An upcoming regulatory RIIO-2 price control period meant it was essential for our client to demonstrate it was operating in as lean a manner as possible. Efficio helped the business to identify areas where significant savings could be made.
Our client owns, operates, and maintains a major natural gas distribution network in the UK. Efficio was engaged to conduct an opportunity assessment following a restructure in the executive team, aiming to “simplify, commercialise, and localise” the business. It identified 10 core categories where long-term, repeatable savings could be made, and set about evaluating and selecting suppliers in a project that would save £10 million a year.
Our client is one of the UK’s largest gas operators, with an annual third-party spend of £1 billion. Ahead of a new gas regulatory period, the business realised it needed to reduce costs to demonstrate continued value for public money and called on Efficio to help achieve this.
The upcoming RIIO 2 – the price control for the gas distribution network – would determine the budget set for our client over the next five years. With the necessary budget impact following RIIO-2 determination targets, it was vital that the organisation could demonstrate it was able to bring down its cost base.
The need to demonstrably reduce costs was compounded by a wider organisational strategy to decentralise the business, enabling it to drive decisions locally to make it more efficient and more responsive.
From a procurement perspective, this would introduce an additional element of complexity, reducing the opportunity to obtain economies of scale and consolidate spend. It would, however, mean there were more opportunities to build strong relationships with local suppliers and manage contracts effectively.
At an early stage, Efficio worked with this client to identify 10 core areas of recurring cost and how to reduce them. The emphasis was on delivering long-term savings, which would continue to deliver benefits over multiple years, although it was also clear there would also be a number of quick wins. The costs included direct spend categories, such as traffic management projects, but also indirect areas, including facilities management such as cleaning and security, construction, and marketing.
Efficio ran a series of requests for proposals in the 10 areas, inviting existing suppliers to put forward a bid for a new contract but also making sure that market-leading competitors were given the opportunity to respond. At the end of that period, suppliers were given feedback on how they had performed and where they fell short, which resulted in more competitive bids.
Our client appointed a steering committee of senior managers, including the COO and CFO as well as the procurement director, with whom Efficio would meet regularly and report on progress. The Efficio team also met regularly with sponsors at a regional level, keeping them informed of progress being made in reviewing arrangements and identifying further opportunities for cost reduction.
In some cases, the incumbent suppliers were selected but at a better price than had been in place before, as suppliers knew their bids would be subject to greater scrutiny and negotiation, including from our client’s senior management team. This had the added benefitof ensuring there was minimal disruption and that local teams were happy to keep their existing relationships. In other cases, new suppliers were selected, where the business felt that quality standards could be maintained or improved but delivered at a more competitive total cost.
The programme ran from May 2020 to March 2021, with Efficio overseeing everything from understanding the requirements to preparing the RFPs to the signature of contracts. In all, it addressed an annual spend of around £115 million and, by comparing the new arrangements with the previous contracts, it was easy to measure the impact. The project delivered savings of around £10 million, with prices on individual categories reduced from between 7 and 25 percent. Most contracts awarded were for three or five years, meaning savings would be made on a recurring basis.
A further benefit was helping to change the culture of the business in general – and procurement in particular – to a more commercial mindset. The procurement team took part in informal training sessions led by Efficio, helping to move the function from a largely administrative role to a more strategic department.
The project also helped to demonstrate the value of procurement to people in the wider business in reducing costs while also maintaining or improving service delivery.
In some categories, the procurement and operation teams needed to be convinced that new suppliers could deliver the work at the same or higher standard, and there was a natural concern in some parts of the business about changing suppliers.
Here, Efficio would engage with those teams directly, outlining the benefits of moving suppliers and the cost savings that would result. In most cases, taking the emotion out of the equation helped to ensure buy-in from those teams and individuals.
The shift from a more centralised organisation and procurement function to a devolved model led by the various networks also presented a challenge. We had to ensure that along with the improvements in delivery performance, our client retained commercial leverage in their supplier agreements.