Managing Customers for Value

Customer relationships are the most important asset of an energy retailer and
represent the value of an energy retail business. Yet how many retailers out
there can truly say they understand the total value
of their customer base, let alone the customer lifetime value (CLV) of every
customer?

In many ways, CLV is a holy grail for energy retailers striving
to manage their portfolio of customer relationships. Martin Yuill, utilities
analyst at Datamonitor, emphasizes: “Understanding customer lifetime
value and its associated profitability and loyalty dynamics is an important
trend amongst leading energy retail organizations. Those retailers who are
able to develop a competitive edge through leveraging detailed customer profitability
and loyalty information for strategic advantage will find themselves a step
ahead of their competitors.”

As Yuill highlights, CLV intrinsically links customer profitability and customer
loyalty. Customer profitability evaluates revenue, margin, and cost-to-serve
at the individual level to determine each customer’s profit contribution.
Customer loyalty evaluates the expected length
of each customer relationship and the underlying dynamics. CLV incorporates
both individual customer profit contribution and the expected length of the
customer relationship (loyalty) to determine
the value of each customer relationship in today’s dollars. Once a retailer
understands the value of each customer relationship and the drivers behind
it, enormous opportunities are created for managing and increasing that value.

What is important to understand is that CLV is forward looking.
It is not an evaluation of past profitability or performance of a customer
relationship. It does not matter if a customer was acquired six months ago,
is still in the red due to their acquisition cost, and has added little value
during that period. Nor does it matter if a customer has been with the retailer
for 10 years and has added enormous value to the bottom line during that time.
The respective past values have already been attributed, received, and consigned
to the past. CLV references historical profitability and loyalty as indicators
to future performance, and evaluates that future performance from a zero-value
base.

The platform for CLV analysis is the customer information system (CIS), a primary
operational system in an energy retailer’s IT application portfolio.
An advanced CIS is a rich mine of up-to-the-minute transaction and customer
interaction data. When combined with analytical models for customer profitability,
loyalty, and lifetime value, the CIS has the potential to transform operational
data into strategic knowledge far beyond an energy retailer’s traditional
horizons.

An advanced CIS captures detailed customer loyalty and customer profitability
information that enables energy retailers to determine who is a profitable
customer and who is a loyal customer today, and what characteristics individual
customers are expected to show going forward. The retailer can then work with
its salespeople and customer service teams to develop strategies to retain
its most profitable customers and seek to change the behavior of the unprofitable
and
less loyal customers.

Profitability and Loyalty

Recent Peace research has sought to ascertain whether customer profitability
measures leveraged in other industries apply consistently to the energy retail
sector. One such measure is the whale curve of profitability that is typically
found in other business sectors such as printing and haulage. The whale curve
depicts the profit contribution profile of a customer base and highlights that
typically 20 percent of customers can actually contribute up to
300 percent of overall customer base profitability, and that another 20 percent
of customers can erode 200 percent of the bottom
line (see Figure 1). Peace’s analysis of utility cost-to-serve factors
including calls to call centers, billing frequency, and collection activity,
as well as revenue drivers such as energy usage and pricing is yielding energy
retail results consistent with the whale curve used in other industries.

The ultimate business value, however, is not simply to recognize
that there are profitable, break-even, and loss-making customer relationships
within a customer base, but to identify which customers are in which profitability
segment in order to focus business resources to increase individual and overall
profitability. It is by applying customer profitability and energy-industry-specific
analytical technology to CIS data that enables energy retailers to identify
which customers are actually profitable.

Peace research is also looking more deeply into understanding energy customer
loyalty drivers. Figure 2 displays a selection of customer traits that contribute
to the evaluation of individual customer loyalty.

If a retailer is able to accurately answer these questions and determine
what makes a customer satisfied or dissatisfied and attribute ratings to each,
it
will be able to apply an analytical customer loyalty model to build a picture
of individual customer loyalty and provide comparisons across the entire customer
base. It can help identify which customers and groups of customers a retailer
should
be focusing retention initiatives on in order to build loyalty.

Customer Value Quadrants

Figure 3 shows how customer profit contribution and loyalty combine
to determine CLV.

  • Golden customers: These are a retailer’s best
    customers. They have significant potential to enhance value going forward.
    Retailers
    require retention strategies that will reinforce the retailer’s
    positive image and keep the customer loyal for the length of time they
    continue
    to be profitable.
    This might include online payment options for those who work in an office
    or add-on services (such as energy audits, various types of warranties,
    and lighting) that foster an image of the company as an essential energy
    solutions provider.
  • Mercurial customers: These include a retailer’s “butterfly” customers
    who flit from retailer to retailer. They are highly profitable, but might easily
    switch supplier given the right opportunity. In this case, a retailer armed
    with CLV information might strive to enhance loyalty with targeted retention
    programs addressing specific factors influencing the customer’s
    propensity to switch. This might include a committed contract term
    at an attractive
    price, the introduction of convenient electronic bank transactions,
    and online bill
    payments that enhance customer stickiness and affinity programs such
    as frequent flier miles or charitable donations. The goal is to move
    these
    customers in
    the direction of, if not into, the golden quadrant over time.
  • Marginal customers: These are customers on the borderline
    of profitability or unprofitable and are not expected to be with the retailer
    for
    very long. Nevertheless, one would expect at least some of these customers
    to have
    the potential to move toward
    the golden quadrant. A retailer should not view all customers in this
    segment through a negative lens. A retailer might examine segments within
    this
    quadrant for potential to build both loyalty and profitability.
  • Faithful customers: These customers are what some in the industry have
    labeled the “barnacles”: loyal customers who have always been
    with the retailer and have no intention of switching. An example
    of such a customer
    might be one who uses little power on their single product offering,
    and the
    overhead of the billing, payment, and customer care transactions
    is, and will always be, more
    than the margin on revenue. Facing a small or negative CLV, a retailer
    can decide whether it can influence the profit contribution upward
    through a
    lower-cost relationship or by up-selling additional products to
    increase revenue and margin.

