On-Demand Practices for Utilities

Not all outages can be prevented, nor is it economically feasible to do so.
But customers are demanding new levels of service and expect utilities to
respond and communicate more effectively when unplanned events occur. In
addition, regulators are expected to push regulated rates of return to 8
percent and 9 percent from the historic 10 to 14 percent range realized.
And stockholders are continuing to seek growth strategies and innovation
in a 1 to 2 percent customer growth market.

In a world of unprecedented business and market pressures, utilities constantly
need to find ways to respond quicker, increase productivity, optimize assets,
and grow revenue, even in an environment of moderate growth. The new agenda
is all about productivity, operational excellence, and competitive differentiation.

So what actions should utility executives take to prepare their companies for
this new world? On-demand business practices can help by making organizations
more responsive and efficient, lowering costs, and uncovering hidden value.
This operational excellence will separate the winners from the losers while
forcing a tighter linkage between business and technology. Being prepared for
uncertainty and unplanned events will be the hallmark of utilities that successfully
embrace the on-demand business and operating environment.

What is an on-demand business? IBM Chairman and CEO Sam Palmisano defines it
as: “An enterprise whose business processes – integrated end-to-end
across the company and with key partners, suppliers, and customers – can
respond with speed to virtually any customer demand, market opportunity, or
external threat.”

Let’s take a closer look at that definition. “An enterprise whose
business process …” Improving processes is what on-demand business
is about. Utilities have the additional challenge of defining their core processes
and measures versus the traditional functional and line of business approach.
Technology is the key to enabling those processes, but the ultimate success
of implementation will depend on the way it transforms the business. IT decisions
need to remain firmly rooted in the business needs of the organization and
aligned to creating business capabilities and value. Unlike the failed paradigms
of the dot-com era, this new model demands that technology align itself to
strategy, not the other way around.

“…
integrated …” Integration is key. The power of the on-demand business
lies in its ability to break down barriers, speeding the flow of processes
and information within an organization. For utilities, this means providing
the right information, to the right people, at the right time, in the right
location, and over the right medium. This may require a cultural shift to use
information in ways that were not traditionally used. One example is leveraging
interval meter data, weather data, and facility loading data to design the
distribution system to more closely match what’s required versus over-
or under-designing the system. This could dramatically reduce unnecessary capital
expenditures on over-building your system and reduce costly maintenance dollars
on preventable outages. Not to mention the positive impact this would have
on customer opinion.

“…
end-to-end across the company with key partners, suppliers, and customers …” On-demand
integration begins within the company, but can expand to encompass businesses
and customers outside the company. The wider it goes, the greater the benefits.
For instance, the typical way of achieving scale was internally within the
enterprise. Today, you can scale by integrating your supply chain with the
supply chains of other enterprises. The automotive business is a good example
of an integrated business. On-demand companies focus on their true core competencies
and outsource key processes or functions to providers who can achieve higher
levels of service at a lower cost. For example, an outsourcer’s incremental
cost of reading a meter or producing a bill can be dramatically less than the
in-house solution.

For utilities, the areas worth considering partnering with an outside provider
include meter data acquisition, human resources, IT, legal and financial
services, and all or part of your customer operations. These relationships
should be
managed in a win-win fashion where you and your provider know how success
is defined for each other. As in any “give-to-get relationship model” you
should strive to make your partners successful, and they, in turn, should provide
you with a competitive advantage and bottom-line business and customer value.

“…
can respond with speed to virtually any customer demand, market opportunity,
or external threat.” The ability to quickly sense and respond to changes
within the company or marketplace is one of the key differentiators of an on-demand
business. For instance, high-resolution weather forecasting in conjunction
with mathematical modeling can be a main driving force behind energy and demand
prices. Imagine being able to more accurately construct load and price forecasts,
schedule generating units, determine trading strategies, and dispatch repair
crews in advance of an event. Or know the financial impact of a major outage
on your business the day after an event instead of the following month.

A Journey, Not a Destination

How can companies become on-demand businesses? Making that transition
is an ongoing journey, one that’s been going on for decades. Let’s look
at three transitional levels of business process integration that utilities
have seen during the past 20 years. This process is similar to the transformation
utilities must go through to become an on-demand business (see Figure 1).

The first level of business process integration is known as process optimization.
Process optimization or vertical integration removes the silos that impede
the flow of information company-wide and allows functional areas or businesses
to streamline operations.

The second level is enterprise optimization or horizontal integration,
which connects processes within the organization from purchasing to distribution,
allowing companies to move products and information across channels,
saving time, and reducing waste.

The third is integration across the entire value chain, which requires
utility leaders to move their vision beyond the view of their own organization
into
the external environment, creating symbiotic relationships with suppliers,
distributors, regulators, strategic partners, and customers.

Many utilities are still in the enterprise optimization level. Utilities
who move to the value-net creation level will realize significant business
value
and competitive advantage.

Attributes

There are four key attributes that differentiate an on-demand utility
and are required for companies to be successful: responsiveness, focus,
resiliency,
and variability (see Figure 2).

They must be responsive to shifts in demand, supply, labor, pricing,
competitors, capital markets, and the needs of their customers, partners,
suppliers,
and workforce. The previous model was mostly about predictability.

They must be relentlessly focused on their core competencies and differentiating
skill sets and assets in order to extract optimum performance from their
operating model. The previous model operated well with limited partnerships
and was successful
in a siloed functional approach to the business.

They must be resilient in the face of changing regulations, demand spikes
and valleys, an aging workforce, disruptive technologies, economic swings,
and
threats to infrastructure from natural disasters, sabotage, or an aging
asset base. The previous model was vulnerable to unforeseen shocks or
events.

