Energy Management and the Realities of the Bottom Line

Jeffrey Hart

June 1, 2004

Paying energy bills. It’s a necessary evil that keeps our homes warm in winter, cool in summer, lights a path to our door and brews our morning cup of coffee. Energy and utilities are critical to our everyday lives, yet the confusion and chaos of trying to understand these bills can certainly be daunting – and that’s just at home.

Businesses have the same issues, just on significantly larger scales. Any multiple-site organization is faced with hundreds, if not thousands of utility bills each month. And, if the business is in a variety of geographically dispersed locations, these energy bills are most likely coming from an array of suppliers. In taking a discerning look at the bills, typically accounts payable professionals are faced with information overload that provides little in the way of business intelligence or performance management.

And, you can’t manage what you can’t measure.

Information does exist on energy savings and utilizing insulation and lighting retrofits to save money and conserve energy. We can all agree that is indeed a good step, but out of context of an integrated and performance-based program that embraces comprehensive expense management, there is a lack of understanding of what can be saved and where energy savings can best occur and how.

It’s difficult for a company to see and measure performance with respect to these multiple site expenses because they are fragmented and oftentimes determined on a regional or local level. With hundreds of suppliers and contracts having an impact on multiple departments and thousands of invoices across a portfolio of sites, without an expense management program, it is a significant undertaking to get a concise view of business performance. Is enterprise resource planning (ERP) the answer? No. Most legacy, ERP and general ledger systems fall far short measuring performance in this area.

Expense Management Goes Deeper

Expense management and energy management goes significantly deeper than insulating pipes and walls, turning off these lights and lowering thermostats. By embracing and instituting a comprehensive expense management and energy management program, good chief financial officers and facility managers can expect to make a significant positive impact to the bottom line. They can expect to potentially not only save tens or hundreds of thousands of dollars, but also reduce labor costs, make more informed decisions and have peace of mind regarding their operations.

Businesses should be confident that their operations are running at peak efficiency and are towing the bottom line with regards to energy. CFOs should ask themselves: Do you know how much you’re spending? Do you know how much you should be spending? Are you procuring at the best rates? Are you learning from your utility bills or just paying them? Are any of your bills wrong?

Some critical questions to ask:

  • Are our sites being operated in the most effective and efficient manner?

  • Which sites incur the most expenses and why?

  • Are we sure that our utility, telecom, waste and lease invoices are correct?

  • Are we on the correct electric rate?

  • Should we be taking advantage of energy deregulation?

  • Are we maximizing our purchasing power and minimizing our expenses?

  • Are we making the right purchasing decisions?

Truth is, between 10 to 15 percent of bills that come into a business are in error.

Combined, energy, telecommunications and leasing are the third-largest expense of doing business, behind labor and cost of goods sold – typically about 25 percent of an overall budget. Yet, most companies continue to cut labor costs through layoffs and offshore outsourcing, or attempt to produce inferior products by lowering their cost of goods. Well, energy prices are going up. Does that mean more people will lose their jobs to keep the bottom line? Expense management is a better way, and it has a positive byproduct – energy and water conservation.

The Reality

The reality is, through no fault of their own, most CFOs don’t have the answers to these critical questions. Successful CFOs have looked toward advanced ideas and methodologies to help them keep the company belt tight, but until very recently, there was no way to develop a performance management and business intelligence methodology for energy. In 1998, Cadence began working with multiple-site companies to institute a comprehensive expense management program.

What we do is work with CFOs and facility managers who are ready to have peace of mind, and who are ready to bring their energy programs up to date. Having buildings up to code and insulating where appropriate is a great step, but it’s time to take a giant leap beyond that. By outsourcing this process, our clients have found that they gain more control in knowing where savings can occur. Our services and software significantly reduce expenses, mitigate jobs being outsourced overseas, and in general, bring a much more rewarding experience at the office.

