Background and Challenge
Network Rail is responsible for Great Britain’s rail infrastructure and is subject to strict cost, access, and price controls by the Office of Rail Regulation (“ORR”). In order to operate successfully under such restrictions, it is critical that the business maintains a clear understanding of cost levels relative to industry comparators, and that it manages costs across its extensive operations, identifying and implementing best practices, and addressing areas of underperformance.
As part of the ORR’s 2008 Periodic Review, L.E.K. Consulting was engaged by Network Rail to conduct two parallel studies: a thorough internal benchmarking study to identify targets for efficiency savings and an input prices review to establish relevant input price inflation levels to 2014. The results of these studies formed part of the eventual regulatory settlement for Network Rail’s 2009-14 funding.
Approach and Recommendations
The complexity and variety of Network Rail’s work activities meant that standard benchmarking techniques would have been insufficient to produce the level of detail and assurance required by the client. L.E.K. therefore had to develop an innovative new benchmarking technique, applying both quantitative and qualitative analysis to 24 distinct categories of Network Rail expenditure, and incorporated a continuous process of learning and improvement to deliver a range of efficiency benefits. An extensive exercise of data collection, analysis, review and iteration was completed to calculate raw unit costs for selected work activities, define structural factors, and produce ‘like-for-like’ unit costs so that genuine comparisons could be made between regions and delivery units. The results were revealing – and, in some cases, initially surprising – identifying savings equivalent to 13% of the relevant costs based on adopting best demonstrated practices across the organization. The output achieved high levels of buy-in from the Network Rail delivery teams involved.
Examining input prices, L.E.K. identified the many different types of labor, plant, and material inputs across a wide range of activities, including large capital projects, ongoing maintenance, and overheads. The work identified the key cost drivers and forecast range of inflation for each cost type and developed a view of regional variations across the UK. In addition, the project highlighted and quantified the company’s exposure to the risk of increased cost inflation due to the London 2012 Olympics and its exposure to the volatile prices of commodities such as oil, steel and copper.
The methodologies used in both studies were transferred to Network Rail management to enable them to continue to utilize the techniques and models as planning and performance measurement tools. Summaries of the studies were also published by ORR.