They must use variable processes, technologies, and cost structures to
maintain high reliability, reduce risk, control costs, use capital efficiently,
and
provide the financial markets with steady performance. The previous model
was successful investing in large fixed assets with inflexible internally
focused
closed architectures.

The Operating Environment

Having a vision for an integrated business with the attributes described
above is a huge leap forward to preparing for market pressures facing
utilities. The complementary component is the appropriate IT operating
environment
or infrastructure that enables this new business design. The IT infrastructure
and the computing model are tools that support the business strategy.
Technology is not a strategy in and of itself, but an enabler. It is
also important
to
recognize that this operating environment is all about modularity and
standards. The trillions of dollars of invested IT is not going to come
together and
be leveraged if there are not open standards to integrate the legacy
and integrate
the new. On the modularity side, you want to buy technology once and
use it for the purpose intended and not have replicated structures.

The technological force that enables the finance, strategic planning,
operational, and infrastructure requirements for responsiveness, focus,
resilience,
and variability is the on-demand operating environment. This environment
allows
utilities to integrate with customers, suppliers, and regulators. In
corporate offices, it provides each individual in the organization with
the information
he or she needs to make insight-driven decisions and evaluate value-added
and non-value-added capabilities and processes. In the field, it automates
risk
management, helps ensure high reliability, and allows for automated variabilization
of output, throughput, and demand. The on-demand environment cuts IT
expenditures and headaches by requiring the utility to pay only for the
services it
uses, not for the infrastructure itself.

In order to serve as an on-demand operating environment platform, a utility’s
IT infrastructure needs to have each of the following characteristics:

It must be integrated to facilitate real-time connectivity among the
systems, data, and processes required to support the industry network,
provide integration
with customers, suppliers, and regulators, and enable active data mining
and decision support.

It must be based on open standards to facilitate collaboration, integration,
and communication, and allow for rapid adaptation to changes in technology.

It must be virtualized, with all resources managed as a single entity,
increasing the utilization of legacy systems while decreasing IT costs
by requiring
payment only for services used.

It must be autonomic, making use of hardware and software that can be
managed remotely, have embedded privacy and robust security features,
and be capable
of self-diagnostics and repair.

These four characteristics do something of great importance for an asset-based
business like a utility: they preserve flexibility in decision-making
and operations. The intertwined forces that will shape the industry in
coming
years will constantly
change the nature of the strategic, operational, and asset-management
decisions that must be made. However, even in the face of this constant
change, the
ultimate objectives of the utility as an asset-based business must remain
focused on
maintaining high service levels, optimizing value, accommodating and
exploiting technological change, and keeping costs low, as illustrated
on the left
side of Figure 3. Addressing the needs of the enterprise in ways that
preserve a optimum level of flexibility will be the only way to meet
these core
business
objectives regardless of the directions in which the business drivers
change our future (see Figure 3).

Asset-based businesses must respond to volatile environments with solutions
that preserve maximum flexibility in decision-making.

Financial and Delivery Models

As an on-demand utility, you’ve discovered the value of integrating your
business processes as well as enabling them with the right technology or IT
infrastructure. In today’s on-demand world, there are also new
ways to acquire and manage these capabilities. For instance, in the past,
if you wanted
more computing, you bought more hardware and software. The trouble was
that the amount needed was difficult to assess. If you bought too little,
you had
upset clients, outages, and lost revenue. If you bought too much, you
squandered precious assets.

On-demand financial and delivery models are now available that offer
new levels of variability, flexibility, and affordability. They allow
businesses
to access
existing infrastructures, applications and business processes over the
network when, and only if, they need it. They also enable a flexible
pricing model
that can change IT from a fixed to a variable cost. The appeal is obvious.
Enterprises liberated from long-term fixed IT costs will be able to devote
more attention to their core businesses and be more inclined to use IT
services when they become more responsive to their needs.

The key questions facing most utility companies today are:

  • How can I reduce my time and cost?
  • How can my infrastructure more dynamically support my business needs?
    and
  • How can I acquire infrastructure and business processes as a service,
    as needed?

This paper has presented an on-demand approach for utilities to address these
key questions. Many utilities today have moved beyond the early stages of integration
and are beginning to operate on demand. If you haven’t already begun
your journey, here are some suggestions.

Start from the top. Operating on demand will involve fundamental changes in
the way your company does business. Horizontal integration – across “vertical
silos, product silos, or functional areas” – or integration across
the entire value chain can be driven only from the top levels of an organization.

Examine the structure of your organization. You’ve probably already identified
some areas of inefficiency in your business. Here are some questions to help
you do a more detailed analysis:

  • Decentralized or shared? Which of your processes should continue to be
    decentralized? What ones can be shared globally or across business units?
  • Onshore or offshore? Which processes can be moved to another state or
    country? Which processes could be optimized if they were done elsewhere?
  • Core or peripheral? Which processes are absolutely fundamental to your
    company’s
    value generation? Which ones could be outsourced to a partner with
    more expertise?

Make IT part of your business strategy. The productivity gains that come from
on-demand utilities are powered by the interaction of IT and strategy. Technology
enables business decisions, and business decisions drive technology implementations.
You need to get the two working together. A good place to start is to:

Establish a clear governance model. Encourage collaboration between IT and
line-of-business leaders by assigning clear ownership of processes.

Make business transformation pay for itself. Start small. As you streamline
one process, you can invest the savings in the next effort. Follow this plan
and your on-demand transformation can become self-funding.

On-demand for energy and utilities is the fusion of business process transformation
and IT, changing not just business strategy, but business conduct. The
move to on-demand will happen because the value proposition is overwhelming.
Transforming
processes begets new IT enablement needs. The fusion of business process
transformation with powerful IT tools and a culture committed to excellence
has the potential
to result in industry leadership.