September 2015 Exclusive Story

Supply Chain Automation

Automated Solutions Simplify Acquisitions

By Richard D. Slack

DENVER–Shrewd oil and gas business owners are always seeking to expand their holdings, filling gaps in their operational portfolios and opening new market opportunities. No matter what the reason, strategic acquisitions require due diligence and a certainty that the company being acquired brings value without any hidden financial or performance issues.

A merger is like marriage; when two parties come together all the baggage accumulated over the years comes with them. In making a strategic acquisition, the acquiring company needs to know where all the potential problems lie before they ink the deal.

Mergers and acquisitions are the norm in the oil and gas industry, and lower oil prices since late 2014 are expected to drive increased M&A activity in the upstream and midstream sectors in 2016 as well-capitalized companies with strong balance sheets look for bargains during the market downturn. And as the saying goes, the same tide floats all boats. As market conditions continue to fluctuate, all oil and gas companies are going to be reviewing their organizations to tighten operations and generate improved returns.

A successful merger or acquisition requires more than just clean books and transparent financial records. In addition to scrutinizing assets, expenses, and profits and losses, acquiring companies must examine existing contracts, partnerships, products, operations, and more. Ultimately, strategic acquisitions are about generating additional profitability from the acquired company within a reasonable timeframe.

A survey conducted by McKinsey & Company shows that most executives expect acquisitions to provide increases in transaction value in three years or less. The survey also reveals that a primary reason for M&A is to expand into new strategic market areas and increase capabilities. That means gaining a detailed picture of the company’s operation before finalizing an acquisition deal. The potential risks as well as the rewards need to be well understood to make sure the balance sheet adds up in the acquiring company’s favor.

Depending on a company’s strategic objectives, it will be shopping for different elements that will generate more corporate value over time. However, most strategic acquisitions do not allow the buyers to cherry pick what they want. Typically, it is an “all or nothing” proposition in which the buyer has to take the bad with the good, and that means identifying and weeding out potential problems in advance.

Successful Integration

The mistake many companies make is being caught up in the “strike while it is hot” mentality, rushing to a deal without considering all the potential issues. The focus is on the immediate acquisition objective or desired asset so the tendency is to close fast and worry about the consequences later. Too often with this approach, the results are poor and very expensive. McKinsey & Company research also shows that in the rush to close, the due diligence on many deals fails to assess as much as 50 percent of the potential merger value.

A good strategic acquisition is about successful integration across the board. In addition to integrating business assets and personnel, business protocols and procedures also must be integrated to maximize operations with minimal disruption.

Automation helps drive smooth operations integration. Almost all business processes are automated these days, and any merger or acquisition requires both organizations to consolidate data and processes and choose a common platform and technological approach to support all aspects of daily operations.

Automation provides transparency and transparency improves automation. If a company can leverage technology and automated business processes as part of its due diligence, it gets greater visibility into operations. Reports generated by automated workflow and financial supply chain systems provide transparency into operations. The greater the transparency, the easier it is to identify potential issues that might arise following a strategic acquisition.

One of the best strategies to ensure a smooth strategic acquisition is to start with a fully automated supply chain. Properly automating both the physical and financial supply chain tracks all interactions and transactions to deliver the transparency needed to assess operations effectively. Starting with an automated system also makes it easier to integrate business processes. What most oil and gas companies discover, however, is that the physical and financial supply chains do not always work together.

Every organization wants to optimize its supply chain to control operating costs, reduce cost of goods, improve cycle times, and do more with less. When performing due diligence for a strategic acquisition, auditors may find unrealized financial assets caught in the physical supply chain and inefficiencies and missed opportunities that have been overlooked. If an organization maintains clean automated supply chain processes, especially financial supply chain processes, it gets more transparency into operations. The best strategy to ensure a smooth acquisition is to maintain best practices around supply chain automation.

Companies can use three recommended best practices to improve financial management of the supply chain to promote transparency and simplify integration with third parties:

  • Adhere to commonly used standards;
  • Use technology to promote efficiency and simplify integration; and
  • Analyze the available data to promote transparency and gain an ongoing, comprehensive financial picture.

Removing Barriers

Technology has been shown to improve supply chain efficiency, making it easier to manage and exchange operational data. For the financial supply chain especially, technology automates previously paperbound processes such as invoices, payments, joint interest billing, royalty data, and run tickets. The challenge is that intricate contract terms, taxation, regulations, and multiple file formats can make it difficult to share financial information.

