The challenges faced by Oil & Gas Upstream companies are:
1. Intense Competition
2. Price Fluctuation
3. Mergers & Acquisitions
4. Address Health, Safety & Environment concerns
5. Difficult regulations

In order to overcome these challenges & cut costs to make their operations effective Upstream companies had started outsourcing some of their functions. Some of the common functions that are being outsourced are:
a. finance
b. accounting
c. HR

Even though these companies have started benefitting from outsourcing, unlike other business functions they are finding it difficult to get same amount of benefits both in terms of money invested & manpower (headcount & associated costs, wages & other benefits, office space etc) reduction envisaged.  

The figure shows an illustration comparing cost/benefit for Upstream compared to other companies outsourcing & what an ideal situation should be.

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The typical problems faced are:
> Focus on core competency – The outsourcing partners are able to do low level task like running a finance operation & carry out routine activities, but they lack expertise in core competency like complex Tax, Royalty, MMS reporting regulations at state & federal levels. This makes the Upstream Companies to stretch its resources with limited budget (keeping expenditure on outsourcing)

> Innovation & Technology Leadership – Imprudent development & application of technology by Upstream companies has resulted in superfluous architecture. Maintaining these along with upgrading the systems has become a big burden for these companies. Upstream Companies wanted the outsourcing partners to help them with streamline & consolidate the complex technical architecture. With limited knowledge & access to some of these proprietary software the outsourcing partners find it difficult to consolidate or adapt to them. As a result the Upstream Companies have to rely heavily on ERP solution providers like SAP, JDE, Oracle to come up with new versions to meet their demands.

These compelling constraints have made the Upstream companies to re-strategize their outsourcing plans to Right Sourcing. Right Sourcing for Upstream companies essentially means - source different pieces of work in different ways. Instead of entering into a big outsourcing plan/contract, companies can break down their activities & choose the partners who are or can be capable of doing the piece of work. Upstream companies can then enter into virtual contracts keeping the short, medium & long term plans they have.

One of the key requirements for Right Sourcing is finding a key internal resource not just for system/software but also for hardware, administration & support. This key resource can be made owner/mentor for the function & made responsible for driving down cost & time for maintaining, developing the function. For example the owner/mentor can be responsible for time/cost required for submitting Tax/Royalty regulation requirements for state or federal reports. The owner/mentor will also be responsible to develop additional resources either internally or within outsourcing partners for developing core competency & technological advancements. This will ensure that they have tight internal controls reducing the dependency on traditional outsourcing contracts & also driving the outsourcing partners to innovate their operations & cut cost & time.

This approach differs from traditional outsourcing in the sense that here they don’t enter into a company to partner contract or agreement but with virtual agreement in place it depends on nature, criticality & urgency of function/activity. The owner/mentor can ask the partner to perform &  have multiple pricing models to pay for the piece & type of work done. This necessitates for matrix pricing model which ensures that the least cost & time model is used for the particular activity. These models give greater flexibility in terms of developing the project specification on an ongoing basis and modify specifications based on the changing needs.