How to Manage Your Third-Party Engineer

My partner was trying to win more work from a client. We did field studies for the independent-sized public company to help decide development strategies and recoveries on some of its more impactful assets, but my partner was trying to get their year-end reserves work as well. Finally, the client shut down my partner when he explained,

"Look, I know how to manage [big-name consulting firm]. I come to you when I want the right answer. You won’t ever get our year-end reserves work.”

The VP of engineering who delivered that explanation is, in my opinion, an honorable man and an excellent engineer, and I still count him as a friend. His explanation pertained not to a nefarious or deceptive practice but to two facts of life. First, outside engineers have limited time and limited familiarity with the fields. They usually accept data and analyses provided to them, and they govern their reserve estimations by a set of explicit guidelines based on conventional methods. Knowing the rules and methods allows the client company to predict the reserves which will be acceptable to the firm.

Secondly and more importantly, reserves of public companies are closely watched since they represent the lion’s share of the value of the company, both intrinsic and market. Revisions best avoid the breezes of whimsy. 

The same facts of life, the same pressures, burden every VP of engineering, but not all have the same character as my friend. The universal understanding of the significance of reserves figures means that the pressure for higher figures can (does) naturally and implicitly flow down to the company engineers who quantify reserves and out onto third-party engineers who opine on reserves for other outsiders. It can also flow explicitly and even forcefully. Serving as an independent third party and serving as an internal engineer, I have received all kinds of pressure. 

On the one side, as the engineer approaches year end reserves, her obligations are instinctive, clear and common to most professions. Topping the list is the obligation to protect the welfare of the public, and "public" doesn't mean Billy Jo walking on the street outside the office building who may or may not be hit by falling work papers. The public spans from investors to third party business partners to interpreters of public statements. A second first-order duty is to be objective and truthful, and this is usually clarified in the codes to mean that concerns and hesitations should be aired and that deception should be avoided.

(More interesting but rarely noted is what is missing from professional codes of ethics. There is no obligation to promote the interests of the employer. An engineer owes to her employer chiefly confidentiality and dedicated work without conflicts of interest, but she does not owe her employer protection from the consequences of its mistakes or compromises to "make the numbers.")

On the other hand, the pressure is always present, mostly implicit. Except for a few special cases, which are also well understood, the engineer/boss/client benefits from higher reserves. Even if the systems do not financially, explicitly reward higher reserves, the culture almost certainly does. Punishments loom as well since the company is paying the engineer, either their invoices or their mortgage, electricity, and water bills. At the beginning of the process and again at the end before they are finalized, the boss or client delivers guidance and commentary as it is their appropriate place to ensure the quality of the end result.

Between and overlaying the balance of the pressures rests the fact of the uncertainty inherent to reserves and the delay of validation. Reserves are "estimated", and all reports come with boilerplate disclaimers about the uncertainty of such estimates. Calculating year-end reserves is roughly like taking inventory of a warehouse--in the dark. Despite a century of science, the best answer is rarely tightly defined. Moreover, it usually takes years for production to unfold and to prove or disprove most estimates.

Moreover, when a client or a manager provides direction and commentary, the person is usually an accomplished professional deeply knowledgeable about the properties, and she bears responsibility for the quality of the estimates. As such theirs should represent a legitimate, alternative opinion, like the feedback from a peer review. Unfortunately, some professionals are more skilled than others. Some positions and some personalities are more susceptible to the ubiquitous human biases. Not all reasonable minds arrive at conclusions near the center of uncertainty, but such flaws are concealed and difficult to identify. As hard as it is to recognize one's own limitations, it is even harder to point out as much to a boss or to a client. Management has the position and responsibility to dismiss an unreliable engineer, and it suffers less in the process. The engineer in the one-down position risks more personal consequences in a disagreement.

Management's influence on the process, like other super powers, can be used for good or for ill. It is rare, in my experience, for companies deliberately to deceive their third party engineers or the public, but it does happen. I have seen it and more than once when a company will deliver or report falsified or deliberately misleading data, and not just in assignments with the IRS and the SEC. Since the data is usually proprietary and confidential, the third party struggles to test the validity of the data delivered to it.

Much more commonly, a company can easily deliver only the favorable parts of their internal analysis or provide no justification at all, using the estimates like anchoring in a sales discussion and then providing justification only to move the third-party estimate back towards the company's. A client may tailor the data to suit his interpretation such as by his choice of analogs for the average well or by withholding his most recent log analysis which indicates lower in-place volumes. Also common, of course, is the nature of the guidance and "commentary" delivered to the third party.

Decades ago a public company client advised my partner vaguely that his company had paid a lot of money to the firm over the years and that at some point he would need a favor in return. The message was encoded but crystal. Unfortunately for him, he picked the wrong person from whom to expect a quid pro quo, and the client went out of business when he did try to call the favor.

The influence can be more implicit and subtle or, indeed, much more explicit and harsh. I have seen and heard of demands from management to engineers that reserves come in at a certain figure, that they be increased or that they be as high as they can be forced to be. Most management is willing to accept a different, independent opinion, but, at its crudest, management may threaten and fight, both in tactic and in tone, with the evaluation engineers.

Managing third-party engineers starts on the inside, with a fearless commitment to the best possible analysis despite the short-term or personal consequences which is explicitly and repeatedly communicated. The best answers come from complete disclosure, which incidentally is also required by professional ethics and by most contracts. If you really want to manage your third-party engineers and your business in the best way, then you should treat them like the expert partner that they should be.

 

Certainly, my experience does not represent the full range. Please tell me about your experiences in the commentary below. Other insight or wisdom is appreciated since, as described above, our collective goal should be the most reliable answer.