« Back to Articles main page


 Oil industry and IT: lessons to be learned
Hydrocarbon Processing

August 2002

WeirauchWendy Weirauch, Managing Editor


The U.S. stock market has been hit by a triple whammy. The first shock was the abrupt and shocking meltdown in the technology sector. The second is global recession followed by the third blow, financial finagling at many firms – all reducing investor confidence in markets. According to Pradeep Anand, president and COO of PointCross, the tech boom is "remarkably similar to the oil boom and bust of the ’70s – ’80s.

"During the past two decades, enormous resources – time, money and people – have been absorbed by technology and ‘financial engineering’ segments of the global economy. The unraveling of these excesses have just begun. The oil industry, considered a laggard by technology aficionados, had similar days of ‘irrational exuberance’ and, perhaps, offers some insights into to what is in store in the technology market," says Anand. Here are highlights of his analysis and outlook for future developments.

In 1981, when oil prices were about $34 per barrel, many leading financial firms and economists predicted oil prices to hit $100 the following year. However, when the oil price peaked in September 1981, and dropped thereafter, the bottom began to fall out of the industry, in slow motion and in waves.

Since then, it has been a highly volatile ride of mini-booms and mini-busts. Market dynamics during this 30-yr whitewater-rapids-like ride give some idea about what future to expect for technology markets. Many telltale signs imply that we are still in the middle of the first wave of decline in technology markets:

bullet Like OPEC losing control over oil prices, the CIOs of technology firms have lost control over their purse strings, and their budgets have been slashed.
bulletToo many competitors and excess capacity are pursuing a share of a smaller pie.
bulletOptimism still abounds, with venture capitalists still funding companies.
bulletRecent departures of tech industry CEOs are still a minority rather than a majority.
bulletEmployment in this sector outstrips earnings expectations.
bulletIndustry consolidation games have yet to begin.

These turbulent times will be painful, but there will be winners in the end. The oil industry can provide lessons in winning under these conditions. The oil industry is rich in data, information and knowledge about booms and busts. Here are a few of innumerable parallels that can be drawn:

bullet In the oil industry, the motivation to absorb and use new technology grew exponentially after 1986, under many circumstances, yielding magnitude-scale improvements in industry economics. Foremost among these circumstances was that industry economics and expectations were stabilized by oil prices. Similarly, if the entire economy is under unyielding pressure, IT will not be absorbed and adopted at previously expected rates. Until the global economy turns around in a robust manner, the bottoming out and the recovery periods in technology sectors can be painfully long.
bulletMore importantly, in the oil industry, departure of the old guard created an environment for change. Industry sectors have a tendency to "ring out the old and ring in the new" when faced with major economic shocks, and the oil industry was no different.
bulletOil companies in the ’80s were similar to IT departments of today, selecting products and services from a smorgasbord, and then creating and managing unique solutions, and their delivery, with consultants. These processes were later discovered to be uneconomical, and were replaced by outsourcing execution to "one stop shop" service companies, improving the overall economics of the industry.
bulletIn the energy business, the financially perceptive big boys grew bigger through mergers and acquisitions. In the technology arena, the adage, "Them that has, gits!" will be eminently applicable, and cash-rich firms with strong balance sheets and customer franchises will be long-term winners.
bulletOil industry lessons show that three major dimensions will determine the survivability of technology firms. These are strength of customer franchise, position in industry (segment) value chain and sustainability of competitive edge. With technology half-lives being what they are, the value of the former two will far outstrip intellectual property as a sole source of sustainable competitive advantage.
bulletIt will be a battle of business designs (or models), and there will be three major survivors – vertically integrated full-service providers, low-cost producers and specialty firms that feed the value chain. Of course, there will be various flavors for different industry segments, but this polarization is inevitable and will create huge competitive barriers to entry. Consequently, successful garage-based startups will be less frequent.

The author of this outlook, Pradeep Anand, is president and COO of PointCross, a technology startup focused on the energy business. He can be reached at pradeep@seeta.com.

Top of page