Every Customer Is Different

As the customer value quadrants highlight,
CLV and its associated loyalty and profit dynamics raise some interesting
questions. A retailer might ask: “Do we have a strategy for new customer
acquisition and retention that provides optimal
profit and value for the company? When a customer shouts, should
we always jump, and how high?” Sometimes it makes sense to temper the knee-jerk
reaction by considering just how valuable that customer will be over the
lifetime of their relationship.

A retailer treating all customers the same
risks suffering a double blow. First, resources can get squandered
on unprofitable customers and, second, profitable ones can get short
shrift
and become
less satisfied. With accurate per-customer cost and revenue information,
and a
deeper understanding of a customer’s loyalty drivers, energy retailers
will be able to target investments at loyalty and profitability improvement
objectives
that focus on the appropriate customers, products, and channels.

The Future for CIS

Understanding the dynamics of individual
customer loyalty, profitability, and value has
however proved difficult for many retailers in
the past. Many previous CLV strategies have floundered, overcome
by too much data, too
much complexity, too many intangibles, and the
lack of systems equipped to support a CLV focus. Today, CLV has become
feasible with advanced
CIS systems that drill down into deeper customer insights, and shed
light on the lifetime value of each customer.

CLV analysis need not incur the time and cost of collating and incorporating
every last piece of data at the outset. Early results can be attained
from informed selections of data that can highlight major value drivers
in specific
business and customer segments that can then be fed back
into the system to enhance value going forward. The customer is the
retailer’s
most valuable
asset, and understanding and managing this
value is entirely feasible with the right technology and the right
approach.

Global Sourcing: Getting Started

Sourcing work to offshore locations and/or moving global resources to domestic
locations to perform work has been gaining momentum over the last several
years as companies increasingly are attracted to the efficiency and effective
gains promised through these approaches. As with all significant and complex
strategic initiatives, there are questions that arise as companies plan and
execute these programs. The following are some of the questions that are
commonly asked, along with one way to answer the question.

Why Did Global Sourcing Take So Long to Become Popular?

Many leading vendors have been focusing on this model for a number of years.
However, there were two key developments in the last decade that enabled the
model to gain in popularity.

The first is the evolution of the Internet. High-quality and low-cost bandwidth
has enabled remote workers to become highly productive and integrated with
their on-site counterparts, paving the way for creative development and maintenance
delivery models. Another byproduct of the Internet was the increased ability
for companies to import staff from offshore locations to domestic locations.

The second development focuses on the devaluation of currencies in a variety
of countries that are now focal points for offshore development. The devaluation
has pushed rate structures in offshore locations to a point where the value
proposition to adopt a global sourcing model is very compelling to many companies.
Between 1980 and 2003, India’s rupee lost over 80 percent of its value
against the US dollar. This devaluation has made it far less expensive for
US companies to conduct business in India. Similar currency devaluations have
occurred in Brazil and other popular offshore locations.

What Should We Look for in a Vendor?

There are a variety of IT research organizations that periodically publish
rankings/evaluations of the leading global sourcing companies. Some of these
organizations include Gartner, Forrester, Meta, GIGA, and others.

The reality is that the handful of leading companies can meet or exceed a typical
list of basic requirements published in a request for proposal and can provide
service that will meet or exceed most companies’ standard requirements.
So, how can a company separate one or two companies from the pack? The following
are a few ideas:

  • Value Add – Companies should ask vendors to submit a detailed response
    on the value add that they will bring to the table. This should include
    a section that identifies what is included at no additional cost and what
    options
    are
    available for an additional cost.
    This response will provide a view to how a vendor defines its offering.
    A limited response in this section might suggest that a company sees itself
    as a body
    shop and the company they are providing service to as a big cash register.
    A more thoughtful and creative response might suggest that the vendor
    is
    focused on a broader picture and providing solutions as opposed to bodies,
    and may
    be able to provide a far greater value proposition than competitors.
  • Delivery Team. One way to select one or two vendors from a group is based
    on the actual staff that will be on-site and off-site performing the work.
    It
    may be tough for a vendor to nail down the actual staff that will be
    working on the project if the start date is a moving target. Companies should
    commit
    to a start date and ask vendors to commit key members of their delivery
    team to start on that date. Once the project has started, the staff that
    is selected
    for the project may ultimately leave the project for a variety of reasons.
    As a result, a company should have a solid understanding of a supplier’s
    ability to back-fill quality. The following questions (and more) should
    be considered in an evaluation: Does the supplier have an industry-specific
    practice?
    Does the supplier have competency centers specializing in the required
    skill set? Does the supplier have staff visa-ready for travel? Does
    the supplier
    rely on contractors or are they actual employees? Does the staff provide
    a formal training program for new employees?
  • Selling the Decision. Across geographies and industries there are varying
    degrees of sensitivity to global sourcing. In some situations, the decision
    to move
    forward will be reviewed multiple times within a company and perhaps
    even with external stakeholders. This may factor into a company’s decision
    to work with one vendor versus another.

