48. How Utilities Can Manage Supplier Risk - BCG

How Utilities Can Manage Supplier Risk. Power companies are turning to external suppliers and contractors now more than ever. Utilities are getting help with tasks ranging from the relatively simple, such as vegetation management and the handling of customer calls, to the complex, including turbine repair and large infrastructure projects. Although the benefits of utilizing contractors are often obvious, the dangers, which include cyber, reputational, financial, legal, and regulatory risks, may not be as easy to assess. Two Boston Consulting Group (BCG) experts, Mike Lewis and João Maciel, were recent guests on The POWER Podcast. Both men are managing directors and partners with BCG based in Houston, Texas. Lewis leads the firm’s Houston office, while Maciel specializes in green energy, energy efficiency, and the environment. The pair helped author a paper on supplier risk management best practices and shared some tips during an interview for the podcast. Maciel noted that outsourcing amplifies three main risks that utilities are typically already exposed to in their businesses. Those are operational risk, reputational risk, and cyber risk. For example, if a contractor fails to follow suitable health and safety practices, then a utility could be operationally affected by the consequences. Additionally, power companies may be held accountable by the community or media when a contractor makes a mistake, which places the utility’s reputation at risk. Lastly, even though a utility may have excellent internal protocols designed to protect digital plant systems, when suppliers are given access to perform work, the utility’s risk increases. Suppliers also bring new risk exposure, such as fourth-party risk, which arises when a supplier uses subcontractors. Another added risk is contractual risk, which may limit a utility’s ability to monitor a contractor’s work. Concentration risk is also a potential problem. If a utility becomes too dependent on a supplier, it could lose bargaining power and internal expertise, which could lead to the last risk Maciel discussed: financial risk. That threat can be realized when a supplier falls into financial distress. If a power company can’t quickly replace the supplier, the utility’s operations could be adversely affected, which could have financial implications. On the podcast, Maciel presents a method to manage the risks. “One of the principles of the approach is that the complexity and the hard work and the really detailed design happens in a center of excellence in the corporate center,” Lewis explained. “It is very tailored to the needs and very, very user-friendly for people at the front lines.” Lewis said a lot of the setup and screening is done as vendors go through the procurement and contracting process, well before a job is scheduled to take place. “When things are the most complex, when the timing is tight, when deadlines are short, when a lot of people are onsite, that’s when a lot of the potential incidents could happen,” Lewis said. That’s why it’s important for utilities to manage risks appropriately in advance.