Cost efficiency for public infrastructure
Five Golden Rules of Good Practice
Although infrastructure investment funding has gradually increased over the last decade, there has been a revenue decline since the COVID-19 pandemic, along with rising costs due to inflation. These challenges are putting pressure on infrastructure organisations to remain financially sustainable. In fact, it’s becoming unaffordable to continually maintain the services expected by their customers and regulatory bodies - they’re having to do more work for less money.
Based on experience of working with infrastructure clients across the globe, Deloitte has identified five golden rules for good practice that help organisations realise operating and capital cost efficiencies. Florence Julius, Deloitte’s London-based Director for Assets and Infrastructure shares her thoughts on these five golden rules here.
- Follow the money: Establishing the cost base of the total expenditure and big spend buckets is the first step toward understanding where to find cost efficiencies. Overheads will no doubt vary across different spend buckets, with the biggest costs typically being staff and procurement. Understanding where and with whom money is being spent helps identify and prioritise areas to look at for cost savings opportunities.
- Size the prize: It’s not feasible to drive cost efficiencies across all areas of spend. So, it’s important to understand what spend is addressable and non-addressable. Focusing on the addressable spend will maximise potential cost savings. Deloitte has deployed a Cost Efficiency Framework that is designed to help infrastructure organisations establish their addressable spend and identify the cost levers that will lead to savings, along with the potential size of the savings.
- Get people buy-in: Identifying benefits requires early engagement of the right people in the process. It starts at the top, with the executive leadership team taking accountability for the cost savings – supported by one executive member responsible for specific cost savings in each opportunity area. This should filter down to the rest of the business to ensure clear responsibilities for cost savings opportunities are agreed to so they can be realised.
- Set up for success: Realising cost savings often requires a big shift in the way an organisation operates, which in turn requires capability changes to achieve the desired savings. Taking the path of an efficiency transformation needs a robust transformation framework. It’s important to recognise if in-house capabilities are capable enough to deliver the scale of change – or whether additional subject matter experts are required to support the transformation.
- Realise cost savings: Evidencing the cost efficiency savings is a key step and one that is often underestimated. Infrastructure clients, particularly in the UK, are obliged by their regulatory bodies to demonstrate cost efficiencies as part of their strategic business plan. Clearly defined performance metrics should be established once opportunities have been agreed and valued. Tracking of cost efficiencies should then be done as part of normal business performance management, with check points established to confirm the actual realisation of the cost savings.
Realising cost efficiency can be a real challenge for infrastructure organisations. But when done right, it helps unlock maximum value to benefit all – public, customers, investors, and regulators. The five golden rules we have shared provide a cross sector guidance on key steps and actions to ensuring success in generating cost efficiencies and underpin their financial sustainability.
