Many digital companies seem trapped in a never-ending cycle of pilot projects and trials with oil and gas companies that never progress beyond the pilot stage to full deployment. And that’s a shame for both.
It never fails. I’m on a call with some digital entrepreneur proudly boasting their technology and the problems that it solves, and the conversation turns to where it’s installed. “We have 90 customers”, they claim, proof that their digital innovation has merit and is solving a real world problem. So I dig a little deeper and learn that indeed there are 90 customers, but all are pilot projects. None has progressed beyond a small trial in a piece of the business, and plans to get beyond the pilot stage are vague and unconvincing.
Why is this happening, and what can be done about it?
The Role of Pilots and Trials
Pilots and field trials are really valuable for digital technology start ups. Developers use precious on-the-ground experience to fine-tune their solutions under real world conditions, identify key additional features that customers really want, and sharpen the fit of the solutions to the industry. Pilots also reveal shortcomings in scalability, support, deployment, and value that start ups really need to solve if they are to progress. Having a number of pilot sites is a badge of credibility with potential new customers, investors, and funding agencies.
Pilots and trials are also useful for oil and gas companies. Customers gain real experience with the latest technologies, and then make credible claims to investors and boards that their companies are progressing with the times. Pilots often surface deeper insights about customers, reservoirs, processing equipment and business processes, which are valuable in themselves. And pilots can reveal just how backward and regressive some business practices in oil and gas really are.
The main construct of a pilot project is contingency. If the technology or solution achieves specified milestones or benefits, then in theory the company will allocate funds to take the technology from pilot stage to a bigger pilot or to enterprise roll out. This model works well enough with some kinds of lab bench chemistry technologies, and explains why an oil and gas buyer is quick to agreeto a pilot or trial. The customer knows that there is an exit ramp if milestones are not met or benefits fail to materialize.
Many of the technology accelerators that now dot the office landscape in places like Calgary are based on providing the contacts, support and tools that a start up needs to land a pilot with a customer. Pilots are a necessary first step into the commercial world of creating and nurturing a viable product and business.
But this model hides certain problems.
The Economics of Pilot Projects
Your typical local buyer in a large oil and gas company has no authority make enterprise purchases. He (and yes, they’re mostly men), is even unlikely to have authority to broaden the pilot to other assets or adjacent opportunity areas. His spending authority is too low. He needs to secure hard-to-obtain approvals from some corporate head of engineering, or business unit manager. He needs to convince others in his company that his pilot has enterprise merit, a task that his performance measures discourage him from doing, and for which he lacks the necessary support. He has no upside in swimming outside his lane.
Your typical digital start up does not leverage the pilot properly to create the conditions for “land and expand”. They don’t clearly explain the merits to the initial customer of a larger presence in terms of better pricing or better performance. They leave unanswered the possibility that, in an enterprise relationship, they will abandon their initial pilot customer. In their eagerness to get a pilot going, start ups don’t clearly set out the journey map that delivers increasing benefits in exchange for a larger presence. Most don’t bother to measure the baseline into which their solution is to be deployed, and don’t link the benefits captured back to their solution.
Pilot projects are prone to bookkeeping games. I have worked on several supply chain transformation projects in the upstream, midstream and downstream, where we were taking cost out of the business. As soon as we secured better pricing or volume discounts, which created a cost benefit in a specific line of business, the line managers quickly reallocated those savings towards other budget line items. A services contract that we renegotiated in the opex budget morphed into a new labour contract in the HR budget, which was beyond our reach. Senior executives keen to see benefits were baffled at the claims of cost savings which simply didn’t appear on the bottom line.
Perpetual pilots are bad for both parties. Technology start ups lack the resources to properly support and sustain dozens of pilot sites, which typically require more intensive care and attention. Some are even burning cash in their drive to exploit Moore’s Lawand Metcalfe’s Law. The more pilots underway, the more likely that the technology start up is spreading itself ever more thinly over its growing base. Pilots don’t count for much with technology investors, who are seeking the annual recurring revenue (ARR) that comes from committed enterprise customers.
Customers are not well served by the pilot that never ends. By not moving to enterprise deployment with its steady cash flow, customers create a risk that the technology company will not survive. Customers fail to capture all the benefits they’re entitled to, since many technologies are really platforms whose benefits grow with scale (again, exploiting the lessons from Uncle Moore and Aunt Metcalfe). And the message that perpetual pilots communicate internally are toxic to the business.
Getting Out of Pilot Jail
To expect the digital start up to solve this problem on their own is a doomed strategy, as I set out in an earlier article on why it’s not the job of the tech start up to drive change at their customers.
As I see it, there needs to be some changes on both sides of this relationship for the technology company and the oil and gas customer to succeed. Digital technology companies need to recognise the limitations of their customers to drive enterprise purchases, and customers need to acknowledge the risks they face by letting pilot projects run to infinity and beyond.
FOR OIL AND GAS COMPANIES
- Shareholders should be asking Boards to account for the disposition of shareholder capital that is allocated to pilots. Certainly some pilot initiatives are sensitive and should not be in the public domain, but many digital trials do not fall into this category.
- Boards should take an interest in what innovations are happening in the business, and work with management to properly fundthe pilots. It makes no sense to allocate shareholder capital to pilot projects and then let them run as pilots forever. Boards should press management for updates on pilot projects.
- Executives should ask for a regular accounting of the various pilot projects and trials that are underway, regardless of scale. That accounting should include the nature of the benefits at stake, how long the pilot has been running, the end game, and lessons learned. Executives should dial back their tolerance of pilots that do not progress, and should withhold funding if a pilot project or line manager does not have an enterprise plan.
- Companies should consider taking a stake in key technologies or solutions to drive heightened attention on the pilot. Nothing creates interest more than an ownership stake.
- Finally, managers should make time in the schedule to share the state of pilots across the company to signal that change projects are encouraged and rewarded.
FOR DIGITAL TECHNOLOGY COMPANIES
Tech firms need to build into their sales efforts more clarity about transitioning out of pilot mode.
- Take the time at the outset of a pilot to measure the baseline of the benefits at stake. The customer or an independent party (a consultant perhaps) should do this so that the bias inherent in measurement is reduced. The baseline should consider indirect as well as direct productivity gains, cost reductions, asset utilization and throughput, and volume growth.
- Make very clear the performance targets that the pilot is intended to achieve, building on the baseline. That could be based on percentage gains or absolutes, quantitative or qualitative.
- Set out the conditions under which the pilot will progress from stand alone to either a larger pilot, second pilot site or enterprise roll out. Make clear what you will do to help the manager through the transition.
- Create value for the initial customer that is only available if the pilot grows. This could be additional features that are available through fleet learning, or new pricing, or both.
- Specify an end date to the pilot. Make it sufficiently distant that the company has enough time to learn to use the solution and embed it into their ways of working. Do not hesitate to terminate the pilot at the end of the pilot schedule.
- Support the customer in creating the growth pathway. Oil and gas companies run a steady series of internal knowledge-sharing and update sessions, which is how they drive change from the bottom up (managers copy good ideas picked up in these sessions). Help your customer get on the agenda, build their slides for them, and coach them on the messages.
It is in the best interests of everyone involved in a pilot to see it transition from experiment to business as usual, but without some changes, we will continue to see a steady stream of never-ending pilots.
Check out my new book, ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, available on Amazon and other on-line bookshops.