Utilities have been exploring innovative ways to manage their supply chains. Among recent trends is a move away from basing procurement decisions mostly on cost and instead moving towards total value of ownership, particularly for big engineering and construction projects. There is also a growing realisation that the procurement function can play a key role in driving long-term value and that it should have a say in group level strategy.
“We’re working in alliances and pooling companies involved in renewables to broaden our understanding of the sector,” says Paul Allison, supplier relationship manager with SSE. The company is working closely with Siemens on upgrading and developing wind turbines to make them cheaper and more reliable, but at the same time is helping rival manufacturer Mitsubishi to break into the UK wind turbine market. “We hope to gain benefits from this relationship,” explains Allison, citing a better understanding of the technologies and their costs, and less time-consuming tendering. “And also develop an alternative supplier.”
EDF Energy likewise is deepening collaborations with some of its suppliers to better capitalise on their knowledge in areas such as construction and planning. And Thames Water last year signed a five-year outsourcing deal with Efficio covering £500 million of annual spend, partly to gain access to that company’s knowledge base.
However, the partnership approach is not without pitfalls. “Straight procurement is easier to do and generally less problematic,” says Will Harman, supply chain expert, PA Consulting Group. “With partnerships, you have to put in the resources to make it work.” He explains that partnering develops dependency on a few suppliers, which means performance and the commercial side need to be monitored carefully.
“You are also seeing foreign-owned UK utilities working more closely with their parents to pool their buying power and drive economies of scale on procurement where they can,” says Matt Havens, a partner within the operations practice at Accenture. Among other trends he has observed is the inclusion of the procurement function within overall strategy. “Often procurement people have useful and unique insights. It’s a move away from being siloed and it does save money and drive innovation,” he says.
The sustainability agenda is another factor driving supply chain innovation. United Utilities, for instance, has pursued a number of initiatives to green its business and encourage its key suppliers to do the same, which in many cases has led to cost savings as well. Warren Kozera, head of business services, strategy and performance, gives an example: “We have been assembling water pumping stations in a factory rather than onsite … It’s cheaper, produces less carbon dioxide and is less disruptive to customers. Water is shut off for less time, testing can be done in the factory and we can have it up and running on site more quickly.”
From suppliers’ point of view, though, utility groups are certainly becoming more demanding. “IT contracts have got shorter, going from periods of five years down to two to three years,” comments Tara McGeehan, utilities director, Logica. She says there is more focus on getting suppliers to share risk, such as asking them to take a hit on their pricing if delays occur, for example.
But there’s more utility groups could be doing to reduce their costs, according to Havens. He recommends they follow the manufacturing industry and source more from low cost countries such as China, which have mature suppliers of pipes, cabling, switching gear and so on. “I see some reticence from UK utility groups to do this, but it’s starting to happen on the continent,” says Havens. “It’s a case of checking if they’re ISO 2000 accredited, looking at their track records and so on. Risks can be mitigated.”
Justin Pugsley is a freelance journalist
Can buy me love: cost set to dominate future partnerships
New government policies for the energy and water sectors will introduce greater competition and price constraints, creating a landscape with potentially slimmer margins and greater financial risk.
Reflections from members of the steering group for the utility industry’s pre-qualification scheme, UVDB, run by Achilles, point to a consequent widespread review of strategy regarding partnerships. One member of the steering group comments: “We are taking a completely new approach to partnerships and are rewriting our strategy, and the key reason for this is to reflect the regulatory changes under way.” It seems the focus in future will clearly be on cost. “It’s likely that the existing ‘pain sharing’ approach will no longer be appropriate – it’s more likely to be a ‘unit cost’ model that is employed,” says another member.
Integrating the supply chain into the way a utility business operates will become increasingly important and will have to be managed effectively. A clear set of strategic objectives and effective controls will be vital. This will be especially important as buyers’ exposure to risks from the supply chain increases. For instance, Regulation 29A, introduced last year, requires utilities to notify suppliers when they are excluded from a procurement process covered by the Utilities Directive, rather than wait until the final contract is awarded. This gives suppliers scope to challenge utilities’ decisions.
With utilities looking to cut costs, suppliers will also come under greater financial pressure, potentially increasing the risk to utilities. Buyers must ensure they go beyond simply making checks on suppliers at the pre-qualification stage and move to monitor them on a continual basis throughout the contract.
Perhaps most significantly, a far more competitive business environment is likely to make suppliers far more vulnerable to financial failure. This can have catastrophic effects on a buying organisation’s revenue, reputation, share price and, quite possibly, its own financial survival.
This summer, Achilles is trialling a financial analysis model to facilitate the exchange of financial performance and control information within established communities of buyers and suppliers. The tool includes historical data, current information provided by the supplier and future projections on financial performance, enabling buyers to better understand the future dynamics of supplier finances.
Philip Foster is utilities director at Achilles, operator of the UVDB supplier pre-qualification scheme
Water works
The water consultancy sector is job-rich right now, with around 5 per cent more roles available than job seekers. The greatest demand is in electrical and mechanical disciplines, followed closely by civils, and this situation is expected to last through to June next year.
There are regional differences in demand due to water companies’ differing geographies, populations, problems and budgets. This has resulted in a growing freelance sector as people move around following the workload across regions.
Peaks in demand for staff would ordinarily result in increased salaries. However, there are a number of downward factors playing on the market – international outsourcing and the the current economy, for instance – which are keeping pricing consistent at a typical 3-4 per cent per annum rise. In the freelance market, rates of pay are far more inconsistent as factors including contract lengths, location and the scope of the role come in to play.
So what is the long-term forecast? Due to the cyclical nature of regulatory periods, we are expecting a marginal drop in demand to occur midway through next year, as the requirement for consultancy work in this period begins to cool. However, we expect this fall to be gradual as projects are finished at different rates. Plus, ironically, because so much of the design work being done has been outsourced to foreign destinations, places like India are more likely to feel the brunt of this reduction in workload.
Rowan Hayes is a consultant with Randstad CPE’s water recruitment team
Fluky TUPE
Utilities rely widely on outsourcing, and when outsourcing arrangements change, staff sometimes pass from old contractor to new contractor, or in or out of the employ of the utility itself. Given this, utilities should be aware of emerging complexity arising around the Transfer of Undertakings (Protection of Employment) Regulations 2006, also known as TUPE.
The service provision change (SPC) test states that for employees to have TUPE protection, “activities” cease to be carried out by A (which can be the client or an existing contractor) and are instead carried out by B (which can be the new contractor or back in-house to the client). However, the definition of “activities” in some recent cases has been questioned (for example, when a full catering service was replaced by a sandwich bar) and employees have been left without TUPE protection. So where there is any change in activities, commercial terms may be needed to provide for staff.
Where TUPE does apply, employees transfer with their employment contracts and service protected, and are protected from substantial detrimental changes to working conditions. Where employment is not protected by TUPE, redundancy costs are usually triggered. In the utilities sector these costs are frequently much higher than elsewhere, as some employees have contractual rights to significantly enhanced redundancy terms. Pension costs can also be significant, particulary if an employee that has transfered repeatedly between utilities has at some point benefited from a final salary scheme and retains the right to an enhanced pension on redundancy or early retirement. Such rights are common throughout the utilities sector, and can survive long after the employee ceased to be in the original scheme.
As with all things TUPE, it pays to assess the implications carefully from the start, cover the risks wherever possible and build the costs into the business model from the outset.
Mark Hamilton is a partner in the employment department at Maclay Murray & Spens LLP
This article first appeared in Utility Week’s print edition of 20 July 2012.
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