Spend Wisely

By Jim Baehr

Spend wisely. This statement appears time and time again in everything from public commission reports to utility strategic plans and the day-to-day public discourse. Doing this isn’t easy and won’t get any easier.

Awareness and Expectations

Water utilities work diligently to enhance the public’s awareness of the importance of managing water resources. But, as the Global Water Partnership points out, raising awareness isn’t the same as telling people what to do. It’s also about explaining issues and providing knowledge so people can make their own informed decisions.

With awareness comes expectations. Expectations lead to questions. Is my water safe? Am I getting what I pay for? Recent high-profile events have brought about a convergence of these two concerns. Is my utility a good steward of both water quality and my ratepayer dollars? The problems that come with decaying infrastructure have put many systems into a state of continual repair which is throwing budgets into disarray. Prevailing thinking is we’re approaching a national crisis that could mean the end of clean, cheap water.

Ultimately the financial burden to make things right falls back to the ratepayers. The ratepayers have the right to ask, “Does my utility…spend wisely?

Traditional Behaviors and a Need for Change

Many water utilities use outdated buying practices and they may not be spending wisely. Traditional behaviors prevail. Low bids are still the norm. Low bids don’t assure value. Low bids aren’t strategic. Consider the following excerpt from a Blue-Ribbon Panel report to Pittsburgh Mayor Bill Peduto addressing the challenges faced by the Pittsburgh Water and Sewer Authority (PWSA).

“The scope and urgency of PWSA’s capital improvement program requires the use of innovative approaches and should not be handcuffed by a 100+ year old public bidding statute.”

Jim Baehr

Jim Baehr

In 2013, the Mayors Water Council issued a research paper declaring that “procurement process improvements (can) yield cost-effective public benefits.” There’s limited evidence the message has been accepted, let alone embraced. The paper points out that habitual procurement decisions create situations where economic inefficiencies are baked into the (institutionalized) procurement process.

For many water utilities, buying goods and services is a function. It’s reactionary — buying for need based solely on price. In commercial enterprises, buying goods and services is about buying based on total cost and value. The Purchasing process, whether in public entities or for-profit businesses, should be strategic. It should deliver value and demonstrate that management is being good stewards of the business.

This requires a total change of perspective — from purchasing as an operating function to supply management as a strategic one. It should be about the buyer and supplier working together to ensure what’s delivered benefits the water user at the lowest total cost, not the cheapest price.

Utilities spend significant energy on identifying the lowest price versus the lowest total cost. The words “lowest total cost” are often interpreted as saving money. Saving money can be viewed as disrupting the budgeting norm. The reality is that attaining lowest total cost means being able to do more with the monies in hand and…spend wisely.

The Other Stakeholders

Suppliers are also stakeholders and they’re capable of helping to introduce innovation for less cost. But, they’re conditioned by the “100+ year old public bidding” process. They’re dealing with a bidding process structured to be transparent but to them it’s opaque. The process routinely has both the buyer and bidder over compensating for risk in both the scope and the bid. Bidders can’t propose alternatives. They’re forced to bid to the lowest price point versus the best total cost/value.

Finally, when it comes to supply management, water is viewed as the least progressive of the major utilities, coming in behind electric and gas. Purchasing professionals in water utilities need to work in a place that’s all about learning and creating, versus doing and enduring. As established purchasing employees retire, water utilities will need to recruit new talent. Emerging professionals are looking for innovative environments. To compete for this talent, water utilities must be able to demonstrate they provide an opportunity that’s as progressive as electric and gas.

What to Do

To establish that a water utility spends wisely requires doing the following:

  • Conduct an assessment/diagnostic to examine what the purchasing group is doing, why it does it that way and what the group can do.
  • Conduct a spend analysis. Modern supply management is data driven. How much detail is available on the monies that are spent?
  • For those water utilities that believe they are not big enough, or don’t spend enough, know that these modern concepts the concepts are being applied in both large and small companies.
  • For those water utilities that are concerned about engaging small and minority owned businesses, modern procurement can identify ways to be more inclusive.
  • For those water utilities that are concerned about practicing within the rules — modern supply management is heavily focused on ethics — to stay in compliance; as well as risk management — identifying problems before they occur.

Benchmark data shows a typical return of between 5x to 9x the investment made in assessing and transforming from purchasing to supply management. Those who make the investment can give evidence that they’re doing what they can do to…spend wisely.

Jim Baehr is the founder of the Sourcing Strategies Group LLC, which supports the supply management needs of clients in both the public and private sectors. He has also served as an independent advisor leading transformation initiatives and supply management projects for chemicals, energy, retail and water clients.

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