It all started with deregulation.
Bob Dickhaus, CEO of Service Resources Inc., an energy and facility management outsourcing provider based in Marietta, Georgia, says many of his buyers began experiencing "unprecedented volatility" in their energy costs. Historically, energy prices were predictable and controllable expenses, a requirement for companies to stay within their projected budgets. Deregulation and supply shortages resulted in a run up in prices. Since energy accounts for 40 percent of the operating costs of maintaining a property, managers missed their budget projections.
They turned to Service Resources to help them manage the supply side of their energy equation. But these companies soon realized outsourcing the entire process yielded more substantial savings than just focusing on commodity purchases. Dickhaus says taking a BPO approach is a new way to look at energy management.
While many companies may have an inhouse energy manager, few have invested in the complex technology or the specialized staff required to manage the complex data that's used to establish energy controls and strategies. "It's beyond a client's ability to do this," says Dickhaus.
Service Resources focuses on corporations that have large portfolios of properties located all over the country as opposed to a manufacturing operation situated on a single campus.
Reducing the Amount of Energy Used
The first step in an outsourced energy management program is to reduce the amount of energy the buyer uses. The BPO provider must get a handle on the client's true energy costs. To do this, it gathers consumption data from all locations, then aggregates them to look at the numbers on a national basis. Service Resources, acting as an independent agent, typically charges a small percentage of the total energy spend as its management fee and then applies its expertise to return multiples of this fee to its clients in cost savings.
The BPO experts on staff help the customer develop an energy strategy to operate the buildings more efficiently. The supplier reviews energy systems and maintenance practices. Sometimes the answer is easy; the company just has to tighten up its control practices, reducing the energy system operations for two hours at the beginning and end of the day.
Service Resources' staffers monitor energy use at 1,500 buildings nationwide from the supplier's central energy management center in Atlanta. Energy management technicians physically monitor alarms from each building every day and are always on the look out for system overrides that gobble up extra power.
"Optimizing building operations often generates about one-third of the total energy savings," says Dickhaus.
Paying as Little as Possible for the Commodity
The BPO supplier aggregates the needs of all its buyers to negotiate better prices with energy companies. For example, Service Resources combined the needs of its 30 clients in New Jersey to negotiate a good price for the $100 million they needed in electricity and natural gas. Dickhaus says the company's leverage "will be even greater in the future" as the newly deregulated energy markets mature.
The BPO supplier does not recommend that is customers sign long-term, fixed contracts with the energy companies. Five to 12 months is the preferred duration. This allows customers to take advantage of continuous competition and a longer term reduction in prices expected in most energy markets.
This area, energy procurement, was Service Resources' first entry into the energy management outsourcing world. Today it typically provides another 33 percent savings, Dickhaus continues.
Removing the Volatility in Prices
In addition to purchasing electricity and natural gas at the lowest possible price, many of Service Resources' current customers are looking for protection from the market volatility that has plagued energy markets recently. To manage this process, Service Resources educates its customers on a number of risk management strategies and implements them on their behalf. Some of these practices include fixed-price contracts and financial hedging instruments.
Along with protecting its customers from volatility, Service Resources deploys strategies that allow its customers to take advantage of this market volatility. Customers have saved millions of dollars by reducing energy consumption for a few hundred hours each year when energy is in short supply, explains Dickhaus.
Deploying Capital to Create Additional Energy Efficiency
If appropriate, Service Resources will develop a plan for capital improvements. The buyer puts up the capital, while Service Resources oversees the construction. Dickhaus explains Service Resources' clients often are able to borrow at below the prime rate, so they prefer to do the borrowing themselves. The BPO provider manages as many as 300 construction projects simultaneously, according to Dickhaus. In 2000, its construction budget totaled $100 million.
Lessons from the Outsourcing Primer:
- Companies can generate large savings if they outsource the whole process, not just one piece, like procurement.
- Outsourcing suppliers leverage the expertise of energy experts across multiple clients to optimize their clients? position in increasingly complex energy markets.
- Outsourcing vendors manage construction projects for their energy clients.