3 Ways a Shared Services Model Can Maximize Private Equity Firms’ Investments in OFS Portfolio Companies

By Lynell Rogeri and Dean Price

Current Oil Market Demands

“The upward trend in crude oil prices is stimulating demand in the oilfield services sector,” explains Opportune Partner and Oilfield Services (OFS) Sector Lead Dean Price. “More specifically, rising oil prices have accelerated drilling activity in the upstream sector, leading to higher demand for drilling and completions services. As demand for services is increasing, M&A activity is increasing as well.”

Many more oil and gas industry experts agree. Last week, Forbes energy contributor Claire Poole proclaimed that “the focus of M&A activity seems to be shifting to the oilfield services sector.” So, how can private equity (PE) firms capitalize on their investments in these OFS portfolio companies?

The Value of Shared Services for Private Equity Oilfield Services

Based on research by Opportune’s oil and gas industry experts, a new whitepaper reveals why a shared services model for private equity (PE) firms could deliver a standard, best practice set of core services across similar OFS portfolio companies. The innovative model provides the PE firm greater control over operations and consistent performance management.

 

private equity firm shared services model for portfolio companies

 

Energy companies are always challenged to expand and contract with market conditions. The dynamics for energy companies have remained challenged with the drop in commodity pricing which has created a material need to reduce costs and pursue new operating models. One strategy that offers significant potential is for private equity firms to create and implement a shared services center which can deliver a standard, best practice set of core services across all portfolio companies.  The center will benefit from economies of scale and provide low-cost services which can leverage best practices, technologies, and capabilities while meeting each of the companies’ needs. In addition to a significant reduction in costs, this model allows the individual portfolio companies to focus their time and attention on adapting products, services, and capabilities of the rapidly changing market and position them to compete profitably in their respective markets.

Shared services provide economies of scale and lower service costs by leveraging best practices, technologies and capabilities while meeting business needs. In addition to a significant reduction in costs, a shared services model would allow individual OFS companies to focus their time and attention on adapting products, services and capabilities in the rapidly changing market and position them to compete profitably in their respective markets.

Business Case

The value of shared services is both economic and strategic, providing:

  • 20-40% cost reduction, depending on the breadth of the shared services
  • 30-40% reduction in capital investment of technology and infrastructure
  • Scalability during growth periods as additional portfolio companies are acquired with relatively low incremental costs

Energy companies are always challenged to expand and contract with market conditions. The dynamics for energy companies have remained challenged with the drop in commodity pricing which has created a material need to reduce costs and pursue new operating models. One strategy that offers significant potential is for private equity firms to create and implement a shared services center which can deliver a standard, best practice set of core services across all portfolio companies.  The center will benefit from economies of scale and provide low-cost services which can leverage best practices, technologies, and capabilities while meeting each of the companies’ needs. In addition to a significant reduction in costs, this model allows the individual portfolio companies to focus their time and attention on adapting products, services, and capabilities of the rapidly changing market and position them to compete profitably in their respective markets.

Shared services are based on the concept of “sharing” common tasks, activities and leading edge technology across different organizations. The goals are to:

  • Rationalize costs
  • Consolidate management requirements and headcount
  • Eliminate redundant technology and processes
  • Reduce capital expenditures and ongoing maintenance costs on new technology
  • Set benchmark service costs across companies
  • Provide transparency of service costs to manage needs and affordability
  • Achieve economies of scale

OPERATING BENEFITS

While cost cutting may be the initial impetus, the potential benefits include:

  • Greater control over multiple operations
  • Increased level of services
  • Integrated and consistent performance management
  • Deeper insight into pending revenues and expenses
  • Enable the private equity firm to retain the process knowledge and intellectual property
  • Minimize risk

OPPORTUNE ROLE

  • Evaluate
    • Define the business and operating model
    • Select the services and the associated business case
    • Define the cost allocation method
    • Price the services for each company
  • Design
    • Organization design and job descriptions
    • Business process and capability models
    • Performance management; metrics, management processes and tools
    • Software selection
    • Service level agreements defined
  • Implementation
    • Temporary staffing
    • Interim or long-term management
    • Controls definition and review
    • Transition management for new portfolio companies
    • Technology environment setup (infrastructure or hosted)
    • System implementation
    • Data conversion
    • Report definition and generation

COMMON FUNCTIONS

The shared services model creates a common operating platform across portfolio companies to service similar business requirements in a centralized organization while maintaining the unique requirements within each company. The more transactional processes are well suited for shared services, while the more strategic processes typically remain within each business.

There is a continuum of possible functions that are appropriate for the shared services organization. Organizations often begin with a single function like accounting or finance, and typically evolve to include tax, procurement, human resource and information technology.