So, what is a comprehensive expense management program? All invoices go through a unique and proprietary two-step audit process to ensure accuracy. The most optimal regulated electric rate is obtained for clients’ sites. Clients are assisted with the procurement of electricity and gas in deregulated markets and provide other consultative services that address the difficulties companies encounter managing site-related expenses.

The fact is, unless you have access to your invoice and expense-related information in a manner that highlights errors and anomalies or lends itself to detailed analysis, it is virtually impossible to effectively manage your site expenses.

In addition to saving money, a good expense management program will transcend the obvious and help CFOs start strategically managing sites. Business executives need to focus on the enabling technologies, methodologies and information channels that:

  • Increase organizational effectiveness.

  • Enhance contract leverage.

  • Improve service supplier performance.

  • Eliminate non-value-added activities.

  • Enable a fact-based approach to continuous improvement.

First Steps: Regulated Versus Deregulated

A good expense management program assists with the procurement of electricity and gas in deregulated markets in a process that has synergies with rate analysis. Begin with a national assessment that matches the geographic location of your sites to market opportunities throughout North America.

A plan is then generated that outlines which utility markets will be analyzed and shopped for competitive pricing. In the markets where there are opportunities, information from each site is loaded to a detailed financial and tariff calculation that compares existing utility rates with supplier offerings. Executives are then provided a comprehensive business case that includes the detailed financial analysis, a risk assessment outlining the advantages and disadvantages of the current energy proposal, and a recommended supplier contract. The supplier contract and associated supplier pricing applies to each individual client, and the contract is signed directly between the client and the selected energy supplier.

For a site’s electric accounts in regulated energy markets, variations in site status, design, hours of operation and load factor all impact the optimal rate for that location. Based on these and other factors, there are numerous opportunities to select alternative rate programs that can result in meaningful cost savings. An expense management program must at its core have a national rate library that allows rate and tariff analysis in all 50 states.

Budget and Benchmarking

An accurate budget is critical to maintaining control over your utility costs. Having a realistic baseline of your utility expense is the starting point for establishing and implementing strategies to reduce costs measurably and allow you to manage aggressively to that baseline. Budgeting services are designed to add precision to projections of an energy spend and will assist in complying with corporate planning standards. Site performance benchmarking allows CFOs to compare and measure sites’ performance against an established baseline to help determine an organization’s energy effectiveness.

Through a comprehensive expense management program, clients have saved time, money and important finite natural resources. Our successes have included:

  • Identified underground water leak due to high consumption failure: Savings of $36,000 per year plus refund.

  • Identified meter that was not resetting correctly: Refund of $148,000, including interest net savings of approximately $250,000.

  • Identified incorrect meter multiplier: Savings of $8,000 per year, and secured a $53,000 refund, including $13,000 of interest.

  • Put client sites on an electric aggregation tariff: Savings of $480,000 per year.

  • Switched client to electric time-of-use rate: Savings of $50,000 per year.

  • Gained client state sales tax exemption: Savings of $40,000 per year.

  • Switched client’s electric account to high load factor tariff: Savings of $18,000 per year.

  • Qualified client facilities for a tariff for which they would not normally qualify: Savings of $1 million per year.

  • Negotiated a deregulated energy deal in one market for one of our clients: Savings of more than $1 million per year.

The bottom line is this. Anything that can be done to conserve energy and other finite resources should certainly be explored, but traditional methods have not taken into account the business ramifications of doing so – typically, they were done on a philanthropic bent. Now there are significant business intelligence, performance management and bottom-line impacts to consider when instituting energy management. And today, those impacts are positive.

Insulating is good. Shutting off running water and turning down the lights, heat or air conditioning – all good things. But it has come time to move beyond that and develop and institute programs that take advantage of the little steps and improvements, but also make great strides in using and conserving energy by businesses. Indeed, money and time can be saved, while gaining knowledge and begin measuring and making informed decisions as to how best to procure, conserve and use energy.