Joint Venture Accounting Provides The Lifeblood For Massive Capital Projects

Venture Accounting

Joint venture accounting provides the lifeblood for massive capital projects – as typified by the oil and gas sector. It also means a lot of pain. More and more companies are discovering that the latest reporting and planning solutions allow recognised stakeholders to drill down to consistent, reliable business data, without overwhelming them with useless or out of date facts. It’s a great way to ease the agony – while making friends up and down the supply chain.

There has been a major change in business reporting, planning and analytical systems in recent years, with the best systems integrating all three, connected to a single reliable source of data. It means far less paper, and many more screens – with up to the minute data being shared across PCs, laptops, and tablets.

The latest reporting solutions have been designed to accept input from any number of very diverse sources to provide everyone – from management to operators, customers and business partners – with real-time visibility into the work flow via easily customised live dashboards. These solutions have already been successfully deployed to improve performance in a host of industry sectors, including finance, real estate, construction, entertainment and facility management.

The same approach offers even greater benefits when a number of organisations get together to finance and manage massive capital projects – typified by offshore exploration and drilling. Joint venture accounting is the cement that holds such projects together, provided you mix it right. But get it wrong and the partnership can collapse leaving damaged reputations that take a long time to heal.

The right planning solutions not only reduce the labour of joint venture accounting, they also increase reporting reliability, consistency and transparency. It is a great way to build trust for joint ventures – let alone the benefits for in-house management.

Keeping Partners Happy

Performance management has long relied on a fixed system of annual plans, targets and forecasts. But we face a far less predictable business environment, where start-up rivals can appear from nowhere with new business models. Instead of steady evolution, today’s business faces unpredictable, discontinuous changes, and both partners and customers can rapidly switch allegiance or demand new levels of service.

When it comes to joint venture partners in the oil and gas sector it is seldom simply a question of two companies simply deciding to share the costs and profits: a typical drilling operation could involve six or more partners with varying stakes. This includes government partners who own the mineral rights and require a “royalty” licence fee but contribute nothing towards expenses. Often the projects will run for several years during which time companies can merge or be taken over, legislation can alter and other circumstances force partnerships to be remade or scrapped.

Joint venture partners may not be as fickle as consumer customers, but the scale of involvement means just as much pain. One modest sized company, with around 150 employees in the oil and gas sector, reported 45 significant revisions to its partnership agreements over just five years. The cost of each change was estimated at around $3000, so they began to look for a better accounting solution.

They already had access to the necessary data from their Oracle Business Suite with Oracle Projects to manage each drilling operation, but reporting meant transferring the data manually to appropriate spread sheets for each partner – taking into account the different levels of investment, costs and obligations. So a significant backlog of work had built up in the time it took to choose a suitable remedy. They opted for a Hubble reporting and management solution, and in just three days it had paid for itself by slashing the administrative spadework and removing the need for advanced IT skills to extract and manipulate the necessary data from the company’s Enterprise Resource Planning system.

Nor did the benefits stop there. Better, more transparent and responsive joint venture accounting wins friends. The sort of contracts being made were extremely lucrative – we are talking millions of pounds for a drilling operation – so there is a lot at stake in becoming and remaining a “customer of choice”. The latest reporting solutions now make it possible to share company data safely with partners: enquiries can be made directly to the system without having to go through customer services. Partners, and their auditors, love it.

And Keeping The Company Happy

Solutions like Hubble are actually being developed to address far wider business issues than just joint venture accounting. All business nowadays is under pressure to adapt to a shifting commercial, regulatory and political landscape.

Making wise decisions fast enough is no longer possible using yearly or even monthly reporting. It can take a hundred days and twenty per cent of management time to complete an annual budget, meanwhile operating and market conditions deviate from the budget assumptions until performance reporting becomes meaningless and opportunities get missed. As a reaction to this dynamic business environment, annual planning cycles are giving way to more frequent business reviews, supported by rolling forecasts that allow people to spot trends, patterns, and possible disruptions before their competitors do.

