As we start a new year, we near the end of our series on the Top 10 energy buying mistakes that purchasing professionals make. By highlighting the common mistakes, we can then assemble a set of best practices that will guide us when managing the procurement of energy. Mistakes highlighted to date include not procuring proactively, missing the most competitive rates, developing an inappropriate procurement strategy for your specific needs, not having a pre-determined goal of what you want to achieve, utilizing an aggregation for purchasing energy, taking a decentralized approach, and hiring one company to handle all energy activities. Here we diverge slightly with a discussion on a different kind of procurement: We will discuss the pitfalls of putting too much emphasis on the process of procuring a suitable energy advisor, as opposed to the results of such advice.
As we have discussed in previous installments, engaging the services of an experienced energy procurement advisor with direct access to the energy wholesale markets is a great way to counter other procurement problems. The end result that you and your organization want to achieve is energy cost-savings and control as a result of reacting more proactively to changes in the energy markets. While keeping the results in mind, you don’t want to get so bogged down in the advisor selection process required to get there that the results end up a secondary issue.
The Mistake: Focusing Too Much on the Process of Procuring the Energy Advisor
At first blush, conducting a proper, thorough procurement process that is consistent with your governing laws and/or policies sounds like the right thing to do. But recall, the mistake here is focusing too much on the process that you lose sight of the desired results. The goal is to establish the best strategy and energy pricing for your organization. The key to achieving your goal is market timing (as we have learned from addressing earlier mistakes). By engaging the services of a quality energy procurement advisor, you add a team member who is much better positioned to help procure during favorable energy market windows because his or her in-depth market knowledge goes much deeper than yours (something we also learned from earlier mistakes).
So why would such an intensive procurement process for an energy advisor be a mistake? Precisely because this process could eat up all your time, reducing opportunities to take advantage of favorable market timing, leaving you with a good energy advisor but no room or time for them to react to the market. In short, you have spent all your time and resources hiring the advisor to the detriment of the end results you want to achieve.
Why It Happens: Adherence to Policy
Adhering to the procurement policy of your organization – and more importantly, the procurement laws that may govern a governmental entity – is definitely a must. No one can be faulted for wanting to do things the right way. However, within the realm of “the right way,” consider whether there are more effective and efficient processes that can be utilized.
Let’s look at a standard RFP process utilized to hire the services of a consulting firm. Everything starts with a lengthy research period to find which consultants are in the marketplace that can meet the needs of your organization. This is sometimes done more formally as an RFI (request for information). If conducted properly, you will have heard from many firms, sat through many meetings, talked to many references, and most likely gotten a feel for your best fit. However, in the standard RFP process, all this narrowing-down research is just the beginning.
Following the research, specifications and a scope of work are developed. This may be sent out just to the narrowed-down group of consultants deemed worthy from the research phase – or could still be opened up publicly to any interested firm. There are typically one or more “pre-RFP” meetings in which specifications are discussed and your organization fields answers. Specifications may be adjusted and re-issued to participants. Finally, responses are submitted – and now the evaluation process begins. There may be multiple cuts leading up to more in-depth interviews and even more meetings, and coordinating such a process to work with the calendars of everyone involved can prove to be a big challenge.
Typically a “best and final offer” (BAFO) round then takes place, in which the goal is to leverage the competitive process to get the best rates. Finally, a consultant is chosen. But don’t celebrate quite yet – now a contract must be negotiated.
All the while, the energy markets – that we know are extremely volatile – are constantly moving. By the time you finally award a contract to a consultant, you may very well be down to the wire in terms of implementing a strategy to procure electricity, natural gas and renewable energy for your organization. And being rushed into an energy contract can be just as bad as agreeing to a deal without due diligence.
How to Fix It: Utilize a Cooperative or GPO Contract
The goal of a cooperative purchasing program or group purchasing organization (GPO) is to connect and contract with suppliers that will provide the best goods and services to the members at rates that are the most competitive in the market. Conducting an open, transparent procurement process and leveraging the size of the membership are keys to establishing such contracts. The vast majority of private and public sector companies in the United States belong to at least one cooperative purchasing program or GPO. Members can access a pre-negotiated contract available for immediate use with reduced fees based on the size of the overall membership.
On the public sector side, state laws allow governmental entities to utilize cooperative and GPO contracts to satisfy competitive procurement requirements. The same justification exists on the private sector side. As a purchasing professional, you are substituting the competitive procurement process you would typically conduct for the process already performed by the cooperative or GPO.
After you have done your research and found the energy procurement advisor you feel would best serve the needs of your organization, you can cut out many months of RFPs and evaluations by engaging that advisor through a cooperative or GPO contract. This, of course, assumes that the advisor is under such a contract – which in itself is an indicator of the background of that advisor. Quality cooperative and GPO contracts are considered the pinnacle of the contracting world, highly sought after by suppliers, resulting in a very rigorous competitive process. Evaluating and awarding cooperative and GPO contracts is typically done by large numbers of evaluators – many times including members themselves. So when you access such a contract, you are assured that the services, experience, and costs have been thoroughly vetted, are utilized by your peers, and represent best of the breed in the industry.
Conclusion: An Efficient Process to Get Desired Results
To boil this issue down to its essence, it is all about conducting the most efficient procurement for an advisor within the policies/laws governing your organization. Engaging the best energy procurement advisor is the first – and most critical – step in best managing your electricity, natural gas, and renewable energy supply strategy. Just as there are many energy procurement advisors in the marketplace, there are also many cooperative purchasing programs and GPOs.
The value of an energy advisor can be tied to the worth of the cooperative or GPO. Therefore it becomes essential that, if you decide that the utilization of such a contract will make the process more efficient and effective, you should only be seeking contracts through the top cooperative and GPO programs in the field.
Quickly finding and engaging the right energy procurement advisor allows you to react efficiently and effectively to the energy marketplace to establish the best strategy and the right price for electricity, natural gas and renewable energy. Keeping the focus more on the results of your advisor, instead of the process of finding one, will lead to greater success in managing energy costs.