Water Journal : Water Journal September 2012-1
opinion regular features 42 SEPTEMBER 2012 water Managing Cost and Productivity in a Challenging Environment Six ways for water utilities to streamline their business models by Bruce Williamson, Lead National Partner -- Operations Consulting, Deloitte The water sector is not isolated from the challenges faced by the rest of the economy. Competition for scarce human resources, diminished security of supply of key capital equipment and operating materials, complex supplier relationships, ageing infrastructure and regulatory constraints all contribute to the complex environment in which water utilities operate. At the same time, more is being demanded from water utilities by ratepayers, regulators and governments, particularly when it comes to increased accountability and efficiency for both capital programs of work and annual operating expenditure. Increasingly, utilities are being asked to look at both cost reduction and productivity efficiency programs as customer service levels and growth are being supported by diminishing capital and operating expenditure budgets. Although there is a clear indication that organisations are beginning to focus on simple cost improvements, it is important that they now adopt a more comprehensive or transformational approach in order to deliver significant and sustainable improvements to their underlying cost structure. This means looking beyond incremental improvements such as hiring freezes, deferred expenses, reduced travel and training, and across-the-board budget cuts. These belt-tightening efforts generally tend not to be sustainable beyond the short term, as the savings they produce are easily pared back over time and scant attention is given to improving productivity. Furthermore, such initiatives can often be a barrier to achieving the necessary improvements as they can lead an organisation to believe it is already addressing the problem. They are also likely to divert attention and resources away from far more important structural cost and productivity improvements. Better Approach Needed Organisations need to understand the full spectrum of cost reduction and productivity improvement levers available, ranging from tactical opportunities that include spend management and low end sourcing (e.g. indirect categories), to the truly strategic, where the organisation transitions to a new operating model. The spectrum of business improvement levers needs to be applied in the context of the overarching objectives of the organisation. For example, is your cost to serve significantly higher than that of your peers or hurdle benchmark rates? Is your scale never likely to match your peers? If so, do you need to move to a business model that will enable you to operate as leanly as possible and rely on key supply chain partners to support your operations? The spectrum of cost reduction and productivity improvement opportunities ranges from the tactical through to the truly strategic and includes: • Spend reduction, which incorporates low end strategic sourcing (indirect goods and services), demand management and tax management to aggressively reduce external spend; • Debottle-necking and business process optimisation, including the streamlining of end-to-end business processes via simplification, elimination or outsourcing; • Strategic sourcing of strategic categories, including the oft-neglected areas of capital equipment, capital projects, outsource partners and, indeed, direct materials; • Infrastructure rationalisation where operational assets, IT and real estate portfolios are rationalised. For example, a number of organisations take the opportunity to address their operational footprints that have been built up incrementally over a number of years, and don't necessarily make sense from an optimal cost or service level perspective given current and emerging business requirements; • Service delivery model and organisational alignment, which involves the re-alignment of staff based on the most effective method of adding value to your operations. Often forgotten, overlaps and gaps in key organisational accountabilities across key processes prevent an organisation from effectively and efficiently functioning. At the same time, management operating systems, including reporting structures and KPI dashboards, lack integration and coordination across the organisation; • Business model redesign, which entails shifting to a more cost-effective business model and at the same time considers if the organisation is well positioned to grow into the future through the provision of improved customer service. Water utilities need to focus more on the strategic end of this spectrum by driving structural improvements such as streamlining their infrastructure, adjusting their service delivery model, and redesigning their business model, since such improvements deliver cost savings and productivity improvements that are both larger and more sustainable than incremental cost-cutting. Analysing actionable spend can help identify major business opportunities and set priorities.
Water Journal November 2012-1
Water Journal August 2012