Undergoing cost reduction through risk informed budgeting for a large Southwest municipal utility
“The MCR team was very professional and very driven. I really appreciate their direct approach to engage executives and managers. Through the course of the project, I quickly came to trust their knowledge and conclusions of our business.”
—Chief Operating Officer
Background
A large municipal electric utility in the Southwest was challenged by the City Council to operate under affordability goals requiring them to limit electric rate increases to two percent per year while keeping customer’s electric bills in the bottom 50 percent of all electric utilities in their state. To achieve these goals, the utility needed to explore new ways to manage its spending in the most effective and efficient manner possible.
Historically, the utility’s business units developed budgets based on the previous year while adjusting for expected differences in the upcoming year. They examined operating expenses in the aggregate without the level of detail necessary for effective budget analysis. This approach limited management’s ability to drive significant, achievable and lasting benefits.
As the company entered their annual budget cycle, the Chief Operating Officer wanted more transparency and rigor in the budgeting process in order to identify areas for significant cost reduction. With significant O&M cost reduction as the goal, the Chief Operating Officer approached MCR for help.
Solution
MCR used its proven Risk Informed Budgeting (RIB) process to help our client reach its spending goals. At its core, Risk Informed Budgeting requires budget owners to justify all budget requests from a baseline of zero. In a sense, it is the antithesis of the more traditional incremental budgeting process, which embeds a continuation of the past without rigorous spending scrutiny.
We worked directly with our client’s management team and budget analysts, guiding them through our RIB process steps:
- Develop a budget item classification framework relating spending levels to specific safety, regulatory and reliability risk factors
- Discuss each budget line item and assign to the risk classification framework
- Facilitate a structured review process guiding senior managers towards a risk-based ranking of all their budget line items
- Facilitate a final ranking process forcing the delineation between line items above and below the target budget funding line
In team meetings, every line manager was asked to challenge their own paradigms of what spending was truly required to operate and maintain their organization. Nothing was taken for granted in the review and all spending was challenged. The approach ensured each line manager’s budget submission was prepared with detailed documentation and recognized facts to substantiate all proposed spending.
Results
MCR and the management team identified opportunities to save $15 million in O&M expenses (nearly 10% of the reviewed budgets). This reduction puts our client on a path to achieve its rate targets and meet the City Council’s affordability goals. In addition to the expense reductions identified by the RIB process, MCR also identified opportunities for operational improvements, including:
Information Technology
- Optimize the overall information technology portfolio by eliminating excessive legacy applications and controlling new application requests
- Reduce a significant number of contractors used as base load employees to operate and maintain key infrastructure
- Apply better software licensing controls to eliminate vendor-imposed penalties
- Establish a cloud / premise strategy to reduce and optimize application and data management costs
- Create a cost awareness culture among managers who were previously unaware of their actual performance to budget over the course of the year
- Improve project management controls to enhance scope control of many projects
Electric Service Delivery
- Reduce overtime used to complete regular maintenance when driven to do so by capital project work load. Rapid customer expansion drove capital workloads, which with limited resources, created a situation where overtime was used to address both capital and regular maintenance.
- Restrict overtime in project implementation with distant completion time horizons. For example, an LED upgrade initiative with a 5-year time horizon was partially completed using overtime.
Power Production
- Enhance power production management expertise in operating with an efficient budget and sharpening skills in effectively managing their costs
- Identify additional budget reduction opportunities management had previously not considered