Organizations operating in the energy sector have typically relied on traditional procurement methods to acquire solutions from external providers. However, many energy companies are reporting better procurement outcomes since shifting to agile. We’ll look at a few examples, but first let’s have a look at what agile methodology means and where it comes from.
Back in the early 2000s, agile was a business practice associated solely with software development. When used properly, it allowed new software to be developed and brought to market quickly. Fast forward a couple of decades and organizations in diverse industries are embracing agile principles across all of their business functions and processes. In the business world, teams who previously got involved in drawn-out contract negotiations and massive requirements documents can now deliver projects on-time and within budget by collaborating with customers. An agile approach is more reactive and flexible to business needs and the often unexpected changes in circumstances.
Agile success stories in business are easy to find beyond software development. Large companies like Swedbank in Sweden and the Baltics boosted employee engagement and increased the speed of service delivery by transitioning to agile. According to Kirill Klimov, who helps to organize the Agile Eastern Europe conference, some of the benefits experienced by organizations who have deployed agile methods are a more rapid time to market for products, improved product quality that better serves customer needs and improved communication.
Understanding agile means understanding how adaptable it can be for any industry.
What is agile and how can it be applied to procurement?
The groundbreaking Agile Manifesto, developed by 17 software developers in 2001,carved a way forward for project management that meant abandoning old inefficient practices in favor of streamlined processes that were resistant to internal and external changes. According to the authors of the declaration, which was founded on 4 distinct values, software development could achieve better results by ending the prevalence of heavy ambiguous documentation, tiresome formal meetings and strict adherence to procedures in project management. The 4 values of agile are:
Individuals and interactions over processes and tools
Working software over comprehensive documentation
Customer collaboration over contract negotiation
Responding to change over following a plan
Additionally, practitioners of agile project management aspire to deliver on 12 principles that encourage collaboration, clear and verbal communication, a focus on customer satisfaction and adaptability to late and sudden changes in requirements.
These values and principles can be successfully applied to software procurement. Imagine for a moment that instead of your procurement being hinged on overly detailed requirements and potentially even confrontational contract negotiations, the contract management process could be collaborative, communicative, focused on higher-level outcomes and built on a strong supplier-customer relationship that jointly celebrates success.
At Navitasoft we have put this value into action by helping several organizations in the energy sector to negotiate story points-based agile contracts. Harnessing this agile practice has resulted in a faster, easier and overall more efficient process that puts customer satisfaction above all.
Story points-based agile contracts
At the heart of a points-based approach to procurement is the idea of assigning story points to each project item, or story, based on the time and effort it takes to complete that story. Each ‘sprint’ (a short, time-boxed period when a development team works to complete a set amount of work) is broken up into these stories. When a specific task is assigned story points, it allows the supplier to determine how long future sprints will take along with the costs involved.
Instead of the supplier holding all of the leverage on pricing, points-based contracts involve both parties coming together to mutually decide how many points to give each deliverable. This group activity utilizes the experience, wisdom, knowledge and skill of both sides to reach consensus, especially when the vendor has specialized vertical industry experience allowing them to more accurately assess the task ahead. It encourages transparency and an open flow of information and provides a space for ideas to develop rather than rigidly sticking to the delivery of an outcome at all costs.
Customer satisfaction is much higher with a story points-based contract, as they feel empowered, involved and in control of a project that can be adjusted to adapt to internal or external forces when necessary.
This stands in contrast to the traditional method where a customer pays the supplier a fixed fee to fulfill a detailed set of pre-defined requirements within an agreed period. In traditional procurement, the supplier is then legally obliged to complete the job for that fee regardless of increasing costs, new requirements or regulations, changing economics or unavoidable delays.
For CKW, a leading energy service provider in Switzerland, moving away from traditional procurement meant that they were able to create an agile contract with vendors 1000% faster than before (decision to contract made in the same day instead of 1-2 months). That result was perhaps at the high-end of the increased speed that can be expected from adopting an agile approach to contracts. Another good example is The Pacific Gas and Electric company’s adoption of agile procurement. They found that agile sped up the process by 30% compared with legacy methods.
In 2010, we broke with energy industry tradition and used an agile story points-based contract to help HEXUM (then MMBF), a Hungarian commercial and strategic reserve underground gas storage (UGS) operator, to meet a third-party access requirement. The project was a success, and the customer hit the 3-month deadline on budget. Ten years later, HEXUM is still a satisfied customer. Several times over the years, our agile approach allowed them to rapidly adapt to new regulations and changes in the market.
We’ve since made similar agreements for numerous other projects in Hungary and across Europe, such as in 2017 with a customer management portal (CEZ|HUb) we delivered for the Hungarian subsidiary of CEZ Group, or in 2019 with the Common Balancing Zone platform we developed for Estonian TSO Elering and Latvian TSO Conexus.
“When customers are faced with large problems, the solution is often not clear at the start,” said Veiko Aunapuu, Regional Security Coordinator at Elering. “During the process, dissecting the problem helps to focus on what’s truly important; requirements that seemed important at first might turn out to be nice-to-haves. It really helps to have a partner who has solved similar problems without a fully defined scope. An agile approach helps to remove communication barriers, since the client and contractor are in the same boat. Trust and a mutual interest in a successful solution are fundamental in the agile approach, and at Elering we had both in cooperation with Navitasoft.”
In every case the customers were pleased with the results and quickly saw the benefits of the greater flexibility.
Agile procurement is smarter procurement
If you’re looking to move away from the rigid, time-consuming processes that have characterized software procurement in the energy industry, embracing agile can add value, speed and flexibility. Traditional procurement methods will continue to slow down innovation and advancement as the sector adapts to a changing world.
The agile software development methods that we at Navitasoft have used to build our products have now been successfully applied to speed up the contract negotiation stage of procurement, yielding faster, higher quality project outcomes for our customers.
Get in touch today to see how we can help you to be more agile by embracing customer-centric procurement of the solutions you need.