Standardized financial formats solve this problem, streamlining financial transactions and making auditing much easier. However, the oil and gas industry has been slow to adopt standardized billing and payment practices, and proprietary systems that use different file formats and workflows get in the way of transparency and integration.

Implementing a common, online information exchange based on industry standards is one way to provide a vendor-neutral approach that is platform-agnostic. A good transaction exchange would be able to accept data in any file format and convert it to a commonly readable form. The exchange model enforces a common set of standards and protocols that benefit the entire financial supply chain by eliminating data inconsistencies. It also simplifies auditing as part of due diligence, and simplifies process integration following a successful merger.

Adopting PIDX as a transaction and electronic business standard, for example, creates value and simplifies process integration. PIDX standards are already being used by a large number of oil and gas companies around the world, so financial supply chain processes that adhere to PIDX suggest easier integration of financial processes as part of an acquisition, and less chance of a revenue disruption because of broken workflows or a need to change to accommodate partner transaction processes. Without standards, it will be harder for any two companies to reconcile financial and business data.

Embracing a vendor-neutral transaction strategy with the help of an information exchange and industry standards offers a number of advantages for any strategic acquisition, including simplifying auditing and due diligence, promoting operating transparency through automated transactions, ensuring ongoing revenues and simplifying process integration by using standards-based transaction processes, and maintaining profitable relationships with existing suppliers.

Efficiency And Transparency

Too many companies are still running their operations using spreadsheets to manage transactions, manual processes to issue invoices, and paper files to record important documents and information. During an acquisition, wading through these disjointed files is time consuming and prone to error. It also makes it more difficult to get an accurate overview of operations.

Digitizing the financial supply chain promotes efficiency and operational transparency. As business processes become more complex, technology makes it easier to stay current with operations and transactions, and to extract performance data as needed. Using technology to automate business processes also sets the stage for future growth. Using middleware to speed transactions and route information speeds procure-to-pay and saves time and money.

For M&A, the most important aspect of using automation to drive supply chain efficiencies is digitizing paper data to make it easier to audit and analyze. When digital information flows between buyers and sellers, the data are more visible, are delivered faster, and enable companies to communicate more efficiently. It also provides a digital “paper trail” that can be used for analysis. With digitized processes, it is much easier to extract data for a comprehensive overview of operations.

Finally, using technology to digitize the financial supply chain makes it easier to integrate disparate business processes. One of the greatest challenges in any merger is consolidating operations. It is always easier to port data from an existing digital system into another digital system.

The great thing about digital processes is that they give raw data for analysis. When assessing a company’s books, assets and operations as part of a potential acquisition, wading through spreadsheets and paper records slows down the process and creates too much room for error and doubt. When all the financial transactions are managed electronically, it is easier to run the numbers using analytic modeling and look for hidden patterns and potential problems.

For example, being able to process invoices and then export the data with a few mouse clicks makes it relatively simple to assess the accounts payable process, understand cash flow, and identify payment problems. Digital reporting enhances visibility and provides insight into issues such as cash flow and finance terms that pinpoint possible bottlenecks in partner contracts and payment processes.

Digitizing the financial supply chain also provides valuable insight into other factors that could impede future profits. The data stored electronically are going to be more complex as well as more comprehensive than paper records. Using carefully designed analytics can reveal patterns and trends that highlight flaws in existing processes and provide a more accurate picture of areas that can yield potential future profits.

So whether managers are looking to make strategic acquisitions or want to position their organizations to be acquired, it is always best to have the financial house in order from the outset. Automating business processes using standardized tools and transaction platforms not only promotes operational efficiency, but makes it easier to extract the data needed to assess operational performance. Automation enables transparency, smoothing the road to acquisition. Standards-based automation also simplifies integration of business processes once the acquisition is complete.

Oil and gas companies never know when an opportunity for a strategic acquisition or merger may present itself. They cannot wait until the last minute to clean up their transaction records. By starting to automate the financial supply chain now, companies will not only see immediate benefits in optimizing current operations, but will also be preparing for the future by having a comprehensive and clean set of books to share with potential partners.

This story is a complement to the print edition of The American Oil & Gas Reporter. For other great articles about exploration, drilling, completions and production, subscribe.