How Much Work Should We Perform Onshore and How Much Should We Perform
Offshore?

How companies structure their delivery models depends upon a variety
of different factors. In some industries and geographies, political and
regulatory
pressures
may prevent a company from configuring a solution as aggressively as
it would like. A recent example reported in the Nov. 21, 2003, edition
of
the Indianapolis
Star involved an Indian company winning a US state government contract
only to have it taken away as public pressure mounted to provide the
work to US
citizens. In the utility industry, there seems to be a higher sensitivity
to global sourcing resulting from regulatory and public interest group
influence. That aside, many utilities are quietly moving forward with
initiatives of
varying
degrees. A quick scan of the leading providers will provide the names
of a number of utility industry clients.

For companies that are looking to define a model that best meets their
needs, Figure 1 identifies three possible high-level approaches and issues
to consider
in selecting each.

For companies that decide to utilize an onshore-offshore model, there
is a continuum of staffing alternatives to consider based upon the type
of
work. Most companies will deploy a 20-80 to 40-60 model.

What Is the Difference Between Transition and Transformation?

In a rush to get to the benefits, more than a few companies have glossed
over two critical components of making a global sourcing initiative successful:
transition and transformation.

A transition involves preparing for and migrating the development and
maintenance services performed by the current organization to the new
organization
without disruption in quality or service. A transition focuses on defining
logical
groups or partitions of applications and then migrating the work performed
around those applications to the new organization. Underlying this process
is careful planning for human resource management, knowledge management,
and change management.

Transformation involves defining and institutionalizing processes consistent
with the Software Engineering Institute’s Software Capability Maturity
Model (SEI CMMI), which consists of best practices to address both development
and maintenance activities. With proper planning and execution, it is
an achievable goal for most organizations to achieve Level 3 within 12
months. Many organizations
will begin with a Level 1 or Level 2 capability. Figure 2 is an overview
of the levels corresponding to the SEI model and the corresponding characteristics:

How Should We Address Business Continuity Concerns?

There are a variety of events that could create problems for your delivery
model. With proper planning, even the most significant and catastrophic
events can be mitigated.

The following is a framework for thinking through various potential disruptions
in service and the resulting items that need to be addressed to mitigate
the disruption should it come into play. Many companies will identify
an alternate
offshore location that is prepared to provide service in the remote case
the primary location is not able to. Often this will just be another
location in
the same country.

A blue alert is a very low to no-impact problem on support. Typically
a temporary outage of the dedicated communications link occurs. Onshore
resources
should
continue to provide support for the critical systems, and the situation
will be monitored and escalated to yellow if needed.

A yellow alert will impact operations for a brief, but temporary, period.
The definition of “brief period” should be determined by
the business user. In this scenario, onshore resources will continue
to provide support
for critical systems. In addition, if needed, travel-ready Indian subject
matter experts will be brought onshore. Plans for moving work to another
location
will be prepared, and finally the situation will be closely monitored
to determine if it is needed to escalate to red.

In the case of a red alert, there are major impacts on the project. The
current delivery center becomes inoperable and support operations have
to be shifted
to an alternate center. As always, onshore resources will provide support
for the critical systems while locally available technical skills from
the US are
infused to the team. Alternate locations will be finalized and migration
plans will be generated. In addition, India subject matter experts will
travel to
the US or to the new country to lead knowledge transfer.

What Should Our Global Sourcing Partner Do to Protect Our Intellectual
Property?

Leading providers will be able to provide to a company with their corporate
standards outlining their policy and procedures to safeguard company
information. The policies should address personnel, infrastructure, and
data and network
areas. All vendor locations and projects should comply with these policies,
and the vendor should be periodically audited for compliance. A vendor
should be able to incorporate additional measures as needed by a company.

Personnel acquisition and management should be a formally defined process.
This should include background checks, language testing, and technical
testing. In addition, all staff should sign or be covered under a confidentiality
agreement. A formal indoctrination program should take place for all
staff providing training
on all policies and procedures. Compliance is a condition of employment.

Remote development centers should require photo identification for all
staff, with electronic card readers limiting access to specific areas.
External
entry should require badge access that is monitored and enforced by security
via
closed-circuit cameras. Around-the-clock security personnel should be
used for equipment sign-in and sign-out.

Project servers, workstations, and documents should be individually numbered
and physically safeguarded. All output devices should be centrally located,
localized, and secured at a project and infrastructure level. Offsite
archiving policies for business continuity are agreed upon with the company
prior
to implementation.

A comprehensive networking policy should be established for the protection
of the client’s LAN. The vendor LAN should be part of a security-enhanced
private network, protected by firewalls.

The client team’s LAN should access only the client’s servers.
The client’s LAN is fully isolated from the vendor WAN, and connection
to the LAN is possible only via specific, secure points. Workstations should
have desktop firewalls, thus establishing protection at the lowest levels of
access, and should be updated online by the vendor’s worldwide tools
and systems. TCP/IP vulnerability scans should be conducted on account servers.
Power-on passwords should be mandatory and must conform to established rules
for complexity and frequency of change. Anti-virus software should be pre-loaded
and kept up to date and synchronized online by the vendor’s worldwide
tools and systems.

AMR – More Than Reading a Meter

Ten years ago, unleaded gas cost an average of $1.11 per gallon, the median family income was about $45,000, natural gas cost about $6.16 per thousand cubic feet, and electricity was about $0.0838 per kilowatt hour. Investor-owned utilities were considered very safe investments, suitable for widows and children looking for dividends.

