How to connect your competitive differentiation through negotiation
If a stock price reflects the discounted future cash flows of a firm, how do we value a stock in an industry many investors believe is transitioning away? This is the challenge conventional energy companies, oilfield service firms, and subcontractors are grappling with.
The solution? Massive distributions to shareholders through dividends and stock buybacks. This has driven the focus on maximizing cash flow and margin, fueling the 2022-2023 E&P consolidation wave and the current OFS consolidation that’s following.
In a commodity-based business, the only sustainable competitive advantage is marginal cost. While increasing economies of scale is often the first and easiest step, the real challenge lies in assessing internal assets—people, acreage, equipment—and processes to build a defensible strategy. Leading through innovation, operational efficiency, or cost can define a company’s competitive edge and position it in a defensible “efficiency frontier.”
However, converting that strategy into commercial actions, such as sales and strategic sourcing, is far more complex. This is where negotiation strategy becomes critical. Negotiation is the external expression of internal strategy. In an industry like energy, which heavily relies on external contractors, aligning negotiations with competitive differentiation is crucial for achieving cash flow goals.
Traditional sourcing RFPs and negotiation approaches often fall short. Without a systematic way to negotiate multiple issues, everything defaults to price, limiting strategic impact.
In my experience supporting sourcing negotiations across industries, price is typically the second or third priority. I’ve helped tech companies align their sourcing with innovation and pharmaceutical companies with quality differentiation.
In the energy sector, the biggest opportunity for O&G and OFS sourcing operations lies in:
Using a strategic RFP and negotiation approach (like MESOs) to align sourcing with competitive differentiation (innovation, cost, operational efficiency, etc.).
Quantifying your unique differentiation to optimize leverage.
Let’s explore point two further. As an E&P, your sourcing strategy only matters to an OFS if it helps solve their business challenge(s). OFS firms, like E&Ps, are focused on differentiation and maximizing cash flow. Anything you can offer that supports this—packaged effectively—will lead to stronger deals. I’m not just talking about revenue – regionality, new product trial or data access, service bundling, referrals, etc. The same principles apply to OFS firms selling to E&Ps.
The first step in quantifying differentiation is understanding your counterparty. The best place to start is earnings calls, specifically the Q&A sections.
With Q3 earnings call season underway, I’ll be sharing insights from these calls that can be applied on both sides of the table: E&Ps in sourcing, and OFS firms in go-to-market strategies.
Later this week, we’ll explore how AI and mobile grid power are shaping Liberty and SLB, and how we can structure sourcing strategies to capture value around these trends.