Over the past year, the energy industry has experienced a tremendous increase
in the type and amount of information demanded by regulators and the broader market.
A plethora of events, beginning with the California energy crisis, the collapse
of Enron, the Sarbanes-Oxley act, and increased scrutiny of energy trading, among
others, has placed an unprecedented level of disclosure demands upon the industry.
The difficulties companies had in preparing and responding to these new information
demands painfully demonstrated the need for better visibility, adaptability,
and flexibility in those views of the business. Organizations must reach for
an integrated framework for effectively aggregating, analyzing, and sharing
critical information between sources inside and outside the organization, enabling
more informed decision-making.
As personalized, role-based business intelligence and performance management
continues to evolve, analytical applications will be at the forefront of driving
the organization’s core business processes. We will see organizations strive
for an environment that integrates not just financial, but all analytics in
order to thrive in a variety of business conditions.
Drivers for Change
In recent months, credit agencies have downgraded diversified energy companies.
Given the importance of the cost of debt and its relationship to the profitability,
companies are quickly learning the value of providing the rating agencies with
all information that may help avoid an incorrect assessment of its risk. Investors,
too, have had to grapple with understanding the value of companies in this environment.
The capital markets have assumed even greater significance as the industry
moves onto a global footing through consolidation and intense merger and acquisition
activity. The economic downturn and the increasing problems with unbalanced
capital structures due to an overweight of short-term debt makes an accurate
valuation foundation even more critical.
A recently published survey by PricewaterhouseCoopers shows that 70 percent
of energy companies believe the market undervalues them. The capital markets
say they need to have better indicators to fully understand and value companies.
We believe the market will reward companies for improved corporate disclosure.
But this is not just about reporting to investors and other stakeholders. In
the long term, this is about managing the company more effectively.
The last several years have demonstrated the importance of being able to change
business focus toward value-creating activities. An industry and analyst focus
that rewarded the pursuit of aggressive investments such as energy trading are
now penalizing those same investments. A return to the core businesses of generation,
transmission, and distribution will provide the safe harbor and cash flows investors
With decreasing access to favorable debt terms, asset sell-offs and divestitures
may become a necessary evil for several market players. An increased cost of
capital is considered unavoidable for most industry players; the question is
who will manage to satisfy the capital market to stay competitive despite significant
debt renewals over the coming year.
Driving Competitive Advantage
The right analytical processes and enabling technology must be in place to
quickly and proactively correct the strategic course in today’s changing environment.
The capability of embedding analytical processes and linked key measures for
decision-making within the management chain will become a requirement for companies
to thrive in a highly competitive and rapidly changing business environment.
We began by focusing on integrated business processes associated with value
assessment, strategic planning, operational planning, and performance management
and control cycles. The objective is to design data management systems to verify
that they support the linking of output from strategic and business planning
at an aggregate level, budgeting at a departmental level, or from performance
management at any and all levels.
Another key objective is determining that employees are spending time and resources
on what creates shareholder value in the most efficient way possible. The availability
of decision data is crucial. A framework should identify and leverage information
across the value chain, making the required information available in exactly
the form and frequency needed.
A well-implemented framework will embed decision-making power, ensuring consistency
between the targets set and initiatives implemented and further reducing the
time required to react to changing market conditions. (See Figure 1.)
Figure 1: Data Framework
Frameworks should verify that:
All strategic decisions are based on shareholder value criteria and
on realizing the most value possible from investments in strategic and tactical
Management processes required to effectively plan, budget, allocate and
manage resources across the organization are in place.
The strategic message is communicated clearly throughout the organization
by simplifying the information landscape with personalized views that support
The required decision-support systems are available on all organizational
levels when required, as required, and with the quality required, leveraging
business intelligence across the enterprise.
Advanced analytical applications are used efficiently to solve business
problems as they arise or even anticipate problems before they arise.
An integrated planning solution describes the set of management processes required
to effectively plan, budget, allocate, and manage resources across the organization.
When a solution is deployed effectively, it is linked to the overall performance
management framework, and verifies that the organization’s relationship between
performance measures and actions are well coordinated.
