In October 2014, UTILCO, a multibillion-dollar gas and electric utility company operating in a broad geographic space, identified approximately $55m in rented equipment that was largely unmanaged.
This consisted of field client spend on construction equipment, such as cranes, trucks and port-a-potties, along with rental car usage. Moneys were remitted immediately via personal credit lines, and rates varied drastically between vendors. The prevailing belief was that centralized management was too difficult due to factors such as changing construction schedules and varying project complexities.
However, the industry standard of decentralized, p-card rentals meant that vendors were not held to performance metrics, and spend across all rentals was neither categorized nor strategic. As a result, the service value delivered to UTILCO was less than what might be possible. For example, due to a lack of visibility, UTILCO had half a million dollars in mobile trailers on rent for over 20 years. Vendors were billing for fencing on projects that had been completed six months prior. Most importantly, there was no way of leveraging the best quality, closest proximity, and lowest cost when procuring equipment for each job site.
In the modern age of large-scale data management, UTILCO knew there was an opportunity to become an industry leader. UTILCO resolved to bring rental spend under management by centralizing equipment requests, amalgamating spend by category, and leveraging purchasing power to make strategic decisions about equipment providers. To do this UTILCO partnered with Agile Sourcing Partners, a business process outsourcing provider focused on the electric and gas utility, construction, security and telecommunications industries, to digitize and centralize equipment rentals.
Prior to centralization:
- Rates varied by more than 200 percent on identical pieces of equipment.
- Vendors frequently billed past UTILCO equipment returns.
- High-dollar UTILCO talent was allocated to administrative tasks.
- UTILCO and Agile worked closely to input controls and eliminate cost overruns, smooth spend, and capture savings. Long-term rentals were isolated and reviewed. Over the course of three years, 20 percent of costs have been eliminated.
This was accomplished through:
- Rate negotiation leveraging data from Agile’s portal
- Specific spend reduction projects with mobile offices, trucks, and cars
- Vendor billing validations across UTILCO and Agile’s portals
Specifically, over three years, Agile delivered a net savings against service costs:
- $1.5m captured in credits for vendor inaccuracies
- $700,000 collected in early payment discounts
- $300,000 recouped in audits of aged vendor billing
UTILCO knew there was an opportunity to become an industry leader through large-scale data management. They also knew, with a large organization and powerful suppliers, change would not be easy. Yet, after three years, the partnership with Agile Sourcing Partners to centralize equipment rentals has been successful. Massive organizational change has taken place. Rental costs have been reduced, there is visibility ranging from category trends down to job-site, line item detail is produced in real time, and spend variance has smoothed.
Together, the companies created two interfacing portals. On UTILCO’s side, Rental Central was created to log all equipment requests. This was married via live data feed with Agile’s Vendor Portal – the online platform that facilitates vendor management. Using these systems, UTILCO and Agile sought to achieve the goal of saving $8m against its $55m target by:
- Centralizing equipment requests and vendor management
- Providing the item visibility in rental spend
- Becoming more efficient in equipment usage
- Conducting rent/buy analysis and decisions
- Shortening payment terms to achieve early payment discounts
- Negotiating better vendor rates with newly understood purchasing power
Early wins were achieved. In just three months, IT development was completed. In six months:
All 200+ vendors were on-boarded.
Eight service type categories were created in the web portal, including: trailers, passenger vehicles, cranes, large vehicles, equipment and tools, stratifying workload and enhancing user experience.
A team was built across UTILCO and Agile. By transitioning duties, streamlining IT, and operating with open books, the team was able to reduce redundancy.
Efficiencies were gained when UTILCO and Agile automated data feeds and invoice validations with the largest vendors.
Early adopters from both UTILCO and the supply base experienced improved quality – UTILCO’s advanced selection algorithm delivered the best equipment/cost/proximity to each job, and Agile’s rapid validation/payment process allowed vendors to be paid within 30 days and early payment discounts to be collected. Never before seen data became available to allow forecasting, smart equipment purchases, and quantifiable vendor performance management. These wins were a demonstration of progress well ahead of the utility industry. UTILCO field clients had gained the ability to budget and operate with increased confidence due to a series of controls created through the UTILCO/Agile IT system alliance, including:
- No vendor substitutions for a higher cost item than what has been requested
- Calculated best rates: automatic switching from daily rates to cheaper weekly/monthly rates
- All change orders validated through approval process
- Pricing validated against contractually agreed upon rates and services
- Measures created to prevent duplicate invoices
- Authorized ID number required for all rentals
- Authorized funding shut off upon project completion and/or equipment return
- Billing timeframe tolerance tightened to within hours of rental period
- Automated notification to vendors and field clients for equipment returns
Still the program was not without its challenges and detractors. Given the sheer size of UTILCO, the clout of the rental suppliers, and the desired improvement by way of disruptive change, achieving success might be compared to navigating a battleship in a teacup. The centralized equipment concept was somewhat confusing at first. Field agents and vendors were not always sure of when to go to Rental Central, when to liaise with Agile, and when to work directly together. For those who were reticent about the program, it provided an entity to hold responsible for equipment related delays, equipment left on site, and any billing discrepancies.