Automated meter reading (AMR) was still a developing industry. In fact, federal legislation was introduced to investigate the possibilities of remote metering. While the federal government was considering a study, 10 utilities reported installing more than 230,000 AMR units. That’s a small percentage of the installed base of meters, but certainly a building block.

For utilities, the primary driver for installing AMR systems was reduction of meter-reading costs. Collecting the critical monthly billing read without errors, without human intervention, and as quickly as possible were the main business case drivers.

Utilities were dealing with specific issues in 1993, including two-income families that resulted in lack of access to meters, meter-reader safety issues, and the increasing automation of processes. The focus was on the reading to provide input to the billing system. More frequent billing, customized billing dates, and improved customer service were all concepts for the future.

The primary technology used for AMR systems was telephone. This could be in-bound or out-bound but was firmly built on the assumption that residences and businesses had phone lines that could be used by the AMR system. While business cases for AMR implementations still include the reduction of meter-reading costs, the decade progressively has brought substantial changes to the overall utility marketplace and to the AMR industry specifically.

Changes

These changes have occurred in four main areas: technology, the utility business, social/economic arena, and regulatory issues. Let’s take a look at some of them and how they affect the AMR business case.

In 1993, few people could have predicted that the percentage of homes with landline telephones in the US would actually decrease. There are several drivers for this, including the decreased cost of mobile services as well as other technologies available to homeowners such as Internet phones and cable modems. In addition, the implementation rate of the Internet has been greater than any previous technology introduction.

These technology changes have affected the AMR industry through the development of new technologies that can be used for meter reading as well as changing the benefits of a telephone-based AMR system. Most systems installed today are radio frequency (RF)- or power-line carrier (PLC)-based.

Changes in the utility business have come from several different areas. The prospect of deregulation and now re-regulation of the electric industry has forced utilities to be more focused on their core business. For municipal utilities, the recent municipal budget challenges also have put more focus on better business practices.

For both investor-owned and municipal utilities, this has created the need to adopt technology that meets more than one need. AMR systems no longer can be justified based only on reducing meter-reading costs. More focus is placed on the entire meter-reading process. For example, collecting accurate reads results in fewer customer calls and less expense because the customer-service department receives far fewer calls complaining about high bills.

The past 10 years have seen a continued growth in the number of dual-income families. Access to these homes has become more of a challenge. In addition, these families often are technically savvy and want more control over their financial lives. This can result in an interest in energy programs that can lead to savings or simply to the customers’ desire to control the date that they receive their utility bills.

Finally, increased regulatory pressures have had an impact on the entire utility business. New focus on better customer service through the elimination of estimated reads or percentage of accurate bills has changed how utilities view AMR. While the deregulation/re-regulation of the electric industry is the most obvious example, water utilities are being hit by increased legislative pressure from the Clean Water Act and the Safe Drinking Water Act.

AMR in 2003

Today there are more than 25 million AMR units installed on gas, water, and electric utility meters. The gas industry leads with about 21 percent of the meters changed to AMR, electric has about 16 percent, and water has 11 percent installed. More than 9 million units shipped in 2002, and indicators show that 2003 numbers will exceed that substantially.

The early technology choice, telephone, has seen a decrease in sales. On the other hand, radio frequency products have captured more than 75 percent of the market. Within the RF market, there are both mobile and fixed network systems. To date, mobile technology has been installed at about 70 percent of the RF systems.

While there are more than 20 AMR vendors listed in the most recent edition of The Scott Report, seven vendors have shipped almost 97 percent of the installed AMR. These include Itron Inc., SchlumbergerSEMA, Badger Meter Inc., Hunt Technologies Inc., TWACS by DCSI, Neptune Technology Group Inc., and Invensys plc.

Many of the new systems being marketed provide more than just a monthly billing read. Network-based systems, both RF and PLC, can provide daily, every four-hour, or even every 15-minute, readings from the meter. The additional information being collected can provide benefits to both the utility and the customer.

Utilities are installing AMR systems today to improve customer service as well as to provide value throughout the enterprise. AMR systems are affecting more than the meter-reading department; they
are being integrated with resources elsewhere within the utility. More accurate and timely data has increased value to other departments.

Many customer-service benefits remain unchanged in 10 years: elimination of estimated bills, reduced off-cycle reads, and reduced billing disputes. However, regulatory pressure has been the driver for the system installation in some cases. One utility was required to answer 80 percent of its calls within 20 seconds. There were two ways to meet this mandate. The utility could substantially increase the size of its call center, or it could decrease the number of incoming calls. The choice was a new AMR system.

AMR provides actual reads for each bill. Customers are increasingly unhappy with estimated bills. If their cellular bill can tell them to the second how long they spoke and with whom, why can’t their utility bill tell them more than just the estimated usage for the past 30 days.

For some utilities, installation of an AMR system has reduced service-center calls by more than 50 percent. The day after bills are sent is no longer the worst day in the customer-service center. With daily meter readings available, utilities can let customers choose their billing date. Using software, the utility can present meter-reading data to customers on a Web site so that they can see where their greatest consumption is occurring.

Daily meter readings not only benefit the customer, they also benefit the utility. One of the first benefits is a reduction in costs related to move in/move out customers. This can be a major expense for utilities in college or university towns with a large transient population.

But more important, having accurate, finely granular data gives utilities the tool to bring more control to their process. When meter reading is collected on only a monthly time frame, analysis of usage patterns is very difficult. But with daily meter readings, load profiles can be built by customer, by neighborhood, by substation, or by supply line.

