Procurement teams must seize the opportunities wrought by change, be fleet of foot and embrace new skills, as well as sweep away excessive bureaucracy from contracts to make it easier to employ small, innovative firms. Those were key messages from speakers at the Procurement & Supply Chain Leaders Forum, which took place earlier this month in Birmingham.
The audience heard how a more austere regulatory landscape, the need to be attractive to investors, and fast-paced advances in technology, spelt huge changes for those leading procurement and supply teams.
Nirmal Kotecha, director of capital programme & procurement, UK Power Networks (UKPN), said during the open panel discussion: “Huge change equals huge opportunity. And if procurement wants to demonstrate leadership, it needs to understand all of that, translate it to the corporate environment and weave together solutions and promote those solutions at the top table.
“All of this requires procurement to adapt to the environment, and to acquire new skill sets. Analytics, for example, I have a bunch of analytics skills in my team now. We used to have roles like procurement specialists, we’ve got data analysts now.”
The day-long event, which was sponsored by Oracle Construction and Engineering and TVS Supply Chain Solutions, threw up myriad new ideas and a plethora of challenges that procurement teams are facing.
Talking point 1.
The need to be attractive to suppliers and investors
The need for the water and electricity companies to make themselves attractive to investors, innovators and suppliers, was a reoccurring theme.
“We have to move away from the idea that the client is the master, and the contractors and consultants are there to serve us. We have to look for mutual benefit,” said Andy Clark, head of procurement and contract management, Yorkshire Water.
Clark said utilities need to look at the barriers to entry and the complexity they add to the procurement process and the delivery of contracts. “Whether that’s complicated prerequisites or torturous reporting requirements for contractors, we need to ask how we can make ourselves agile as clients, to attract different kinds of organisations to work with us.”
He said it was vital for utility companies to attract innovators. These are often small and medium-sized enterprieses, which are often locked out of procurement processes. He said utilities need to be “the voice of the innovators in the industry, and make it easier for those organisations to get in”.
UKPN’s Kotecha picked up on the idea: “There are new entrants to the market, coming through from spaces we would never have imagined before… We need to understand where the new dynamic disruptors are going to come from. We’ve got to make ourselves attractive to them.”
He also warned there could be consequences for procuring the best deals as the RIIO2 framework sees price controls for networks switch from eight years to five: “It has consequences when you reduce it to five.”
Talking point 2.
Innovators are key
So how do you bring in innovative firms with no track record and perhaps with ideas that are not quite ready for market?
Kieran Brocklebank, head of innovation, United Utilities, set out how his organisation had just done that, with an open competition to engage more people. The initiative, dubbed Innovation Lab, was launched in February last year, and has now just closed its second round with 140 suppliers across four categories: future of water; connected customer; empowered knowledgeable colleagues; and right information, right place at the right time.
The Innovation Lab initiative scooped Utility Week’s Supply Chain Excellence Award in 2018. And it saw United Utilities sign a framework agreement with a Canadian technology firm to roll out artificial intelligence (AI) across its network – in a move believed to be a first for a UK water company. The deal, signed with Emagin, will see United Utilities introduce large-scale AI into its operational systems.
Brocklebank said that in the first round United Utilities received 83 ideas, half of which were outside the UK and half of which were outside the water sector. He said that a key learning had been that “you need to go overboard describing the problem you are looking to solve. But the process meant that UU learnt a lot about the market and the innovative technology out there.”
Talking point 3.
Spreading the risk
Tougher price determinations require fresh thinking and for utility companies to play a bigger role in the delivery of projects, speakers said.
Yorkshire Water’s Andy Clark said the company was moving from the current delivery of using five or six large contractors for large contract works, to using as many as 80 in the next period.
“That’s because we think we need to break up our approach, rather than sit behind a very large contractor, to actually have a relationship with lots of different contractors, where we take on more risk ourselves. It’s much more complicated for procurement, but it will deliver a better result for the client overall,” he said.
Clark said Yorkshire Water’s switch to employing smaller and tier 2 contractors directly was nothing to do with the Carillion collapse and nervousness around tier 1 suppliers, some of which have been experiencing financial turbulence. “When you employ a management contractor, you normally expect to pay for the privilege of not having to worry so much or be so directly involved as a client with the relationship with the supply chain, so there is a premium for the lack of client interaction.
“We can’t afford to have any more. We will have a very austere settlement for AMP7, so we have to look at where we can have a closer relationship with our supply chain.”
Talking point 4.