An effective integrated process will utilize a common set of drivers, performance
measures, and assumptions. These will be shared between business processes and
their associated supporting applications, which will determine that a change
to a single driver or assumption will permeate throughout the entire framework.
For example, the same values should be utilized when determining a calculation
for maintenance cost per line mile, whether producing output from a business
planning application at an aggregate level, a budgeting application at a departmental
level, or from a balanced scorecard application at any and all levels.
When business processes support the capture of statistical and financial results,
analytical forecasting engines can be utilized to provide projections on an
automated basis. This will enable managers and business analysts to engage in
activities that provide greater value.
The business processes covered in an integrated planning framework include
strategic planning, business planning, financial planning and forecasting, budgeting,
and performance measurement.
Integrated and aligned planning processes enable utilities to implement strategic
changes faster and more consistently across business units and functional areas.
The transition from a high investment environment aiming at building new business
areas, such as trading and increasing market share through mergers and acquisitions,
to a cost- and risk-concerned environment moving back to core business areas
requires very efficient and integrated planning processes. Changing direction
is all about speed and agility in determining what will create value, what initiatives
are required, where resources are best used, and supporting a smooth implementation.
Integrated Performance Management
Performance management is best described as an integrated set of activities
to effectively plan, budget, allocate, and manage resources across an enterprise.
It is the process by which a company makes its strategy happen. Effective performance
management drives the company’s operational, financial, and business performance,
helping to ensure that the strategy is delivered efficiently and effectively.
A value-based management approach begins with the identification and decomposition
of the value chain into major activities. Specific business drivers and initiatives
can be targeted as a means to improve value, and can be used as a basis for
planning and performance measurement. Cascading business drivers and initiatives
down and across the organization facilitate a clear focus and an agile strategy
There is no shortage of enterprise-wide measures and targets to choose from.
Initially, it is important to stratify measures into two broad categories: enterprise
level, or those used by executives and for business portfolio management; and
operational level, or those used by operational managers and leadership.
While enterprise measures provide the information necessary for major investment
decisions and strategic orientation, operational-level metrics are concerned
with optimization of the business processes and ultimately support the enterprise
measures if aligned correctly.
This approach can also be used to develop tactics for realizing the value of
entering new businesses, integration of merged organizations, or implementation
of cost-cutting or risk-management initiatives. Often, identified business value
opportunities are not driven down through the organization to specific targets
for accountability from individual groups.
A value management approach can help ensure consistency in what external capital
market stakeholders are considering critical and what is measured and targeted
internally. This orientation may promote programs that optimize return on assets
over the long term, even if some short-term initiatives would not be normally
feasible outside of this context. This approach can strengthen the ability to
communicate clearly and consistently to capital market players, potentially
positively affecting credit risk ratings and market capitalization, and thereby
the cost of capital.
Figure 2: Technological Environment
In order to optimize the value of processes in the framework, the right technical
solutions must be deployed and tightly integrated. To support a more seamless
flow of information, existing systems often need to be changed to capture new
information or provide better data integration. The challenge is to gain an
understanding of the existing environment, develop a future state technical
framework based on defined process and metric requirements, and develop a phased
plan to migrate to the new state.
Developing a strong technical environment will require a number of data repositories,
analytical calculation engines, and presentation and reporting tools. The right
tool is one that is based on clear requirements. For data repositories, relational
databases are typically used for integrating large amounts of detailed information
from various sources.
Applications that require fast, multi-dimensional access to aggregated information
may utilize online analytical processing databases. The ability to consistently
extract data from various sources for downstream analytical databases and applications
is critical. To support this need, many companies acquire or develop extraction,
transform, and load tools for moving data quickly and accurately between source
and target databases and applications. Analytical calculations are often provided
as part of an analytical application, such as a business modeling or operational
Finally, several types of presentation tools are needed to deliver the right
view of information to the end user. Again, the business process needs should
drive tool requirements. Types of requirements range from ad hoc reporting to
online front ends with the ability to drill down into detailed information for
further investigation or opportunity assessment. Developing the technical environment
based on clearly defined process and technical requirements will support the
right selection and integration of tools.
Market players able to take advantage of these tools and frameworks will place
themselves on the front line in the competition for capital, proving to be among
the best in their market for long-term value creation and risk management.