Accurate load information enables engineering departments to correctly size the infrastructure of the utility. In one case, information from the AMR system was used to right-size transformers at a utility, resulting in substantial savings. Likewise, water utilities can correctly size and select meters by knowing what the typical consumption and high consumption for a service area will be.

Marketing departments can use the data collected to run models of different rate structures. Time-of-use rates become an option for utilities, better matching costs to price. One California study indicated that peak-rate usage could be shaved by 20 percent if customers had accurate pricing information. And each megawatt of reduction can equate to $400,000 in savings per year for the utility.

With a network AMR system installed, utilities can then look at other services they can provide their customers. One utility provided energy analysis services to large customers. By looking at when energy was being used and correlating with building activity, the utility quickly identified incorrectly set HVAC systems. This resulted in 5 percent to 10 percent savings for the customer. For the utility, it provided differentiation of its service on a proactive basis.

With more than 25 million points installed at more than 6,000 utilities, the business cases are diverse. But more utilities are finding that AMR looks much more attractive.

Future of AMR

With more than 200 million meters yet to be changed out to AMR, what does the future hold? There are a number of drivers that can give some indications. These include lower-cost equipment with more features, customer demands, and continuing legislative and regulatory pressures.

The AMR industry continues to be very active. New products and new manufacturers appear frequently. Many of the new products focus on reducing the cost of the meter and AMR module. For some, this is done by integrating the two technologies, for others it occurs through reducing the cost of installing the final product.

The new products often have new features. These include leak detection abilities for water-oriented AMR products and solid-state electric meters that combine metering and AMR capabilities.

The increased choice of communication technologies – Zigbee, 802.11b, and Blue Tooth – have created a wider spectrum of AMR products. Utilities have the ability to tailor their AMR solution to their territory and customer needs. Solutions exist for urban, suburban, and rural communities and can be combined to provide a custom-fitted solution rather than one-size-fits-all. The increased levels of customer service provided by retailers have raised the bar for utilities. Many customers want to be able to choose their billing date. They want exact bills, and many want better control over their energy purchases. AMR systems can assist utilities in meeting these challenges.

Meter-reading dates typically have mandated billing dates. With meter readings available on a daily or more frequent basis, a change can be accommodated easily. Likewise, installation of any AMR dramatically increases the accuracy of the read. In some cases, AMR system providers will guarantee accuracy rates in excess of 97 percent.

Control over energy costs can come from a number of AMR systems. For some customers, a prepaid metering system that lets them pay for energy usage on a weekly basis may meet their needs. For others, remotely controlling the thermostat from their office may be their requirement. AMR systems today can provide these benefits.

Legislative and regulatory demands will not lessen in the coming years. AMR systems can provide the raw data to meet some of these. For example, monitoring of the network used in an AMR system can provide more accurate outage information than calls received from customers.

Discussions surrounding the Energy Bill recognized the value of advanced metering to the nation and included tax incentives.

The more than 6,000 utilities in North America that have made an investment in AMR are seeing the benefits. There is an immediate impact on the cost of collecting meter reads, but the benefits flow throughout the enterprise. More accurate reads reduce the burden on customer service departments and allow meter readers to focus on upgrading systems rather than collecting meter reads. Engineering departments can use the data to make better decisions in developing the infrastructure, and outage teams can respond more rapidly to the correct location.

AMR isn’t just about meter reading; it is about the information that enables a utility to make well-informed strategic decisions and to excel.

AMR – More Than Reading a Meter

Ten years ago, unleaded gas cost an average of $1.11 per gallon,
the median family income was about $45,000, natural gas cost about $6.16 per
thousand cubic feet, and electricity was about $0.0838
per kilowatt hour. Investor-owned utilities were considered very safe investments,
suitable for widows and children looking for dividends.

Automated meter reading (AMR) was still a developing industry. In fact, federal
legislation was introduced to investigate the possibilities of remote metering.
While the federal government was considering a study, 10 utilities reported
installing more than 230,000 AMR units. That’s a small percentage of
the installed base of meters, but certainly a building block.

For utilities, the primary driver for installing AMR systems was reduction
of meter-reading costs. Collecting the critical monthly billing read without
errors, without human intervention, and as quickly as possible were the main
business case drivers.

Utilities were dealing with specific issues in 1993, including two-income
families that resulted in lack of access to meters, meter-reader safety issues,
and
the increasing automation of processes. The focus was on the reading to provide
input to the billing system. More frequent billing, customized billing dates,
and improved customer service were
all concepts for the future.

The primary technology used for AMR systems was telephone. This could be in-bound
or out-bound but was firmly built on the assumption that residences and businesses
had phone lines that could be used by the AMR system. While business cases
for AMR implementations still include the reduction of meter-reading costs,
the decade progressively has brought substantial changes to the overall utility
marketplace and to the AMR industry specifically.

Changes

These changes have occurred in four main areas: technology, the utility business,
social/economic arena, and regulatory issues. Let’s take a look at some
of them and how they affect the AMR business case.

In 1993, few people could have predicted that the percentage of homes with
landline telephones in the US would actually decrease. There are several drivers
for this, including the decreased cost of mobile services as well as other
technologies available to homeowners such as Internet phones and cable modems.
In addition, the implementation rate of the Internet has been greater than
any previous technology introduction.

These technology changes have affected the AMR industry through the development
of new technologies that can be used for meter reading as well as changing
the benefits of a telephone-based AMR system. Most systems installed today
are radio frequency (RF)- or power-line carrier (PLC)-based.

