Top 10 Energy Buying Mistakes You Didn’t Realize You Were Making (& How to Avoid Them) No. 6: Using a Decentralized Approach
We are now halfway through our series on energy buying mistakes. The first five articles discussed the mistakes of not procuring proactively, missing the most competitive rates, developing an inappropriate procurement strategy for your specific needs, not having a predetermined goal of what you want to achieve, and utilizing an aggregation for purchasing energy.
Some issues go beyond the specifics of energy procurement and get in to broader issues of procurement practice and policy. In this sixth installment, we’ll take a look at how a decentralized procurement policy can lead to problems in procuring energy.
Centralized vs. Decentralized
The discussion about whether to centralize or decentralize an organization’s procurement is not new. This is a debate that will most likely continue for many years to come – and the reason is that, for the most part, there is not necessarily a right or wrong answer.
Organizations that prefer a centralized approach do so for a number of reasons, which include ensuring adherence to corporate procurement policy, standardizing needs/specifications, and consolidating administrative resources. By comparison, those that favor decentralization state that this approach allows each facility to procure for its own needs as it sees fit, and that it creates a more customized approach to the specifics of each location. For site managers who want more control over the operations at their facility, a decentralized approach is what is favored.
Too often, organizations fit energy procurement into the same bucket as procurement for everything else. As part of their corporate culture, they fall back on either centralized or decentralized methodology. Below we will discuss why taking a decentralized approach to energy procurement can result in a less desirable end result.
The Mistake: Taking a Decentralized Approach to Buying Energy
Facility managers who want more control over their operations prefer a decentralized procurement structure. This allows them to buy what they feel they need, regardless of what other sites or facilities may do. When this is applied to energy, it means the whole transactional process is dealt with on a local or regional basis. The facility manager handling the energy procurement is typically talking directly with energy suppliers in that area – meaning they are dealing with the local representatives of those suppliers.
Why It Happens: Facility Managers Want to Handle Their Own Procurement
When an organization takes a decentralized approach, it allows the local sites and facilities to handle procurement matters on their own. This fits in with the local managers who want to therefore handle the procurement themselves, and energy is considered just another example of something that is specific to that facility. The manager may feel that someone in central procurement has no idea what the actual energy needs are at their location, and for that reason they need to have the ability to procure on their own.
Another issue that sometimes leads to energy procurement being decentralized is that there are so many differences between states, and even between utilities within each state. This means that if you centralize the approach, the person in central procurement needs to understand enough about all these various states, utilities, and tariffs to be able to properly conduct procurement for all sites. Many organizations see this as an unnecessary burden, believing it is smarter (and easier) to leave energy procurement in the hands of local managers.
The result of this approach is that the facility in question works for the best energy contract available to them based on those local discussions. Sounds great… except that it also means pricing and terms are negotiated in a vacuum, which doesn’t take in to account the larger picture of the organization as a whole. This, in turn, means that prices are not reflective of the leverage of the entire organization: More favorable terms and conditions could be negotiated for the organization as a whole than for a single facility.
How to Fix It: Centralize Energy Procurement
Centralizing energy procurement first and foremost ensures that one strategy and approach is being taken by the organization. As an example, a decentralized approach at an organization with three different facilities may find that one location is on a floating index energy contract, one is on a fixed price, and one is still just receiving power from the local utility. This represents three very separate strategies from three managers. Chances are that at the organizational level, there is one coherent thought about risk management that would govern how energy is procured. But the decentralized approach prevents the ability for consistency across the organization.
The first step in centralizing involves pulling all information together. As a person in central procurement, you will need to find out what contracts, terms, and rates are in place for all of your facilities. You’ll want copies of contracts and even bills to see how these are structured. Next, you’ll need to talk with the local managers to understand if they are proactively taking a particular approach, or if they are just “doing what has always been done.”
As you start the process, centralization will lead to two key benefits for your organization. The first is that pricing will be leveraged by the larger scale of your organization. While you can’t establish a price for all facilities nationwide with one supplier, you can increase leverage when conducting procurement for each facility by letting suppliers know what the bigger picture is. This means that suppliers are competing to win more of your business as a whole while still individually pricing each location, resulting in better prices than just working with the local supplier representative. Secondly, you can also use this organizational leverage to negotiate the terms and conditions your organization needs to ensure consistency across all facilities.
The challenge comes when you have to navigate the intricacies of each market. This is a key area where an energy advisor can provide crucial assistance by helping to develop a sound risk management strategy and then ensuring its implementation across locations in all states and utilities.
Conclusion: Centralize Where Necessary
As we’ve talked through this scenario of how a centralized approach can give you greater negotiation power, keep in mind that there can be several strategies under one procurement department. So even though you may centralize the procurement of energy for your organization, there may be other areas that are still left decentralized. The key takeaway is to develop a strategy that fits within your organizational approach, while also taking advantage of a centralized energy procurement approach.
Bob Wooten, C.P.M., CEP, is Director of National Accounts for Tradition Energy, and has over 20 years of experience managing commercial, industrial and governmental procurement programs for a wide variety of clients. Bob holds professional certifications from the Association of Energy Engineers and the Institute for Supply Management, as well as a B.A. from Texas A&M University, and a Master’s Degree in Public Administration from the University of Houston.