Integrating field-based charges into the Procure-to-Pay process

Deborah Close, Digital Oilfield - Houston

Over the last several years, many E&P companies have taken a hard look at their internal processes in a quest to drive down costs and increase production. One process that has been scrutinized by a number of companies is what is often called the "Procure-to-Pay" process. Since most E&P companies spend millions of dollars a year just processing invoices, automating and improving this process promises significant returns. However, to date, most of the analysis of the Procure-to-Pay process has focused on the office-based invoice approval process, including the accounts payable process. The field-based approvals have largely been ignored by both operating companies and technology providers.

The value of integrating field-based processes

One might ask why the field-based processes have not been dealt with up to this point? What is the potential value of automating the field-based approval component of the Procure-to-Pay process? Does the value of potential improvements warrant the effort associated with addressing the field-based processes? Digital Oilfield has been working with several of its customers and suppliers to address these questions. The following is a summary of our findings.

We concluded that the value of potential process improvements is directly derived from electronically capturing operator and supplier approval status related to detailed commercial transaction information on a daily basis. Value can then be realized in several key areas:

• Verified contract compliance and time savings for both supplier and operating company
• Better cash management for operating companies and suppliers
• Ability for operating companies to negotiate early pay discounts

Verified contract compliance / time savings

Time savings is the value opportunity that is most often cited when discussing field-based charge approvals. There are two reasons why that is the case. First, the effort associated with managing this process is well understood to be tortuous and prone to problems; and, second, with current activity levels and staff shortages, any improvement initiative that could save time and free up petroleum professionals for higher value work tends to get attention.

To better understand the nature of the challenge, let’s review the documents involved in field-based charge approval. There are a number of different documents that are typically used to indicate that a service has been performed or goods have been received in the oilfield.

In many cases, field tickets are used. These documents specify the scope of the work performed or goods delivered, as well as the quantity. Paper copies of the appropriate field document are usually approved by the operating company field representative. These documents may or may not have prices for each line item. In other cases, most often related to MRO goods, a goods receipt document or packing slip will serve the same purpose. In the case of drilling or workover operations, the tour sheet is actually the field document that details the delivery of goods and services.

For the field approver, the verification of the field ticket or goods receipt for simple goods and services can be fairly straight forward, and may require only several minutes of review per field document. However, field tickets and tour sheets for complex services (drilling, completions, workovers, etc.) require a significant amount of review. Tour sheets, for example, detail not only rig time, but crew and equipment time as well.

Moreover, often the operating company field representative needs to understand the contractual terms to approve the tour sheet, further complicating the field review process.

There is certainly room for process automation within the field-based approval process. But the largest process automation opportunity is further "downstream", within the office-based approval process. If the field-based charges can be captured and managed in a way that makes the office approver’s reconciliation and approval easier, the opportunity for savings is quite significant.

So what happens to the field documents (field tickets, goods receipts, tour sheets), and how do they impact the invoice approval process? Once the field documents have been approved by the field operating company representative, further review is required by the ultimate approver of the invoice. In a paper-based workflow, this usually entails reviewing and reconciling the field document with the invoice.

There are many reasons why there could be discrepancies between a field document and the invoice. For example, the field ticket would detail the line-items of the service or goods delivered, but the supplier representative would have no way of knowing at the time of the field approval what the appropriate charges might be. Thus, the invoice will contain line items that were not present on the field ticket. In current paper processes, the only way to spot the discrepancies between field tickets and invoices is to review every line item.

With tour sheets, the reconciliation to an invoice can be quite complex, as the tour sheet documents many crew and equipment details. For example, items such as crew overages and underages, rig repair, stand by time, equipment rental, crew subsistence, mud consumption, and many others, are all documented on the tour sheet. Thus, reconciling invoices to a multiple tour sheets can be an extremely onerous task.

Our customers have told us that an invoice with an associated field ticket or tour sheet may cost anywhere from $20 to $80 to process. For most companies, that represents many millions of dollars per year in processing costs. These customers have also have told us that automation of the office-based invoice approval process provides cost savings from 50% to 80%. However, those savings do not include the automation of the reconciliation of field documents to the invoice. If that process was to be fully automated, the opportunity exists to virtually eliminate or at least substantially reduce the approval and reconciliation process for a large number of invoices. This would be achieved by electronically matching line items on field tickets with invoices, and then further checking the line items for accurate pricing. Clearly, the time savings opportunity for operations and accounts payable personnel is material.

It is worth noting that time savings are available not only for the operating company, but also for the supplier. The ability for a supplier to take an electronically approved field ticket and it into an invoice with very little effort represents an opportunity for significant manpower cost reduction on the supplier side of the process. In addition, opportunities exist to integrate with other field-based systems, for example, EDRs (Electronic Data Recorders) and Electronic Tour Sheets, providing automatic generation of daily charges. This type of integration drastically reduces field ticket data entry requirements for the supplier.

Better cash management

Optimum use of capital is a key objective for well-run companies. For E&P companies, managing cash, and in particular, understanding committed spend versus AFE, has always been a challenge. The capture of actual costs in the E&P company’s financial system can lag the actual date of the performance of the work by as much as 60 or even 90 days. This is often because the paper trail and process associated with approving field charges, followed by an invoice, and then entering that invoice information into the financial system, takes many days. The result is uncertainty about the company’s cash position, which limits opportunities for Treasury departments to implement various cash management strategies.

For the supplier, collecting receivables on time is a key driver of financial performance. Most suppliers pay close attention to their DSO (Days Sales Outstanding, which is the number of days from the time of submission of an invoice to payment). Of course, timely or even early payment frees up cash for more investment, and provides suppliers with more flexibility from a cash management standpoint. In addition, DSO is a metric that is often watched very closely by market analysts, which in turn can affect the stock price of public companies.