Changes in the utility business have come from several different areas. The
prospect of deregulation and now re-regulation of the electric industry has
forced utilities to be more focused on their core business. For municipal utilities,
the recent municipal budget challenges also have put more focus on better business
practices.

For both investor-owned and municipal utilities, this has created
the need to adopt technology that meets more than one need. AMR systems no
longer can be justified based only on reducing meter-reading costs. More focus
is placed on the entire meter-reading process. For example, collecting accurate
reads results in fewer customer calls and less expense because the customer-service
department receives far fewer calls complaining about high bills.

The past 10 years have seen a continued growth in the number of dual-income
families. Access to these homes has become more of a challenge. In addition,
these families often are technically savvy and want more control over their
financial lives. This can result in an interest in energy programs that can
lead to savings or simply to the customers’ desire to control the date
that they receive their utility bills.

Finally, increased regulatory pressures have had an impact on the entire
utility business. New focus on better customer service through the elimination
of estimated
reads or percentage of accurate bills has changed how utilities view AMR. While
the deregulation/re-regulation of the electric industry is the most obvious
example, water utilities are being hit by increased legislative pressure from
the Clean Water Act and the Safe Drinking Water Act.

AMR in 2003

Today there are more than 25 million AMR units installed on gas, water,
and electric utility meters. The gas industry leads with about 21 percent of
the
meters changed to AMR, electric has about 16 percent, and water has 11 percent
installed. More than 9 million units shipped in 2002,
and indicators show that 2003 numbers will exceed that substantially.

The early technology choice, telephone, has seen a decrease in sales. On the
other hand, radio frequency products have captured more than 75 percent of
the market. Within the RF market, there are both mobile and fixed network systems.
To date, mobile technology has been installed at about 70 percent of the RF
systems.

While there are more than 20 AMR vendors listed in the most recent edition
of The Scott Report, seven vendors have shipped almost 97 percent of the installed
AMR. These include Itron Inc., SchlumbergerSEMA, Badger Meter Inc., Hunt Technologies
Inc., TWACS by DCSI, Neptune Technology Group Inc., and Invensys plc.

Many of the new systems being marketed provide more than just a monthly billing
read. Network-based systems, both RF and PLC, can provide daily, every four-hour,
or even every 15-minute, readings from the meter. The additional information
being collected can provide benefits to both the utility and the customer.

Utilities are installing AMR systems today to improve customer service as well
as to provide value throughout the enterprise. AMR systems are affecting more
than the meter-reading department; they
are being integrated with resources elsewhere within the utility. More accurate
and timely data has increased value to other departments.

Many customer-service benefits remain unchanged in 10 years: elimination
of estimated bills, reduced off-cycle reads, and reduced billing disputes.
However,
regulatory pressure has been the driver for the system installation in some
cases. One utility was required to answer 80 percent of its calls within 20
seconds. There were two ways to meet this mandate. The utility could substantially
increase the size
of its call center, or it could decrease the number of incoming calls. The
choice was a new AMR system.

AMR provides actual reads for each bill. Customers are increasingly unhappy
with estimated bills. If their cellular bill can tell them to the second how
long they spoke and with whom, why can’t their utility bill tell them
more than just the estimated usage for the past 30 days.

For some utilities, installation of an AMR system has reduced service-center
calls by more than 50 percent. The day after bills are sent is no longer the
worst day in the customer-service center.
With daily meter readings available, utilities can let customers choose their
billing date. Using software, the utility can present meter-reading data to
customers on a Web site so that they can see where their greatest consumption
is occurring.

Daily meter readings not only benefit the customer, they also benefit the utility.
One of the first benefits is a reduction in costs related to move in/move out
customers. This can be a major expense for utilities in college or university
towns with a large transient population.

But more important, having accurate, finely granular data gives utilities the
tool to bring more control to their process. When meter reading is collected
on only a monthly time frame, analysis of usage patterns is very difficult.
But with daily meter readings, load profiles can be built by customer, by neighborhood,
by substation, or by supply line.

Accurate load information enables engineering departments to correctly size
the infrastructure of the utility. In one case, information from the AMR system
was used to right-size transformers at a utility, resulting in substantial
savings. Likewise, water utilities can correctly size and select meters by
knowing what the typical consumption and high consumption for a service area
will be.

Marketing departments can use the data collected to run models
of different rate structures. Time-of-use rates become an option for utilities,
better matching costs to price. One California study indicated that peak-rate
usage could be shaved by 20 percent if customers had accurate pricing information.
And each megawatt of reduction can equate to $400,000 in savings per year for
the utility.

With a network AMR system installed, utilities can then look at other services
they can provide their customers. One utility provided energy analysis services
to large customers. By looking at when energy was being used and correlating
with building activity, the utility quickly identified incorrectly set HVAC
systems. This resulted in 5 percent
to 10 percent savings for the customer. For the utility, it provided differentiation
of its service on a proactive basis.

With more than 25 million points installed at more than 6,000 utilities, the
business cases are diverse. But more utilities are finding that AMR looks much
more attractive.

Future of AMR

With more than 200 million meters yet to be changed out to AMR, what does the
future hold? There are a number of drivers that can give some indications.
These include lower-cost equipment with more features, customer demands, and
continuing legislative and regulatory pressures.

The AMR industry continues to be very active. New products and new manufacturers
appear frequently. Many of the new products focus on reducing the cost of the
meter and AMR module. For some, this is done by integrating the two technologies,
for others it occurs through reducing the cost of installing the final product.

