With the renewed emphasis on green energy, and a national net-zero greenhouse gas emission imperative planned for 2050 by the Biden Administration, significant investments must be undertaken to improve procurement processes — in excess of $2 trillion, as estimated by the U.S. Department of Energy.
A significant percentage of that spend will be concentrated in the electric utility sector. To ensure maximum return on the investment, industry procurement management will have to embrace best practices for streamlining processes and implementing next-generation technologies. The drive toward digitizing procurement will be a major focus initiative for the utilities industry.
Over the past decade, procurement organizations in many electric utilities have significantly advanced their capabilities, introducing concepts of strategic sourcing and seeking better ways of managing spend, suppliers, and contracts. Opportunities for improvement still abound, however, since the procurement function in utilities has often evolved independently across multiple business operating units:
- The generation group often has its own centralized business unit, with a highly transactional focus. It manages spend across dedicated generation operations.
- Transmission and distribution procurement functions are often focused on upgrade and maintenance, as well as on new construction projects. They’re mostly aimed at meeting project timelines, and might not have cost reduction as a strategic metric.
- Enterprise procurement functions are more often functionally aligned with an emphasis on routine procurement activities, contract compliance, and supplier lifecycle and relationship management.
The varying initiatives and objectives of the procurement function across utility companies can lead to siloed operations and suboptimal performance. Looking across business processes, technology and performance measures, leadership sees significant disconnects — and with them, opportunities for improvement.
Procure-to-pay processes execute the complete procurement cycle from the time a purchase requisition is created to when the invoice is paid. A fully integrated procure-to-pay process will provide end-to-end coverage and tracking functionality.
Typically, most utilities have implemented manual processes with limited standardization and integration across operating units and with suppliers. As a result, companies often are faced with time consuming and expensive operations.
A minimal level of automation might exist throughout the procure-to-pay process, requiring a high level of manual interaction. Spend analytics should be undertaken as an ongoing initiative every few years to establish more control over spend dollars and value generated. Procurement management should explore opportunities such as the implementation of e-procurement technology with punch-out catalogs, to drive toward a more optimal state of procurement.
Utilities should plan to initiate improvements in order to:
- Standardize and centralize all transactional activities and processes across the organization.
- Implement automation and outsourcing throughout the procure-to-pay process, including electronic transfer of documents with the supplier, supplier portal with purchase-order flip, and direct-payment processes managed primarily by the banking network.
- Establish a sophisticated approval process that allows for relevant business, finance, and procurement interventions.
- Implement electronic document storage, routing and integration to accounts payable, approval workflow and compliance with audit, legal and regulatory requirements.
- Initiate self-service portals for clients and vendors to access procure-to-pay data, submit invoices, and receive performance data.
New systems aid in the procurement process and can produce output reports to measure, improve and control uniform performance across the organization. Preferably, the technology will provide a single integrated system that is fully automated and produces timely analytics and reports for effective decision and management.
Typically, most utilities are managing procurement activity in functional silos across multiple operating units, with a mix of manual and electronic processes with basic reporting capabilities. Typically, we see utility organizations utilizing manual systems such as Excel or Access databases, as well as enterprise resource planning (ERP) applications, to support the procurement lifecycle across multiple operating units.
Significant investments in technology will have to be made over the course of the next three to five years in order for utilities to mature their processes and enhance existing systems. Implementing new applications will also be critical to recruiting, developing and retaining human resources from a reduced talent and labor pool. If your technology is older than the people using it, your human capital is at risk. The new generation of talent is growing up on NextGen technologies, and won’t tolerate a less-than-current technology support infrastructure.
Master data management is another key success factor that’s often missing in aging multi-system environments.
Given this state of affairs, utilities should set their procurement technology strategy to implement:
- A fully integrated global I.T. system infrastructure that incorporates procure-to-pay operations, typically including requisition to check enablement, contract management, spend analysis and reporting, and other solutions as appropriate.
- Automated workflows, allowing authorization and standardized requests and sourcing processes.
- A consolidated data warehouse with standard format, feeding a web-based electronic supply and demand planning system.
- Highly automated processes utilizing electronic documentation storage and transfer, spend analytics, and sophisticated business intelligence reporting.
- Electronic access for strategic suppliers to selected information, such as demand and forecast data, inventory levels, production and project schedules, and procure-to-pay documentation.
Utility companies need to be able to measure the performance of their supply networks. Valuable tools include executive dashboards, balanced scorecards, key performance indicators, and benchmarking.
Typically, utilities have some basic metrics along with ad hoc benchmarking activities to measure procurement performance. However, there’s no standardized approach to procurement and supplier scorecards. There are no well-defined metrics or processes to track and report procurement performance in a consistent and meaningful manner. There isn’t a consistent definition or shared meaning of “cost savings,” with no follow-up confirmation of the actual savings achieved. And operating companies often don’t value cost savings when they’re not involved in the supplier selection.
To ensure a consistent performance-measurement system, utility companies should move toward the following:
- Functional alignment of metrics between internal organizations, with key performance indicators tracked at the employee level, measured both quantitatively and qualitatively.
- Balanced scorecards to measure procurement performance, with progress monitored on at least a weekly or monthly basis, and metrics aligned with overall business KPIs.
- External benchmarking to identify performance gaps, set targets and identify process changes to close the gaps.
As utilities face challenges arising from the pandemic, bad weather and a shrinking labor pool, they need to embrace next-generation technologies to power procurement performance. Utilities must act to capitalize on available funding and public awareness, so that they can continue to efficiently deliver power to the communities they serve.
Sandeep Shah is global procurement consulting practice head, and TK Subramanian is an engagement director, with Tata Consultancy Services (TCS).