Management: The Evolution of Outsourcing and Insourcing in Oil and Gas Accounting

Abstract

With fluctuating oil prices, the oil and gas industry is constantly looking for ways to reduce costs. Several companies outsourced their accounting operations in the mid-1990s, but many are now rethinking their decisions to take this plunge. Many companies have evolved their thinking about back-office outsourcing. In the past, running unique, efficient back-office functions, such as accounting, human resources, or customer care, was considered to be a competitive advantage. However, most companies sustained large, costly departments that developed and maintained in-house proprietary systems. These systems were typically inefficient, comprising loosely connected processes. The introduction of enterprise resource planning (ERP) systems in the early 1990s made an efficient back-office operation a prerequisite. By design, ERP systems impose common processes and link functions that once may have been separated. With common processes and data in place, many set up centralized shared services to gain economies of scale. Companies were able to focus more on front-office operations, where competitive advantage is truly achieved. Subsequently, several firms took the next step by outsourcing their back-office operations to third-party companies. These outsourcers handled similar back-office operations across many companies, presumably achieving even greater synergies and cost savings for their customers. Similar trends were seen in the US oil and gas industry, particularly in oil and gas production revenue accounting (PRA). As in other industries, oil and gas companies also once considered an internal, streamlined accounting operation as a competitive advantage. Most oil and gas companies developed and maintained inefficient in-house processes and systems to handle the vast array of functions that make up PRA. As oil and gas companies searched for ways to reduce costs in the 1990s—to counter fluctuating oil and gas prices—back-office accounting was considered to be "low-hanging fruit." Many also found that ERP systems improved accounting data accuracy and decision making and reduced costs. Production and revenue activities within the US oil and gas industry are complex and can vary significantly, making synergies more difficult to achieve. Production and revenue functions include land management, contracts, pricing, and revenue distribution to interest and royalty owners. In this environment, the skill sets needed to understand and navigate through regulations and laws are unique, and often differ significantly based on geography. ERP systems were designed to handle these complex requirements (Fig. 1).