Accounting and administration don't have to be time thieves for oil and gas company managers.

Every family should have a trusted financial butler to gather income and take care of bills. That would leave the breadwinners with more time to devote to family matters.
In the same way, oil and gas companies can outsource accounting and administrative duties they often consider a necessary evil and devote more executive time and energy to finding, producing and selling oil and gas.
The outsourcing of those back-office functions is more than the elimination of a hassle factor. In many cases it can save a company substantial sums of money and assure management that the latest expertise, hardware and software are handling its company's administrative needs.
"It's often a 15% to 55% savings, depending on the client's current situation," said Tommy Eubanks, partner in charge of PricewaterhouseCoopers' Energy Centre
of Excellence.
Eubanks said the arrangement also allows companies to concentrate on their strategic positions and outsource the tactical work.
He added companies like the idea of outsourcing for three basic reasons:
• strategic - they can concentrate on finding oil and gas;
• tactical - other companies can do the job more cost-effectively with high quality; and
• management - they avoid management and development of accounting and information technology professionals and can take advantage of scale.
"We can generally save 25% to 35% in costs vs. our clients' in-house operations. Our labor costs generally are about two-thirds of our clients', and our overhead is low," said Jeff Myers, president of Associated Resources Inc. in Houston, Texas. Cost is the biggest advantage, he added. Accountability and responsibility hold the next two places on the priority list.
"In some instances, the driver is not necessarily cost savings," added Trip Ray, chief executive officer of Novistar. Cost may be third or fourth on the list of advantages, he said. Many of the costs are the same, but the client gets a more advanced back-office platform and fewer administrative concerns. "We ask clients to look 5 years out and see flat costs or a lower level of acceleration."
Size
Although the size of the company that outsources its administrative work doesn't seem to matter, size may determine the company that handles the outsourced chores.
Very small mom-and-pop companies might do their own work or they might take their books to a local accountant. At the other end of the scale, BP started outsourcing in the mid-1990s. In between, larger midsize companies such as Kerr-McGee Corp. are showing more interest, said Eubanks.
His clients include some operations of BP plc, Kerr-McGee, Trade Ranger and American Fibers & Yarns with others in various stages of negotiation.
International operations may make a difference. PricewaterhouseCoopers set up its first center for BP in Bogota, Colombia, with others in Rotterdam, the Netherlands, and Lisbon, Portugal.
"In E&P our target is mid- to upper-level companies," he said.
Novistar emerged as a separate company through Torch Energy Advisors' use of Oracle's upstream energy software to provide back-office services for clients such as Nuevo and Bellwether. Novistar then acquired Oracle Energy Upstream from Oracle Corp. The purchase brought in 25 Oracle clients, including parts of Shell, Phillips, Unocal, Occidental Petroleum, Conoco and Kerr-McGee. Novistar later added Newfield Energy and has increased annual revenues from US $15 million to $28 million, Ray said.
Novistar also owns Petroleum Financial Inc., which specializes in smaller companies.
Midsize and smaller companies tend to adopt outsourcing more quickly, Ray said, because they have to do it to survive. An outsourcing company can spread its staff among a number of companies without compromising the privacy of any company.
Three large independent companies make up more than half of the business of Associated Resources, but it also has several smaller companies that employ 10 to 30 people. And it has some business operations of major oil companies.
In short, outsourcing arrangements are available for companies, or portions of companies, of any size. But producers considering outsourcing may want to look at the services offered.
Services
PricewaterhouseCoopers focuses on finance and accounting, human resources, applications support, information technology, procurement and real-estate management, but the scope of services varies according to the client's wishes.
PricewaterhouseCoopers hires all or part of the people who made up the client company's back office. That accomplishes two goals. The accounting company instantly acquires the knowledge and working relationships of the client company, and it places those employees on the front lines of the business instead of keeping them in their back-office roles.
"The people know the client's business. We help them catch up with new technology and client service," said John Rutter, lead account manager with PricewaterhouseCoopers.
"As an external provider, there's a behavioral change. Now they're in the front office of PricewaterhouseCoopers instead of the back office of an oil company," Eubanks added. That creates different incentives and measures of customer satisfaction.
The outsourcing company puts its own policies and work practices into place. The company can install a whole new financial system, if the client wants it. It can install and manage new hardware.
