Business Services: The Next Frontier in Cost Reduction for Utilities

Transcription

1 Business Services: The Next Frontier in Cost Reduction for Utilities By John Sequeira, Ph.D. Copyright 2007 by ScottMadden, Inc. All rights reserved.

2 The Changing Landscape Twenty years ago the typical utility was composed of a large group of direct employees supplemented by a handful of outside advisors in areas such as legal, audit, and business strategy. Today the opposite is true. In nearly all utilities we work with, we find a small, core group of employees supplemented by a much larger group of external business services providers. In fact, these business services providers, or BSPs, represent the fastest growing category of procurement spend in North America today not just in utilities, but in all industries. Two decades ago, business services averaged less than 15% of a utility s total non-fuel spending. Today, according to a recent survey by ScottMadden, this percentage ranges from 40% to 76% of non-fuel spending (see figure 1). Figure 1: Business Services Spend as Percentage of Total Non-Fuel Procurement 80% 70% % Business Services Spend 60% 50% 40% 30% 20% 10% 0% Surveyed Utility Companies What is included in the business services category? Well, just about anything you cannot pick up and move around. Generically, there are four categories of business services: temporary service workers, consulting services, professional services, and outsourcing contractors. For utilities, this translates into IT outsourcers, benefit administration support, tree trimming services, maintenance contractors, site security services, facilities services the list is near endless. A Difficult Problem The issue is not that external services are growing in proportion to internal labor resources; this trend is projected to continue and benefits both the utility and the economy in general. The issue is that most utility procurement departments are not managing business services spend to the same degree of oversight and care exercised with respect to products and materials. At every utility we visit, there is clear recognition that the procurement department is not on top of the company s business services spending and that this has multiple negative consequences. Why are we in this situation? Well, it is complicated, as usual. Problems that stick around are rarely easy to solve. This one has a number of contributing factors including those listed below: Copyright 2007 by ScottMadden, Inc. All rights reserved. 1

3 Lack of data visibility. Large companies may have thousands of service providers that have never been classified or examined. Most utilities do not know how much they actually spend on external business services. When they find out they are often greatly surprised. Little leveraged spend. Service providers often provide services to multiple business units without them being aware that the same vendor is providing services elsewhere. Services spend is poorly leveraged across the enterprise. Decentralized decision-making. Buying decisions for business services are largely decentralized within business units. Management s prerogative. The selection of business service providers is often considered a prerogative of business unit management. No trespassing signs abound. Lack of effective spend control. Compared to materials procurement, there are few, if any, spending guidelines related to business services. Standard contract terms and conditions are poorly designed to handle business services spending. Multiple processes. The process of delivering business services is often different for each service category: Some are routine, while others are highly specialized Some are administrative, while others are professional Some are provided on a full-time basis, others on a part-time basis Some are managed by the buyer, others by the suppliers Some are provided on-site, others are provided off-site Some focus on tactical issues, others on strategic issues Some may support ongoing operations, others support one-time needs Little process standardization. Services sourcing and delivery is generally managed on an ad hoc basis. Each buying organization follows its own internal process, with little process standardization. The process is often labor intensive. Focus on transaction cost. Buying decisions are most often made based on transaction costs (bid price) rather than the life-cycle cost of service delivery; yet, available research shows that most service costs are incurred after the original transaction. Limited automation. Today's ERP packages are poorly designed to manage business services procurement or delivery management. There are multiple point solutions that are excellent at one function or another, but a comprehensive suite of services procurement tools is not yet available. Undersized investment and staffing. Few sourcing and/or buying organizations are adequately staffed or trained to effectively manage business services procurement and delivery. All of these factors make it especially difficult to improve how business services are sourced and delivered. No Easy Solutions Effectively managing business services sourcing and delivery is no walk in the park. Many of the same excuses we ve heard for the past 20 years when implementing world-class materials sourcing and management are now being expressed with respect to services. Process and culture change are hard to implement. Our experience shows implementing effective control over services spending requires parallel Copyright 2007 by ScottMadden, Inc. All rights reserved. 2

