Aberdeen’s international reputation as a centre for excellence in the oil and has sector continues to buck the trend and outperform an economy which is still facing wider economic challenges.
We are already seeing considerable new investment in exploration and production which is forecast to lead to increased production in the years ahead. While the benefits of exploiting fresh reserves and expanding into new territories are obvious, the creation of longer supply chains means that new risks are introduced which need to be addressed.
The horsemeat scandal taught us that we should never take supply chain certainty for granted. Indeed the upstream sector would be wise to conduct comprehensive background checks on new partners, while also actively monitoring compliance with contractual agreements.
In October 2012 the UK Government granted 167 new licences for more than 300 North Sea blocks – this is expected to usher in a new era in exploration and production as companies look to exploit untapped resources. Meanwhile the Scottish Government suggest capital investment in the industry rose 35% in the last two years – from £8.5bn in 2011 to £11.5bn in 2012. This comes at a time when research suggests up to 50,000 jobs could be created in 2013.
This increase in investment will see many companies looking to expand through joint ventures, outsourcing work which was previously carried out in-house, while some companies will be eyeing fresh opportunities in emerging markets. In this context, “getting into bed” with the wrong partner, whether that leads to possible non-compliance with relation to health and safety, sanctions or anti-bribery laws and regulations or whether the partner merely has poor general business ethics can come back to haunt the unwary.
At the same time, KPMG estimates that 70% of contracts contain charging errors; the firm’s Corporate Governance team has recovered $2bn in cash recoveries and cost savings for clients from contractual counterparties since 1997.
When subcontracting, businesses need to be confident that partner organisations share similar standards and place value on attention to detail, given this complex matrix of contractual relationships.
The 2010 Gulf of Mexico oil spill is a good example of how a complex contractual landscape can result in a spread of reputational damage, with lawsuits and regulatory action still ongoing involving a number of upstream companies. But this is just one example which highlights how closely corporate reputations are tied together.
More generally, as organisations become increasingly dependent on the actions of their suppliers and JV partners, the implications of not performing risk based pre-contract due diligence and post-contract monitoring of the quality of the work being performed, as well as compliance with codes of business conduct, could be significant. Unseen political connections of overseas partners, or undeclared ownership by foreign public officials, can also lead to increased risks for the UK organisation.
The mindset is changing and businesses now realise the wisdom of sharing information as a way of minimising risk. Business leaders should not be concerned about offending partners rather if a company entering a joint venture or major supplier or agency relationship does not want to open up its business to reasonable pre and post contract scrutiny, alarms bells should already be sounding.
At a time of continued economic uncertainty the issue of overcharging on contracts is also critical. The role of contract audits has never been more important. By making clear that the costs around the contract are transparent, and adjusting for “errors” or contractual misinterpretations by the contractual partner, all parties can move forward through a contractual term on a firm commercial footing, with no surprises.
When you enter into a new business partnership you are making a one-time choice which you have to get right. Once that relationship is in place, while there is an unavoidable element of trust in the partner, you cannot let trust alone result in the creation of a compliance or commercial blind spot.
Ken Milliken is forensic partner with KPMG in Scotland
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