Oil industry and IT: lessons to be learned
Hydrocarbon Processing
August 2002 Wendy 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:
 | | 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. |
| | Too many competitors and excess capacity are pursuing a share of a
smaller pie. |
| | Optimism still abounds, with venture capitalists still funding
companies. |
| | Recent departures of tech industry CEOs are still a minority rather
than a majority. |
| | Employment in this sector outstrips earnings expectations. |
| | Industry 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:
| | 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. |
| | More 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. |
| | Oil 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. |
| | In 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. |
| | Oil 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. |
| | It 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.
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