A main difference between current economic growth and past growth periods is the slow growth of inflation, and contractors have gotten used to not factoring inflation into their bids. But the drilling industry - which has not been helped by technology applications to the extent of the general economy - is beginning to experience some inflation again, which can lead to decreasing profits.
Labor ConcernsThe tight labor market has contractors searching for effective ways to hire and retain new talent. Contractors are finding that today's employees, particularly at the project management and field supervisory levels, are looking beyond the paycheck to other factors when choosing employers. Quality of life, opportunity for personal and professional development, satisfaction in one's work, a "voice" in the company, time for family and outside interests are more important to workers today than ever before. Therefore, contractors are moving towards more customized compensation programs (within legal limits) such as job sharing, flex-time and incentive vacations. Flexible scheduling increasingly is becoming a major incentive in hiring, motivating and keeping employees - especially younger employees. Expect to see much more flexibility in all aspects of hiring, compensation and time-off policies, as well as equity and gain-sharing/profit-sharing programs in the future.
Despite the increased importance of non-compensation factors, wages remain an essential problem for contractors, who simply don't pay enough to adequately compete for labor with other industries. Contractors cannot afford to squeeze their profit margins any further, so they only way they can provide high wages and better benefits is to increase productivity. Contractors who focus on the details of increasing productivity create huge competitive advantages. Incentive compensation can be a part of a successful productivity improvement process.
The recent trend of people leaving the industry at younger ages than ever before is adding to contractors' labor difficulties. The solution is to work more deliberately with young employees' skills and provide them with incentives to stay in the industry. Innovative contractors are emphasizing employee development, using both informal and formal training programs to foster employee growth. In most cases, larger firms have the advantage in this area, especially those that are able to keep up with the technological challenges. Contractors will need to be more in tune with their field employees' needs or continue to face high turnover rates and loss of labor to other industries.
Training IssuesTraining is becoming a hiring incentive, as well as a necessary activity to keep up with technology changes and improve skills. But even as more contractors recognize the need for training, they continue to have difficulties finding the time to train their teams. Training issues will remain in the forefront as contractors seek creative training delivery methods in all areas, ranging from field productivity and safety skills to project planning and client-relationship programs. Ongoing and well-defined training and educational opportunities supporting employees' career development are vital to maintaining a motivated, productive and competitive workforce.
Training also is critical as contractors grow -whether through acquisitions or internally - because veteran managers must take on new tasks and younger managers need new skills commensurate with their expanding responsibilities.
An increasing number of workers' first language isn't English, making it more difficult for them to understand safety procedures and instructions. This dangerous situation can be remedied by training of those employees and others who are expected to work with them. Beyond the obvious humanitarian benefits of making a safe work environment, promoting safe work practices is good for business. Driving down Workman's Compensation rates can save contractors a substantial amount of money and provide a real differentiator for marketing to future clients.
The Computer AgeThere is a continual need for contractors to improve efficiencies using the basic business software products for word processing, e-mail, spreadsheets, databases and presentation tools.
The growing use of sophisticated project management software to control project costs and improve reporting and planning systems is becoming a critical issue. To compound this issue, owners are demanding that contracts track projects using a compatible platform to give the owners real-time access to project information. Proactive contractors have implemented project-specific Web sites to share information among all members of the project team. This tool not only saves time and money, it anticipates and reduces surprises on projects. Many firms now have information-technology support divisions, and the costs of maintaining and upgrading hardware, software and networks should escalate even as contractors realize economies of scale as they grow, either internally or by mergers and acquisitions. Expect to see technological proficiency as a significant pre-qualification issue. Smaller contractors will be shut out of some types of work as clients demand information requiring high-priced upgrades to software and systems. The small contractor simply won't be able to afford the costs of some new software. Application service providers (ASPs) will have an opportunity to provide affordable alternatives to smaller contractors.
Field reporting and information retrieval from hand-held computers, often called personal digital assistants (PDAs), will be a reality for many firms within two to three years. The pocket-sized PDA rapidly will evolve into an oversized, all-weather version that clips to the belt and is designed to operate in a wireless environment on the jobsite. The PDAs may be voice-based or pen-based. Immediate access to current, real-time, shared information - with integrated communications capabilities for team involvement - is the goal, and leading-edge companies should be using PDAs within the next two to three years.
Some contractors are concerned that owners are putting bids on the Internet and sharing the results with everyone in the bidding process. This practice amounts to a reverse auction that brings down the price, with the lowest bidder getting the job. Some contractors fear this process will preclude them from offering value engineering to the owner.
Contractors tentatively are adopting technology. Often, computers are installed but not networked, and enterprise software solutions (fully integrated programs for most, if not all, business functionality) are affordable for only very large contractors. That situation will change rapidly as software available online through ASPs begins to focus on this industry, putting substantially more sophisticated and affordable software products within the reach of small- and medium-sized companies in the near future.
Technology often is taking the place of a craftworker's years of experience in the field, for better of for worse. Training requirements for effectively and efficiently using complex equipment and machinery are putting additional strains on workers and companies. With the increasingly rapid pace of technological change, these strains will continue. Productivity increases brought about by the introduction of new technologies will be somewhat eroded by the function of this transitional phase.
Sales and MarketingWith the decade-long market expansion in the industry, it might be assumed that marketing and selling have taken a backseat to other management tools. Not so. Increasing margins through value-based selling and image improvement in targeted markets is an active pursuit of many companies. Domination of local markets still requires a low-cost strategy, but building the bottom line means demonstrating more value to customers than that of the competitor. Good marketing programs and strong selling skills are essential to making the case for value.
Many contractors are discovering the real power of clearly defining and communicating a market position. Going well beyond the directory-listing approach, they are creating company identities and focusing services on specific customer needs. At all levels, contractors are taking a more aggressive client-relationship approach, particularly in the area of keeping existing clients. The cost of doing repeat business with a prior client is less than the cost of doing business with a new client.
Many contractors and managers are realizing the profitability limitation of negotiating fees with owners who haven't embraced a win-win concept. Some contractors are moving more of their business back to lump-sum contracting where the risk allows for more profit upside, and downside.
Innovative owners have recognized the mutual benefits of working with a selected group of profitable contractors. Strategic alliances with open communication and collaboration between owners and contractors can be highly successful. However, the development of these strategic alliances is very difficult, and many well-intentioned initiatives have failed.
What do the country's most profitable drilling contractors have in common? Active, continuous productivity improvement programs. Key elements of their programs include field supervision and craftworker involvement. Executive management's active support is essential, but productivity isn't built on top-down, work-harder initiatives. Material logistics, project scheduling and communications, "daily huddles," and team-based problem solving are all part of their secrets. "Total quality management" as a label may have come and gone, but continuous productivity improvement remains the key to winning performance in a competitive market.
Proactive specialty contractors are picking customers rather than always letting customer pick them. This strategy may not only improve pricing, but long-term relationships, as well. It allows contractors to perform at higher efficiency levels, value their service offerings and generate a reasonable level of return on investment. These alliances create win-win situations for specialty contractors and their clients.