As we go about the business of bringing transparency to energy markets, we sometimes hear clients or suppliers or consultants refer to this work as “procurement” of electricity. We don’t use the word procurement here. Why?

Every institution needs to procure materials– whether it’s paper, or other materials and supplies or even large pieces of equipment. This kind of activity is essential to any institution, and surely it is done carefully and with great effort. Typically, procurement professionals develop purchasing standards, negotiate prices on goods, control and manage inventory and address disposal of products used in the supply chain. There seems to be some discussion, even amongst procurement professionals, about what defines procurement. In a Procurement Professionals LinkedIn Group, one member asked the difference between procurement and purchasing– the question elicited 300 comments from professionals in the field.

The common themes from that discussion included: procurement is an end-to-end process that is largely focused on cost reduction, it often has an ROI attached to it. One member in the group identified the distinction in this way:

Simple definition: Purchasing is transactional (I will buy x for $y). Procurement encompasses Purchasing and everything else before and after the purchase.

All good points. But we would argue that neither word properly defines the act of purchasing gas and power in deregulated markets. So how does energy cost management differ from procurement and purchasing?

1. Energy markets are volatile, not static. With energy, you are not so much negotiating with suppliers, as coming up against a volatile commodity market. Energy is a commodity, it is volatile, it does not stop being volatile once you make a purchase.
2. Making sure your energy purchase is the right one for your organization is not trivial. Energy purchase decisions cannot be easily measured by a profitability standard that might work for goods used in production or in a typical procurement or purchasing operation. Right now, it is difficult to know whether the energy contract that you have signed is actually in line with your budget, or better than all other available alternatives, unless you have some arms length capacity for analysis, like The Megawatt Hour provides.
3. You can not stop the process once you decide to sign an energy contract. In fact, in many respects, that’s just when the process starts. Once you have signed an energy contract, the process doesn’t stop. Nor should it. You, as a buyer, will always be in energy markets– there is no way to stop the process once you are operating an institution or a business in a deregulated market.

In fact, it appears that the dialogue and discussion about the institutional challenges facing procurement organizations embraces these observations. In a recent article by Robert Bowman in Forbes titled The Five Traits Of ‘World-Class’ Procurement Organizations Bowman suggests that in order to continue to drive improvements in organizations, procurement organizations need to:

Act as trusted advisers to top management. …the procurement function in leading companies is nearly four times more likely to be involved in corporate planning and budgeting at a high level.

Help drive innovation in supply markets. More than just demanding the lowest price, procurement works with suppliers to cut the underlying cost of their goods and services. There is plenty of efficiency opportunity that purchasers and procurement people can bring to energy markets. Too often, the flow of information and innovation is one-way– from suppliers or markets to clients. Energy buyers are the main force in the marketplace — without buyers, businesses, colleges, universities competitive markets don’t exist. We advocate having businesses use their market power to bring about innovative contract structures, products and efficient operations by suppliers.

Provide fresh insights into key supplier data. Companies can draw on information to create predictive analytics, providing a deeper view of markets.

Help manage and alleviate supply-chain risk.

All of the hallmarks of effective procurement organizations identified here are consistent with the successful organizations that we see managing energy, power and gas effectively. The insight here is that the best procurement organizations understand the complexities of energy cost management– and they’re re-inventing themselves and their organizations to bring innovation to the practice– something that we are just starting to see in energy cost management.

Bottomline for businesses. Make sure you have the right people involved when making energy cost management decisions. In order to make the best decisions for your business, involve supply chain, involve facilities, but don’t forget finance. And don’t forget to access market insights in the process– now that you have the capability, use all of the tools available to you.