Early pay discounts

Many suppliers routinely offer discounts if invoices are paid in a time period that is shorter than normal terms. However, it is not unusual for E&P companies to be unable to take advantage of the available discounts, since they simply cannot process invoices quickly enough. Although electronic invoicing systems have helped tremendously with shortening processing times, issues related to reconciling invoices with the field documents often cause these discounts to be missed. This is particularly true during high activity levels, when for example, approvers delay approval of drilling invoices until they have time to go through the backup documentation, which may mean paging through many tour sheets.

The value of early pay discounts can be significant, depending on the procurement strategy of the E&P company. Some of our customers have implemented early payment terms as part of their standard contracts, and have told us that the value of realizing available early pay discounts to be anywhere from 0.5% to 1.0% of the total E&P spending. Again, even for a small E&P company, the savings opportunity is material.

The value driven by time savings, better cash management, and realizing early pay discounts is significant. But before we can answer the question whether or not the value warrants the effort to undertake process improvement for field-based charge reconciliation, we must first consider the challenges and determine if they can be resolved with an appropriate level of investment.

Challenges in the field

There are a number of characteristics of business processes in the oilfield that can make it challenging to realize the value that has been described above. For example, if one of the objectives of process automation is to eliminate invoice approvals altogether so that high value domain professionals don’t spend time checking and reconciling invoices, what is getting in the way of making this a reality?

The problem with current approaches is that no solution exists at the field site that electronically captures both the supplier representative and operating company approval of the detailed line items and quantities. Some technology vendors might take exception to this position and claim that they have a working solution that addresses the field ticket to invoice workflow. At Digital Oilfield, we have just such a solution as well.

However, the fact is that current electronic field ticket solutions have not been highly successful, and have not been broadly adopted. There are several reasons for this:

1. The field supplier representative doesn’t have the capability at the field location to electronically enter or modify a field ticket, packing slip, or service order to the correct quantities as measured and agreed upon.

2. Internet connectivity may not be available or may not be available at the specific time the supplier needs to complete the paperwork for the operator’s approval.

3. Many suppliers either struggle with or simply can’t navigate through a web-style field ticket interface, especially if they haven’t been trained to use the interface.

4. For many charges that are daily-rental based, the supplier field representative isn’t even on location for much of the time, so he/she can’t create and validate the daily rental charges; so the question of approvals is left until a paper record is created at the time of invoicing.

5. Often, and this is especially true with standard drilling contracts, the field representative doesn’t have access to the detailed commercial terms that cover such items as additional rig crew charges, third party charges, and rig or equipment down-time allowances.

These problems have limited the ability to capture both parties’ agreement to a transactional document at the time the transaction is completed in the field. As a result, a great majority of electronic invoice transactions are submitted along with scanned images of the paper field document. The invoice approver then has to review the scanned image, or in the case of drilling related invoices, review all the scanned images of multiple tour sheets or rental sheets in order to verify whether or not a field operator representative approved all the charges. It’s time consuming, error prone, and in many cases results in the requirement for additional communication between operating company approver and the operator’s field representative, in order to verify the validity of charges.

The necessary components of a field-based system

What might a solution look like that would address the unique challenges of capturing, approving, and reconciling field-based charges?

First, it must demonstrate the ability for both supplier and operator to electronically adjudicate transactions at any location in the field at the time the transactions take place. This is extremely important given that it is very common for operating companies to employ contractors to supervise field work. Even if they use their own staff, rig and job supervisors often rotate from well to well and from job to job.

Thus, if there is a discrepancy that requires the office approver to verify quantities or scope on a field ticket, it can be difficult to, first, find the supervisor who was present while the work was being performed, and second, if found, for the supervisor to recollect the exact specific of a job that may have occurred weeks or months earlier. If an easy mechanism is provided that allows operating company and supplier field staff to submit and approve charges daily, this problem is eliminated.

Second, the solution must be easy to use. As any software developer knows, this is simple to say, but very difficult to accomplish. Most field staff are accustomed to using some sort of PC. Nonetheless, they are rarely IT experts, and are generally opposed to engaging in large amounts of data entry and complex workflows. So for a field charge reconciliation system to be broadly adopted, it must not impose a burden on the field users, or it will not likely meet with acceptance.

Ideally, mechanisms should be in place to leverage other field-based systems (such as EDRs, electronic tour sheets, daily operations reporting systems) to electronically capture information and automatically populate line item charges, reducing data entry for the field users. Other ease-of-use innovations, such as touch screens with large buttons and no requirement for use of a mouse, can go a long way to increasing acceptance.

Third, the solution must not require constant connection to the internet to function. Many field locations have poor and/or intermittent connectivity. So, solutions that are strictly web-based exclude themselves from adoption in certain locations. This means that the ideal solution will work on a stand-alone basis, with its own software loaded on a field PC, transmitting data as required when a connection is available. This, of course means that the ultimate solution must also have the ability to keep disconnected databases "in sync".

Fourth, since contract terms are sometimes required for a field approver to fully process a field document, the system should have the ability to "push" contract terms from the office to the field, giving the field user everything he/she needs to fully approve all field charges.

Conclusion

Field-based charge reconciliation is the one component of the electronic invoicing workflow that has not been satisfactorily addressed. If technology is developed with field constraints and users’ needs in mind, then broad adoption should follow. This would allow for the elimination of the invoice approval process entirely for a large number of invoices, resulting in material returns for both operating companies and suppliers.

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