How we made cost savings with a budget deficit
The last few years have been hard on procurement budgets across the board and in May 2018 ScotRail was facing a significant deficit.
The ScotRail network is vital to Scotland’s communities and to the country’s booming tourist industry. The organisation needed to find cost-saving initiatives that could be delivered in a 12-month period, and therefore it turned to us for help.
The ScotRail franchise, which has been operated by Abellio Group since 2015, provides more than 94 million passenger journeys each year, with more than 2,300 intercity, regional and suburban rail services a day, over 340 stations, and some 800 trains serving Scotland’s railway. Railway services in the UK are operated under a number of regional franchises, which are granted for specific periods of time following competitive tender. The ScotRail franchise was awarded to Abellio for seven years (to 2022) with options to extend for up to a further seven years.
ScotRail needed us to conduct a diagnostic of third-party spend and procurement capability with the aim of identifying short term savings opportunities.
The process was not without its challenges. Whilst we needed to conduct a diagnostic, the client did not have a single data source that contained all of the information required to complete an Opportunity Assessment Review (OAR). Our highly skilled analytics team was able to create one from four separate systems that had no commonality of data fields. We then used high quality spend analytics tools to identify patterns and savings opportunities through consolidation, demand management and process re-engineering.
Minding the gaps
We undertook an in-depth analysis of a £454m client spend, 99.5% of which was categorised.
Additionally, we identified:
• improvements to be made in contract coverage and contract management which helps the business to manage cost and risk out of its contracts
• some areas of improvement in policy, process and government, including high exposure to risk and non-compliance
• a need for dedicated procurement resources, to prevent responsibility defaulting to individual service areas.
We were able to identify 30 potential saving opportunities, more than half of which could be delivered within the same year. We also reviewed the source-to-pay process and supporting systems, and conducted a procurement maturity assessment review to identify improvement opportunities. Within this process, we uncovered annual saving opportunities of between £2.5m and £7.6m from 18 initiatives, with a ROI of at least 3:1.
Despite delays caused by client operational issues, six projects were completed in 2018, enabling savings of £3.88m and cost avoidance of £0.42m.
A further seven projects with a potential value of up to £1.89m were sufficiently advanced to handover for client completion during Q2 of 2019. Three projects were not progressed at the request of the client and two were discontinued after having identified very low, or no, savings potential.
Embedding best practices to enable continuity
Thanks to the shortcomings we identified, ScotRail requested a dedicated procurement resource for six months to support its day-to-day requirements. During this period, we dealt with ad-hoc requests, such as advice on routes to market, compliance to standing orders and contractual matters. We offered tactical support on supplier specific issues, conducted tenders to deliver replacement or new contracts, identified suppliers without contracts and corrective action, created a pipeline of tender and contracting activity to maintain future coverage, and updated the terms and conditions of contracts to reflect the needs of the business.
During this period, we:
• addressed contract issues with 15 suppliers
• developed market-ready specifications and tender documentation and conducted tenders to support five strategic projects
• increased contract coverage by 22 percentage points
• improved pipeline visibility of contracts by 18%
• updated contract documents to include legislative requirements
• addressed franchise obligations and supported the sustainability agenda of the business
• increased compliance to contract and mitigated commercial and reputational risk.
Establishing equitable compensation
As ScotRail services are wholly reliant on unfettered access to the railway infrastructure, if this becomes restricted for any reason ScotRail can claim compensation. The client believed that it was not recovering all of the available compensation. We conducted a review to understand the claims process, validate gaps and assumptions and reviewed actual and unclaimed compensation.
We found that ScotRail had been under-compensated for rail replacement buses by £1m over one year. There were also restrictions in making additional claims, difficulties in the process and a lack of capacity for capturing the details required to challenge settlements. So, we made proposals to make this more robust and quicker. We undertook a detailed review of costs incurred as a result of the closure of Ayr station and revealed that these were £2.4m higher than the compensation calculated by Network Rail.
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