This, of course, was part of the purpose of the program – to provide responsibility for and eliminate equipment-related barriers to the business. In fulfilling this role, the UTILCO rentals team focused on and succeeded in training field agents on where and how to channel equipment requests, and the Agile team was similarly successful in coaching the suppliers to adhere to rental return requests. By the end of year one, the equipment rental program had validated and paid significant outstanding vendor invoices that predated the program’s existence. The cleanup effort pushed equipment rental spend over $70m. While this was a tough pill to swallow against an expected budget of $55m, it provided a true baseline of organization-wide spend on equipment. It allowed the program to stabilize, and it paved the way for true organizational improvement to be realized. Year two saw the program mature and begin to make advancements. By the end of year two, the program had:
- Achieved 99 percent billing accuracy
- Transacted over 60,000 equipment rentals
- Integrated the six largest equipment rental providers, including United, Enterprise and Hertz, to full round-trip automation for invoicing, accounting for 56 percent of the transactions
- Reduced administration by UTILCO with Agile managing vendor payment and consolidating billing (approximately 1000 vendor invoices consolidated to one weekly bill with line-item detail for UTILCO)
- Improved invoice payment to above 90 percent within 30 days by automating validations and data entry for the majority of invoice/dollar volume, and training vendors to a higher level of accuracy
- Captured an average of $40,000 per month in early payment discount
- Processed over 100,000 invoices for payments to suppliers exceeding $140m
- Agile implemented daily invoice flow monitoring, weekly spend tracking, and monthly vendor performance and forecasting based on UTILCO’s criteria
- Conducted monthly statement reconciliation on 80 percent of spend and quarterly reconciliation of 100 percent of spend to keep accounts current and avoid end-of-construction and end-of-year spikes
- Achieved break-even with Agile’s services netting cost savings and cost avoidance equal to the fee for their service
- Created over 25,000 individual service units to provide pricing transparency down to the equipment model on rent
- Enhanced the monthly accounting process by implementing accruals
- Transitioned over 2000 legacy reservations to new system
Nearing the end of year three, UTILCO and Agile have ironed out communications and advanced several other areas of the business. Using the data visibility created by the UTILCO/Agile relationship, the equipment rentals program has made incredible strides. Prior to the program, rates paid for the same piece of equipment, even with the same vendor, could vary more than 200 percent.
Specific Savings Example
Identical excavators (spend: $5m) ranged from $2,000/mo to nearly $7,000/mo. This was because individual construction managers were contracting directly with vendors, and it was not possible to leverage volume spend at the transaction level.
Spend visibility allowed for volume leverage and vendor stratification.
Today, rates are contracted down to each unique piece of equipment with each vendor and vary less than 10 percent. The standard price paid for the same excavator today ranges from $2,200 to $2,400.
Other insights included new understanding of long-term rentals and rentals redundant with owned equipment. Learning that over $0.5m in mobile office trailers had been on rent for more than 10 years, UTILCO and Agile realized that this equipment had been paid for several times over. Rental Central worked with the field clients to understand what was truly needed. With Agile’s help, any continued long-term assets were purchased and capitalized, while unneeded equipment was returned to vendors. Similar achievements took place with pickup trucks. Field clients were asked to look at what was on rent in comparison to what was truly needed. Did construction projects need 3500 diesels or would quarter-ton trucks get the job done just fine? Rental Central was able to reduce nearly a quarter of the on-rent truck fleet over a period of six months.
Car Rental Success
Another example of this type of success occurred with car rentals. The data visibility provided by Agile revealed that a significant portion of car rentals were used for trips within the UTILCO service territory. As a result of this realization, UTILCO directed employees to use personal vehicles and submit mileage receipts rather than rent cars. Car rentals spend was reduced from $6m per year to $2.2m per year.
UTILCO and Agile were able to repurpose or eliminate construction, administration and engineering talent away from non-value added administrative work by:
Reducing $1.4m on-hold invoices from $35,000
Burdened Talent Cost:
$100 per hour
Invoice Cleaning Time:
Labor Dollars Repurposed:
Automating 89 percent of the invoice processing and validation
Invoices per year:
Admin Burden Rate
$50 per hour
Labor Dollars Repurposed
In addition to greater savings through EPD, rebates, and standard program practices, the smoothing of invoice payment allows a reduced cost of money. It is estimated that UTILCO can keep up to $4m less on hand than in previous years. At 8 percent return, this is a savings opportunity of $320,000.
Program in Review
The program is now in a fine-tuning stage. Increasingly, vendor invoice entry is automated and greater savings are achieved through early payment discounts. The vendor list has been refined, and negotiations have been executed to solidify normalized, improved rates. The impact of the program has extended to influence capital asset investment decisions. Agile’s goal is always to provide more value to offset costs, and the program is now delivering a net profit on services rendered as a result of the cost avoidance, cost reduction, and cost recovery channels that have been created.
Sean Dempsey is an MBA student at the University of San Diego’s Supply Chain Management Institute and a program manager at Agile Sourcing Partners. Contributing authors include Bradley Lineberger, Dylan Fassari and Ali Davallou.