No debate would be complete without reference to Brexit, and certainly the saga is engulfing procurement and contract specialists. EDF’s contracts and claims manager Scott Fotheringham said a combination of Brexit and a shortage of renewable technology was having an impact on costs. “Most of the stuff we buy comes from Europe, which is tariff free. We may be forced to pay WTO [World Trade Organisation] tariffs on a lot of kit, which will put the price up. So, what we’re very conscious of is any drafting that I or my predecessors have put in regarding change of law, or change of interpretation of law.
“We are constantly on guard for price-reopening events… we’re in a moment of very rapid change right now. So that for us is a big issue,” he said.
Fotheringham cited an example where EDF had recently procured 28,000 solar panels from China, which were being shipped to Southampton. Originally EDF was looking to negotiate a deal where the Chinese supplier would ship panels with duty paid, and EDF would take delivery in the UK.
“We couldn’t get them to actually sign that deal, so I’ve taken delivery of those things in Shanghai, because they don’t want any timing issues or any legal issues about importing stuff into the UK,” he explained.
But the situation was also being exacerbated by the shortages in renewables technology, he added. “What I’m finding is that as we change and move into new technologies, suppliers have a huge amount of power. Suppliers tell you what you’re going to have, when, and what’s it’s going to cost you. And if you don’t like it, you can try somebody else.
“Because we’re working in a global market, where other players, like India, China, even Africa to a certain extent, are growing massively. And therefore, the tech that we want to buy, the low carbon tech, is in short supply” he said.
Returning to Brexit, United Utilities’ Nirmal Kotecha brought a positive note to the table: the opportunity the situation has brought to get procurement’s voice heard at the top table. “Procurement has played a huge part in getting the business ready, and more assured, in terms of making sure the lights stay on in the event of disruption post-Brexit, through properly mapping out critical supply chains, and thereby actually developing a new skillset.”
Talking point 5.
Carillion changes everything
The collapse of Carillion and problems faced by other tier 1 contractors, including Interserve, have created huge uncertainty for boards, speakers said.
“It has certainly added a lot of nervousness to a business at a senior level,” said Yorkshire Water’s Clark.
“We’ve looked at our procurement processes. We’re looking to improve the way we manage credit risk particularly, and ensure that our contracts have protection against what would happen in that scenario.”
EDF’s Scott Fotheringham said EDF looked much more at the cash flow and working capital of the supplier. “There’s no point driving someone to bankruptcy. And also, in all of our approval papers we will write where we would go if it all went terribly wrong, how we could manage the fallout of the administration.”
For UKPN’s Nirmal Kotecha, it is imperative for utility companies to move away from buying least-cost to buying on outcomes, which consider every aspect of the life-ownership of that asset, and keep a close watch on payment practices down the supply chain.
He also pointed to the issue of banks toughening up thier lending regimes after the Carillion collapse, which had created cash-flow problems. “That has a huge impact, and therefore as a responsible client, what are we doing to make sure we pay our supply chain on time? Can we move to things like self-billing?”
Dale Evans, chair of the Infrastructure Clients Group, which includes a number of utility firms in a group that represents 70 per cent of all UK infrastructure spend, is banking on an entirely new approach to procurement projects. Under the so-called Project 13 initiative, he said clients, including Anglian Water, are developing a new business model based on an enterprise, not on traditional transactional arrangements. The idea is the new type of arrangements will boost certainty and productivity in delivery, improve whole-life outcomes in operation and support a more sustainable, innovative, highly skilled industry.
UKPN’s Nirmal Kotecha said: “It is an absolute game-changer as far as construction procurement delivery is concerned. Some of the things that have legitimised Project 13 – namely Carillion and Interserve – procurement had a role to play in all of that.”
“We have to move away from the idea that the client is the master, and the contractors and consultants are there to serve us. We have to look for mutual benefit.”
Andy Clark, head of procurement and contract management, Yorkshire Water
“You need to go overboard describing the problem you are looking to solve.”
Kieran Brocklebank, head of innovation, United Utilities
“Huge change equals huge opportunity. And if procurement wants to demonstrate leadership, it needs to understand all of that.”
Nirmal Kotecha, director of capital programme & procurement, UK Power Networks (UKPN)
“What I’m finding is that as we change and move into new technologies, suppliers have a huge amount of power. Suppliers tell you what you’re going to have, when, and what’s it’s going to cost you. And if you don’t like it, you can try somebody else.”
Scott Fotheringham, contracts and claims manager, EDF