The new products often have new features. These include leak detection abilities
for water-oriented AMR products and solid-state electric meters that combine
metering and AMR capabilities.

The increased choice of communication technologies – Zigbee, 802.11b,
and Blue Tooth – have created a wider spectrum of AMR products. Utilities
have the ability to tailor their AMR solution to their territory and customer
needs. Solutions exist for urban, suburban, and rural communities and can be
combined to provide a custom-fitted solution rather than one-size-fits-all.
The increased levels of customer service provided by retailers have raised
the bar for utilities. Many customers want to be able to choose their billing
date. They want exact bills, and many want better control over their energy
purchases. AMR systems can assist utilities in meeting these challenges.

Meter-reading dates typically have mandated billing dates. With meter readings
available on a daily or more frequent basis, a change can be accommodated easily.
Likewise, installation of any AMR dramatically increases the accuracy of the
read. In some cases, AMR system providers will guarantee accuracy rates in
excess of 97 percent.

Control over energy costs can come from a number of AMR systems. For some customers,
a prepaid metering system that lets them pay
for energy usage on a weekly basis may meet their needs. For others, remotely
controlling the thermostat from their office may be their requirement. AMR
systems today can provide these benefits.

Legislative and regulatory demands will not lessen in the coming years. AMR
systems can provide the raw data to meet some of these. For example, monitoring
of the network used in an AMR system can provide more accurate outage information
than calls received from customers.

Discussions surrounding the Energy Bill recognized the value of advanced metering
to the nation and included tax incentives.

The more than 6,000 utilities in North America that have made an investment
in AMR are seeing the benefits. There is an immediate impact on the cost of
collecting meter reads, but the benefits flow throughout the enterprise. More
accurate reads reduce the burden on customer service departments and allow
meter readers to focus on upgrading systems rather than collecting meter reads.
Engineering departments can use the data to make better decisions in developing
the infrastructure, and outage teams can respond more rapidly to the correct
location.

AMR isn’t just about meter reading; it is about the information that
enables a utility to make well-informed strategic decisions and to excel.

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.

Economic Development Partnering

Regulated utilities compete every day. They try to persuade other corporations
to locate operations within the utility’s service area.

Today, all corporations evaluate their global choices, appraising such factors
as taxes, workforce quality, and transportation services. Company executives
with energy-intensive operations also evaluate energy costs and services.

High-tech companies, for example, spend 10 to 15 percent of their operating
budget to power computers, cleanrooms, and laboratory spaces. Just within a
small state like Massachusetts, a pharmaceutical laboratory has a choice between
two biotechnology centers, one in Cambridge served by NSTAR and another in
Worcester served by Massachusetts Electric Co. To attract development, Mass
Electric touts its low distribution rates, energy-efficiency programs, network
reliability, and customer service. The utility also advertises its New Choices
Program, which provides customers contact information on qualified commodity
suppliers.

Economic development competition is increasing. Utilities need to do more to
create a compelling case for businesses to expand within their service territories.

The Case for Economic Development

Why should a distribution monopoly, with a regulated rate of
return, care about customer growth? First, the regulated return
isn’t guaranteed. Public utility regulators may disallow rate increases
when ratepayer costs become too high. To keep rates low, utilities must attract
large commercial and industrial (C&I) customers, spreading utility fixed
costs across more deliveries. New or
expanding businesses also spur secondary growth, increasing
the employment base that supports new residential housing and
small businesses.

The second economic development benefit is higher utility earnings, especially
between rate cases. Why? Greater sales revenues increase the use of the utility’s
capacity. Also, unlike risky investments in non-core utility businesses like
speculative energy trading, economic development investments offer predictable
revenues and earnings growth.

Finally, economic development rates and services keep
utilities competitive, retaining industrial customers seeking to disconnect
from the pipes and wires infrastructure to obtain
better service or lower prices. Economic bypass was especially prevalent
prior to deregulation when corporate
energy managers installed dual fuel systems and constructed on-site co-generation
systems.

Become the Network of Choice

Distribution utilities are network businesses, connecting
fragmented energy buyers and suppliers. As Nicholas Economides
of the Stern School of Business points out in The Economics of Networks, the
economic value of the network increases as more companies – customers
and merchants – transact business
across the network.

To create customer loyalty to the distribution system, utilities
must invite, rather than repel, service providers. With greater variety of
offerings, C&I customers will more likely find services that meet their
operating goals. Distribution utilities cannot provide the full range of services
by themselves. Why? Public utility regulators restrict utilities to offering
only basic rate services, segmented into a few customer classes.

Large C&I customers want customized attention. They expect all vendors,
including distribution utilities, to understand their business needs, offering
new ideas that improve productivity. Some corporate purchasers like General
Motors want commodity purchases tied to spot market prices. Other companies
like Dow Chemical value earnings predictability, seeking hedged prices to control
natural gas feedstock costs. Commercial building owners, however, look for
assistance to finance and install the best available energy-efficiency technologies
to lower building energy use.

To reach tough business buyers with different needs, utilities
must market and operate open networks, becoming magnets for three types of
partner connections: corporate executives and real estate developers; trade
allies like architects, engineers, and developers; and energy service merchants.
Utility executives should think like executives at Amazon.com or Simon Property
Group, the largest
owner of shopping malls. Both companies attract customers because they draw
a large selection of quality merchants, which brings more customers, each reinforcing
the growth of the other. Mall owners
offer a shopping environment that concentrates buyers and sellers to maximize
transactions.

