An organisation is “cost efficient” when it conducts its business at the least possible cost. An important step in improving and achieving cost efficiency is identifying and measuring the scope for efficiency improvement. Efficiency benchmarking techniques have widespread use in regulated industries across the world. Organisations or units within an organisation are compared to each other, in order to identify the “efficient frontier” and measure the scope for efficiency improvement relative to this frontier. Regulated prices are intended, in part, to reflect efficient costs, and regulators are particularly interested in assessing what the efficient level of costs is. Network operating, maintenance, renewal, or enhancement costs are often benchmarked. Efficiency benchmarking techniques are used to assess business plans, identify the scope for efficiency improvements, and to regulate prices accordingly.
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Efficiency Benchmarking Using Simple Performance Metrics
Simple key performance indicators (KPI), such as network maintenance cost per kilometre of gas pipeline, can be compared between organisations (external benchmarking) or between units within an organisation or regions across a network (internal benchmarking). These comparisons are versatile, and they are straightforward to calculate, monitor and interpret. Whilst they provide a good starting point in assessing the efficiency of a business, they do not take into account important differences between comparators, and may lead to a misleading assessment of efficiency. More sophisticated methods can be used to provide a more accurate assessment of efficiency.
Efficiency Benchmarking Using State-Of-The-Art Econometric Frontier Analysis
In order to achieve a “fair comparison” between organisation, econometric analysis is often used to control important differences between comparators that: (1) may affect costs, but (2) are outside of business control (and therefore cannot be ascribed to cost inefficiency). In the energy sector, these factors include geographic differences in employee wages, and the particular characteristics of energy networks including age, condition and complexity. FTI Consulting combines world-renowned expertise in economics and econometrics, with deep energy industry knowledge. We apply state-of-the-art econometric analysis including “stochastic frontier analysis” (SFA) to estimate efficient costs in these industries. We advise the regulators that set these price controls, as well as the energy businesses that operate within them.
Efficiency Benchmarking Using Data Envelopment Analysis (DEA)
Data envelopment analysis (DEA) is an alternative method for efficiency benchmarking. Although it does not use econometrics, this method allows for accounting for non-controllable factors before assessing efficiency. DEA is sometimes used on its own, or to verify the results from econometric analysis. When used on its own, DEA benefits from the deep sector expertise and modelling expertise that FTI Consulting professionals can provide.
Functional benchmarking refers to the benchmarking of back-office business costs, for example, those relating to IT, administration, or human resources. FTI Consulting Network Regulation professionals compare unit costs for specific functions for the company we are benchmarking with costs in comparative companies. FTI Consulting Energy professionals have considerable experience addressing the main challenge presented by this methodology is the identification of the appropriate comparators; this is because very different conclusions on efficiency can be reached when using different sets of comparators.
Total Factor Productivity Assessment
If a company’s costs are decreasing, is might be because salaries are decreasing, because it is selling less, or because its markets are shrinking. There are many reasons why you can have increases or decreases in costs or in what you produce. FTI Consulting economists and accounting experts have deep experience in total factor productivity assessment, especially with regulated companies and industries, using key metrics to help companies estimate what their efficiency and productivity are and whether they are increasing or decreasing.