fast that technology investments run the risk of being outdated before they deliver any value or competitive edge.

The wave of technology change is even larger, touching every corner of every industry. The pace of change is so fast that technology investments run the risk of being outdated before they deliver any value or competitive edge.

Engaging a third-party provider that is investing in technology and has the capabilities to monitor global regulatory change can be an excellent way to stay ahead of the curve, and can help you avoid falling behind and incurring unnecessary expense. Rather than building in-house competencies in technology that might become obsolete, you gain the surety of digital readiness for whatever’s next. Outsourced just-in-time subject-matter resources can reduce respective in-house costs.

  • Outsourcing and co-sourcing: what to consider

    If you are considering outsourcing or co-sourcing tax or finance functions, start first by delineating strategic decision-making functions. There are some things only you can do, and strategy is one of them.

    Conversely, there are some deeply technical tasks for which engaging a service provider is an easy call. These are the tasks you don’t have in-house and have no intention of bringing in-house.

    That leaves a large middle ground where outsourcing can make sense. Here are some key questions to ask yourself and issues to consider when shopping around:

    • Listen to how the outsourcer approaches the potential business. View a quick solution skeptically.
    • Does the outsourcer say, “Here’s what we’ll do for you?” or “How can we help you?” It’s the difference between one-way, one-size-fits-all delivery and a flexible, co-developed solution.
    • How well does the outsourcer know your industry? Do they understand your corporate culture and priorities?
    • Do you want the outsourcer inside your firewall? That decision will determine the scope of the engagement and many process details.

     

Conclusion

The decision to engage an outsource or managed services provider in your tax or finance functions does not occur in a vacuum. All of these options intertwine with cost reduction, value creation, risk management and more. Thus, it must be integrated with your overall strategy and operating model — the ways you do business today and the ways you want to do business tomorrow.

If your organization is struggling to transform, thinking differently about your people, processes and technology is crucial. Ultimately, it can reduce costs and help you focus resources on more strategic activities. But success requires buy-in from all stakeholders and commitment to a new way of doing business.

Summary

The benefits of outsourcing include efficient utilization of personnel and other resources, along with the surety of regulatory and digital readiness.

About this article

By Jay Fenlaw

EY US-West Tax and Finance Operations Leader

Partner with diverse industry sector experience. Focused on collaborating with colleagues across specialties and geographies to bring all of the global EY organization to our clients.