From the PricewaterhouseCoopers point of view, the optimal setup would put everyone on the same systems and processes. The same software and processes offer opportunities for more value and more integration among companies where that's appropriate. "One way we can help is by sharing costs across companies, like access to trade exchanges or other outside service providers. All our clients have financial and procurements systems that have to interact," Eubanks said.
The company can work with accounts payable, accounts receivable, joint interest billing, capital asset tracking and tax and regulatory reporting. It also can help with financial analysis and trending, and support gas marketing. And it can handle all the information technology applications that support those operations.
"We're looking at ways to work synergies with BP, Kerr-McGee and with companies such as Nortel outside the energy industry. One example of that is contact center capabilities," he added.
It's easier to talk about what Associated Resources doesn't do than what it does, Myers said. Clients can make selections ranging from traditional accounting functions to asset management and engineering reporting.
It can handle joint-interest accounting, income and expenses per well, split stream accounting and most other oilpatch tasks.
"We can put together the whole package or put together whatever service they want," he said. For example, the company can put a company's accounting processes on the Associated Resources system, or it can use the client's system and access it through the Internet.
It can take reports from pumpers, schedule workovers, contract drilling rigs and market gas.
The advantage an outsourcing company offers, he said, is that it spreads its costs among a lot of companies. For example, Myers said, he just upgraded one software package at a cost of $70,000. That meant client companies didn't have to pay for individual copies of that upgrade.
The client also has a say in the billing. The company will bill by the hour, by the well or by the job.
At Novistar, revenue settlement, royalty administration, production volume management, lease and land administration, division orders, marketing accountings, cost management, joint venture accounting and authorities for expenditure all can be integrated with Oracle financial packages, Ray said. The system also can be used with SAP, PeopleSoft and legacy software.
It also offers a lot of options. In a hosting environment, for example, the client company can keep its employees but outsource the maintenance of equipment and software. It also can sell the client the software. Or Novistar can handle the whole package. "Our salespeople can tailor the system to the clients' needs," he added.
The system works best when the customer adopts the Novistar footprint, including software and workflows.
It also can act as a connection point for e-procurement work with companies such as Wellogix and Trade Ranger.
Outsourcing shouldn't be a difficult decision. Producers outsource drilling, logging, fracturing and a host of other activities. Today, it's a rare company that does its own payroll work.
Still, the move by oil and gas companies to outsource back-office activities hasn't occurred as quickly as analysts predicted.
Reluctance
"There's still a lot of secrecy in oil and gas," said Myers. But trade shows such as the North America Prospect Expo are changing that. A decade ago, a company wouldn't think of hanging its prospects on the back of booth and inviting the world in to take a look.
Another obstacle toward conversion, he said, is, "All companies think they're unique, totally different from everyone else. They all think their way of doing things is innately superior to all the others. It isn't so."
Operators are concerned. Ray added, "They believe that anytime they outsource, they lose control. They're worried about quality."
That shouldn't be a concern, he said. Novistar signs a service-level agreement. "If my service goes down, it costs money, and I'm accountable to the customer," he said.
Another concern is political. It's not easy to tell long-term employees that they no longer work at the company. It's hard to ship employees off to an outsource company. That should be a strong concern. Typically, 60% to 100% of the client's employees get job offers from the outsourcing company.
In some cases, a company may actually gain control by outsourcing back-office functions, Eubanks said.
"With all the mergers and acquisitions, with companies being bought and sold, back-office costs are uncertain," he said. An outsourcing company measures those costs precisely so it can price its services to customers.
"There's an advantage in outsourcing, because we must track costs by unit, and we can, therefore, easily variablize what otherwise is a fixed administrative cost.
Timing
Typically, some event in a company's activities triggers a move to outsourced back-office functions. That event might be a merger or acquisition that forces companies to try and make different back-office systems compatible. It might be a spinoff that leaves the orphaned company without its own back-office system. It might also be a startup situation in which the new company has the option of farming out the back-office work.
"Startup companies don't want to start their own back-office operations," said PricewaterhouseCoopers' Rutter.
When BP and Amoco merged, it was a natural process to bring both operations under the PricewaterhouseCoopers umbrella, Eubanks added. It made even more sense when Arco and Vastar joined the company. "BP came in shortly after Amoco. Things were changing anyway, and we could do the back-office integration for Arco," he said.
In a period rife with changing ownership of companies and properties in which markets throw their capital at low-cost producers in any oil and gas price range, an operating company should consider outsourcing noncore activities, including the back office, to concentrate on its core operations.

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