4 changes in each of the four quadrants of Service Management Excellence: people and organization, policies and processes, data and knowledge, and tools and technology (see figure 2). Figure 2: The Four Quadrants of Service Procurement Excellence Business Services: The Next Frontier in Cost Reduction for Utilities Culture Executive sponsorship Organizational structure Knowledge/expertise Employee development People & Policy & Organization Process Policy design Process design Performance management Consequence management Change management Spend data Supplier data Market data Organizational experience Leading practices Reports/records management Data & Knowledge Tools & Technology TECHNOLOGY ERP platform Best-in -class TOOLS Systems applications Templates Analytics Guidebooks Scorecards While achieving results is difficult, the business benefits are substantial. Applying supply chain management practices to services procurement typically results in savings ranging from 4% to 8% of total services spend. At the low end, this translates to an increase in operating income of between 5% and 9% for most utilities and an even greater impact on corporate earnings and market valuation. Where do these savings come from? They come from reduced service costs, improved value engineering, process improvement, and improved risk management (see figure 3). ScottMadden's ServiceSpend sm diagnostics will help you understand your service spending and focus on the areas of greatest potential savings. Our methodology will guide your teams through a disciplined approach that lays out key actions and responsibilities and establishes targeted performance outcomes. Figure 3: Cost Driver Contribution to Total Cost Savings Reduced Spend: Negotiated rates, capped expenses, leverage opportunities Value Engineering: Appropriate use and measurement, service quality, improved scope and delivery Process Improvement: Standardization, rationalization, use of technology, improved reporting Other Benefits: Reduced business risk, management controls 40% 10% 5% 45% Copyright 2007 by ScottMadden, Inc. All rights reserved. 3

5 We believe that improved management of business services spending offers tremendous opportunities for cost savings and improved operations. And, while many utilities have made great strides in this area in recent years, we have only touched the tip of this iceberg. Take the quick ServiceSpend sm selfassessment below and see if business services procurement is an area where you could improve the bottom line. It generally costs more money to wait than to begin. Figure 4: The ScottMadden ServiceSpend sm Test The ScottMadden ServiceSpend sm Test Yes No 1. Is your total business services spend a relative small portion of your total organization s annual spending? (i.e., generally less than 20% of your total procurement spend) 2. Do you know what your total enterprise-wide spending is for each external business service category? (e.g., temporary service workers, consulting services, professional services and outsourcing providers)? 3. Do you have clear guidelines on when, and when not, to use external services? 4. Do you know how many different service firms you use across the enterprise? 5. Do you know what services they provide and to whom? 6. Are you sure you have not paid a consultant to provide a service for one business unit that has already been provided to another? 7. Is 90% or more of your service spend covered by formal contracts or purchase orders? 8. Is the majority of your service spend managed under a preferred supplier program? 9. Do you use business terms and conditions specifically tailored to each category of service spend? (versus a single set of terms and conditions used for all services procurement) 10. Do your business units find it relatively quick and easy to identify and engage business services suppliers as needed? (versus it being a long and painful process) 11. Do your business units turn to the purchasing department for leadership in identifying, negotiating with and managing service suppliers? (versus the purchasing department is primarily used to process transactions after the real decisions have been made) 12. Do you jointly work with your service suppliers to reduce total lifecycle costs? (versus your supplier relationships are generally focused on achieving lower initial transaction cost) 13. Are you confident that any new knowledge and innovation developed by service providers while working for you will be owned exclusively by your company? (i.e., you are not paying for your service vendors R&D function) 14. Are you confident that the proprietary information you make available to your external service providers is secure from subsequent sharing and distribution to your competitors? NOTE: If you answered No to four or more of the above questions, you are likely leaving value on the table or exposing your company to unnecessary risk. John Sequeira is a partner at ScottMadden, Inc., with more than 30 years of domestic and international consulting experience. Dr. Sequeira is a certified management consultant and currently serves as supply chain practice leader for ScottMadden. He has extensive knowledge of supply chain management, operations improvement, and information technology planning. His industry experience encompasses electric & gas utilities, oil & gas companies, manufacturing, financial institutions, retail companies, and government entities. He has conducted consulting projects in the United States, Europe, Central and South America, the Middle East, and Southeast Asia. Prior to joining the firm, Dr. Sequeira served as a vice president at Cap Gemini Ernst & Young and was a partner with the predecessor firm of Ernst & Young LLP. He received a B.S. degree in political science from the University of Santa Clara (Magna Cum Laude), an M.P.A. from the Daniels College of Business at the University of Denver, and a Ph.D. in economics from GSIS/University of Denver. Copyright 2007 by ScottMadden, Inc. All rights reserved. 4