How our client identified 11% savings per year using advanced spend levers
Our client’s situation
Our client, a medium sized utility, required help with the identification of savings and implementation strategies for each category of spend. Our 2015 CPO study, revealed that the four spend levers Pay Less, Buy Less, Buy Cheaper and Buy Smarter, can be a great start to identifying savings.
Having recently merged with another entity, spend data was not readily available and procurement responsibilities were largely undefined. Grosvenor undertook an organisational-wide spend and category analysis plus a review of the entire procurement function to identify opportunities for savings and efficiencies.
While the available data was not granular enough for a detailed spend analysis, it provided a great starting point for our category analysis. We identified 26 spend categories across the headline categories of construction, direct, indirect, goods’ supply and property. We further identified the people working for our client with the best knowledge within each category. During 30 minute interviews with these representatives from each category, we validated the spend, the most important suppliers and the biggest savings opportunities for each category. We also leveraged our solid understanding of each category and our wide network of category experts, to determine industry better practice.
The four spend levers in action
Below is an example of the opportunities we have identified in the engineering services category:
Market testing was common for our client. In fact, for all contracts above $20,000 an open tender was conducted. While this has resulted in some competitive outcomes, they were outweighed by the effort required. Establishing a panel arrangement with three organisations per engineering discipline would allow some volume aggregation and encourage discount rates for continuous work. An annual panel refresh may see the lowest performers dropped and new organisations introduced to the panels.
We found some scope for parts of the construction being completed off-site in a factory, without the influence of weather and with the ability to leverage economies of scale. We also identified that the client’s internal engineering knowledge was not sufficient to understand if the service providers’ designs included all ‘bells and whistles’ instead of fit-for-purpose solutions.
We know that this lever has the highest savings potential of all. Engineering costs are only a very small portion of the overall construction cost and yet, the plans delivered by engineers have a huge impact on the construction cost. The widely used commercial model, where the engineer’s fees are based on the total construction cost, provides little incentive for the engineer to think outside the box to reduce the total construction cost. In the future, our client will only appoint engineers to the panel who are willing to fix their cost and monitor their performance to reduce overall construction cost through a KPI measure.
Our client completes dozens of projects every year and yet, legal terms and conditions for the engagement as well as the scope for the services are agreed at the project level. This is cumbersome for all involved. From now on, this contractual documentation is to be agreed upfront before appointment to the panel.
Our client’s benefits
Across all categories, it is conservatively estimated that our client can achieve savings of 11% per annum by implementing procurement initiatives to Pay Less, Buy Cheaper, Buy Less and Buy Smarter.
Increased procurement governance is also expected to generate a higher level of accountability for our client’s business managers and foster professional relationships with all service providers. Implementation of performance measurement and contract management initiatives ensure that the identified savings continue to be realised throughout the life of the contract.