Cost-Cutting Won’t Save The Oil And Gas Industry. Customer Focus Will

Fluor, an engineering, procurement and construction company headquartered in Irving, recently announced that it will strategically restructure itself. The company’s playbook had all the buzzwords signaling cost-cutting — “capital reallocation,” “overhead reduction” and “disciplined project management.” But notably, Fluor’s restructuring announcement does not once mention the word customer.

A singular focus on cost-cutting is unlikely to fix the more fundamental problems with strategy that many companies in the oil and gas industry, particularly the engineering and construction players, seem to ignore. The CEOs and boards focus their strategy on technology and cost-cutting, taking their customers in the oil and gas industry for granted. They look inside their own company for cost-cutting avenues and erode customer value and revenue growth.

In an analysis this year of 626 business-to-business companies rated by 4,105 customers, we measured cost focus and customer focus for each company. Then we related cost and customer focus to sales and margins. On average, customer-focused companies had 31% higher sales and 21% higher gross margins than cost-focused companies.For the energy industry, we used the C-CUBESTM Customer Value Index (C-CVI) to provide a consistent and comparable metric of customer value. The C-CVI is based on over 6,000 customer evaluations of 110-plus major energy companies. A score of 100 on the C-CVI indicates a company that is delivering the highest level of customer value, and a score of zero indicates the lowest customer value. The average C-CVI for the energy sector is 76.3.

At 72.5, Fluor’s C-CIV is much lower than competitors Jacobs of Dallas (76.7) and KBR of Houston(75.7). As far as customers are concerned, Fluor is not satisfying their needs as well as its competitors. McDermott (74.5) and SNC-Lavalin (74.7) also score relatively lower.

When you compare the earnings performance of companies with their C-CVI, the pattern is clear. Fluor, the Houston company McDermott and SNC-Lavalin of Montreal, the three competitors with low C-CVI scores, have consistently missed earnings estimates, even as their leadership has espoused a strategy of cost-cutting and efficiency. With higher C-CVI, KBR and Jacobs have met or beat earnings estimates. This strong predictive association of customer value and stock returns is also borne out using a larger database of 600-plus business-to-business companies. CEOs and boards in the oil and gas industry need to realize and accept they are no exceptions.

In the long run, an inward-looking strategy based on cost-cutting will damage the companies unless their goal is to explore strategic options. A better way forward starts with customer value to focus the company’s strategy. The cost focus is a natural consequence of disciplining operations and initiatives to support critical customer-value drivers that build revenues. By itself, cost-cutting is not a strategy. Customers, after all, are the main sources of cash flow for any company, even in the oil and gas sector.

Vikas Mittal is the J. Hugh Liedtke Professor of Marketing at Rice University’s Jones Graduate School of Business. Shrihari Sridhar is the Joe Foster ’56 Chair in Business Leadership and Professor of Marketing at Texas A&M University’s Mays Business School.

Fluor responds:

“At Fluor, we have the best employees and clients in the industry and they, along with our shareholders, are front and center of everything that we do. Our ability to deliver great service for our clients depends first and foremost on the operational and financial strength of Fluor. With our strategic review behind us, we are acting with urgency, delivering on our promise to deliver value to clients and other stakeholders and focusing on achieving long-term success.”

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