The Stream by River Logic

When and How to Plan for the Unplanned? New Tax Law and the Pipeline Transportation Industry Give Clues

July 24, 2018 | By Cheryl Hammer
Tags #Oil&Gas

With H.R. 1, the tax bill signed into law at the end of 2017, January 1 debuted reduced corporate taxes from 35% to 21% — a positive impact for companies, in general. However, as a Wall Street Journal article points out, the certainty of tax reform brings uncertainties ahead on actual financial outcomes for pipeline transportation operators.

The open-ended question at present is whether the Federal Environmental Regulatory Commission will take another look at pipeline companies’ lowered costs and introduce new regulations that mandate companies to pass through savings to consumers. If so, this regulatory action could diminish profit margins and equate to a loss of hundreds of millions of dollars for some companies.

Complicated what-if scenarios like these are often the angst of business unit managers who are reluctant to dedicate time and resources to situations that may or may not happen. And why is that? Even today, with the limitations of existing scenario analysis technology, these things can take days or weeks of preparation. Part of the reason for this is that Excel remains the most common tool for conducting scenario analysis and, given its inability to appropriately represent cross-functional trade-offs, constraints or multiple simultaneous objectives, its performance remains sub-par in most situations.

However, a domino effect like this is a perfect time to ask (again): When is it appropriate to plan for the unplanned? What’s the best way to go about planning for the unplanned?

We touched on the limitations of Excel above, but there is another class of tools that companies might use for these types of situations: business modeling and optimization tools. Though this class of technology addresses some of the limitations of Excel, it unfortunately comes with its own limitations. Optimization models traditionally built using programming languages take months to develop before insights can be delivered. Even so, the resulting model is almost never flexible enough to rapidly change assumptions, inputs, objectives, etc. — things that are required when companies are needed to run hundreds (even thousands) of scenarios. Meanwhile, impacts may already be in motion, leaving management with a horse on the run and no cart to guide it.

This tax and regulation scenario prompts questions like:

  • What tools can quickly address and optimize unplanned situations?
  • Are resources in place for rapid response planning and execution?
  • What is the minimum amount of time needed to gain new insights into unplanned events?
  • What is my role? Am I ready to lead or participate?

With recent legislation, corporations receive a tax break; however, pipelines companies may receive more requirements. How can these companies reap the tax benefits without losing profits to regulations?

Add Multiple Objects

Screen Shot 2018-06-26 at 10.17.13 PM

Pipeline companies maybe required to reduce rates, passing along tax break savings to consumers. With new rates, financial objectives should be listed to preserve profits. Other targets like cost-cutting should be included.



Model Financial Impact

Screen Shot 2018-06-26 at 10.17.20 PM

Model financial implications on all decisions across functions. Visually see how actions impact outcomes on the business as a whole.



Apply Agility to Scenarios

Screen Shot 2018-06-26 at 10.17.27 PM

Bring agility to decision-making and scenario analyses. Will regulations impact every facet of the business equally? How can changing operating costs be included in rate adjustments?



Explain counter-intuitive insights

Show executives why decisions that appear to be unlikely, optimize outcomes. For example, can alternative routes reduce operating costs and offset potential rate reductions


So what should management seek in a technology solution? It’s almost certain that none of the existing technologies in a company’s stack (whether it be a Risk Management tool, a Financial Planning or Corporate Performance Management tool, Excel or some other planning solution), are the best-in-class choice for problems like our new tax law. Perhaps it’s that management is fine settling for “good enough,” not wanting to explore all of their options. Perhaps they’re assuming that anything better would be a nightmare to implement and adopt.         

As thought-leaders in the decision support and advanced analytics space, one of our main goals is to help companies (management, in particular) feel empowered by knowledge — the knowledge to make the best decision when it comes to their tech stack, rather than settling for “good enough.”

A platform that incorporates machine-learning can uncover insights even with incomplete data, and provide an output of  best  scenarios that give business teams more immediate access previously reserved for data scientists.

Business value is expanded with use across the enterprise. Companies can leverage commonalities in data, modeling and optimized planning by utilizing advanced analytics that deliver insights faster. No more angst. No more concerns about the uncertainties that may occur. 

As more fallout from the tax law becomes known, companies that incorporate a technology platform now will gain the advantages of identifying the next moves to keep margins from diminishing and profitability from sinking.

digital transformation in oil and gas

Tags #Oil&Gas
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