Today’s more agile organisations are learning to manage planning as a continuous process not constrained by the financial year. It may still be appropriate to set regular strategic reviews or to hold a planning meeting in response to some major change, as one Fortune 50 company CFO explains: “Once the year is under way, we review performance twice a quarter. We ask questions about how we are doing, what’s changing in the market- place, what are the new opportunities that have arisen, and so forth. We might then produce a new estimate based on the latest knowledge. Plans never work out the way you expect, so you have to adjust as you go.”

Adjusting “as you go” not only requires real-time data on key performance indicators, it also means making that data much more widely available. For a manufacturer of consumer goods, for example, a special offer posted on the company website could trigger a surge in orders: so traditionally the website manager should inform the product manager and the product manager should make enquiries to ensure adequate stocks and so on up and down the hierarchy and chains of command. Unless this is done absolutely consistently according to best practice, there is always a chance that someone along the supply chain gets overlooked: maybe the goods are in stock but a forklift driver is off sick?

In a climate that calls for rapid response to shifting circumstances – including changes in joint venture partnerships – management should not be simply looking at internal data: as well as keeping an eye on the health of those business partners, there will be changing government regulations, exchange rate adjustments as well as the risk of economic downturn as external factors that could either sound a warning or suggest a new opportunity. So the latest reporting and planning systems offer access not only to ERP data but also to any number of external market feeds, including data from business partners, suppliers and customers.

Being designed top down to address real business needs and efficient operations, these systems do not deliver an indigestible mountain of information to each busy manager’s desk. Instead they offer a clear, simple window into operations via self-customised “dashboards” that offer real time reporting, automated alerts, the ability for authorised persons to input data into the system, and an easy way for colleagues and partners to comment and collaborate without having to dump data into Excel and email it.

The Right Data In The Right Hands

Although these solutions enable everyone to build their personalised dashboard relevant to their own operational needs, the important difference is that all those individual reports will be automatically based on the same consistent, centralised data. This eliminates the old problem of different decision makers relying on mutually inconsistent, manually selected spreadsheet data.

At the same time, it encourages greater collaboration. Instead of passing requests and instructions up and down the chain of command, more staff across the organisation are encouraged to think for themselves, feel more responsible for their own decisions and empowered to take part in the company’s success.

This is particularly relevant in the case of joint ventures, because such a solution enables the owner to offer any authorised person some measure of access to the system – and that could include business partners and auditors. Offering a more or less restricted window into the joint venture accounts is far more efficient than having to accept enquiries and respond by creating spread sheets manually.

An example from one among nearly fifty Hubble customers already in the oil and gas sector: how do you partition the fuel cost of delivering supplies to a number of offshore rigs in a fair manner when the supply ship makes a round trip between different partners’ rigs? This is a contentious issue: but once a system has been agreed by the partners and they can all access the actual figures to check that it has been fairly administered, then a lot of time and energy will be saved.

How does anyone build a reliable network of partnerships? Begin by considering the reputation and scope of a number of suitable companies. Then explore relative costs and ask for comparative quotes. Finally ask: “is this a good company to do business with?” Anyone who builds a reputation for transparent, fair and efficient joint venture accounting wins a major business advantage. In a fast changing business environment, painless agile partnerships are a must.

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Naill McClean

As a Product Manager, Naill (don’t let the double l fool you—it’s pronounced Neil) takes the lead on the Hubble product roadmap. By interpreting and prioritising customer and market problems, Naill gives guidance and direction to the global product team. His efforts directly impact the next challenge that the product software takes on. Prior to joining the Hubble forces in 2013, Naill was knee deep within the industry himself. Having personally been a qualified Management Accountant, Naill has worked in a number of Finance and IT positions. His 15 years of experience cover the bases of technical report writing to ERP upgrade leadership. If you ever find yourself wanting to discuss the inner workings of Oracle E-Business Suite, he’s your man.