By facilitating transactions, utilities capture system-wide
market information, which they should package into new
distribution services to improve partner experiences and meet customer preferences.

Distinctive Business Cluster Scenarios

Focusing on the economic development of customers and partners requires utilities
to create a bold new marketing position. Many utilities have bits and pieces
of an economic development package, but few utilities create a unified brand
experience that expresses a compelling message to C&I executive decision-makers.

To reposition their companies, utility executives should develop a unique
brand promise targeted to specific business clusters within
their service territory. Each metropolitan region serves a different set
of clustered businesses such as financial services, semiconductors, aerospace,
chemicals, or food processing. Each cluster business shares similar strategic
and operating goals. For example, Detroit’s automobile cluster may want
utility partnerships that provide expertise in power technologies for robotic
welding, automated machine tools, and fuel cells, while New York City’s
financial services cluster requires uninterrupted power with minimal voltage
fluctuations.

The first step toward cluster marketing is learning the business challenges
facing C&I customers through one-on-one executive meetings and focus group
sessions with facility managers. Utility
key account managers should develop the initial survey questions based on prior
customer experiences, identifying customer requirements for budget control,
industrial competitiveness, operating reliability, and environmental goals
(see sidebar, “Sample Customer Research Questions”).

After meeting with customers, the utility should then develop several user-experience
scenarios, one for each business cluster. The user scenario captures the complete
set of preferences for how the customer wants to buy, control, use, and pay
for energy services. For example, real estate investment trusts may want “smart
communications,” such as aggregated electronic bills with drill-down
Web site views of hourly energy use and demand for each building and lessee
sub-meter. To control costs, these building owners may also be willing to pay
for meter information that tracks tenant power use and demand, flagging sub-meter
data that exceeds normal levels or jumps outside of pre-set benchmarks. To
keep their tenants fully informed, owners may also
want to be paged about the estimated duration of power outages after
a hurricane or blizzard.

Help Business Partners Succeed

Utilities should identify the best performing partners, the ones that bring
new customer connections or increase customer satisfaction with the utility’s
network. Successful partners provide the services that best fulfill each scenario
brand promise. Just as many utilities have installed customer information systems
(CIS) to better track and serve customer needs, they should add partner relationship
management (PRM) systems. Why? Utilities should shape the quality of their
network services by supporting their top trade allies, directing resources
like
co-opt advertising funds and key account referrals on a merit basis.
To improve partner effectiveness, utility-specific PRM solutions should:

Capture and Report Customer Satisfaction
Utilities should build trust with customers by hosting customer ratings of
supplier experiences, similar to the eBay and Barnesandnoble.com style ratings.
Small to medium-sized C&I customers benefit by knowing which lighting contractors
or commodity suppliers deliver services on time, on budget, and with accurate
bills. Rating suppliers also creates a Darwinian competition that eliminates
low-quality vendors, leaving only the best vendors connected to the utility’s
business partner ecosystem.

Track Trade Ally Performance Against Utility Goals
Utilities should create scenario-specific balanced scorecards for tracking
contractor results in the PRM system. For a gas utility, metrics for a heating
and plumbing contractor should include the number and types
of gas-fired appliances installed in commercial buildings, adherence to gas
utility safety regulations, timeliness in communicating and meeting construction
milestones, quality of work, certified experience with
each business cluster’s operating needs, and success selling energy-
efficient technologies.

Coordinate Economic Development Marketing
As distribution utilities build closer relationships with high-performing partners,
utility managers should use the partner relationships to create uniquely compelling
total energy cost management, quality,
and reliability packages. By analyzing demand and use profiles for each cluster,
the utility can combine demand-side management
and co-opt advertising budgets with incentives from trade allies to develop
a customized proposal for the business customer’s evaluation team. Using
a PRM exchange, potential general contractors can request bids from qualified
sub-contractors to drive better bargains
in their proposals.

Use B2B Exchanges

Opportunities to create new revenues will emerge as utility executives move
toward a network business model. By evaluating
the information needs of all connected parties, utilities should gain
a unique vantage point to spot efficiency gains across the portfolio
of customer and partner transactions. Utility managers should look for new
ideas that maximize the value of embedded information locked away in corporate
databases or the paper files of customer account managers. Several utilities
already operate online exchanges to facilitate cost-effective communications
between utility schedulers, suppliers, and partners.

Early examples of information exchanges include:

Connecticut Light and Power Offers Online Meter Data Service
Each day, electricity merchants schedule power deliveries to meet their business
customers’ next day, hourly demand profile. If the
next day’s actual demand increases unexpectedly, the power supplier is
forced to buy wholesale spot market supplies at prices that can jump as much
as 10 times higher than their contracted generation prices. To help power marketers
manage costs, Connecticut Light
and Power sells three levels of meter data services: standard silver, gold,
and platinum. With platinum service, marketers can go online
to view and download hourly data by meter, account, or aggregated grouping.
The service also includes 13 months of online historical data, which suppliers
or customers can view graphically or in report format. Using the historical
data, suppliers can input specific customer-load profile data into their forecasting
algorithms, improving their ability to estimate customer loads based on seasonal
and operational conditions.

Union Gas Provides an Online Gas Scheduling Exchange
With its new unbundled gas storage service, Union Gas expected thousands of
daily emails and faxes from its half-million customer accounts seeking to schedule
and balance gas deliveries. To efficiently manage the daily transaction overload,
Union Gas built Unionline, a Web-based service that enables marketers to electronically
nominate daily gas volumes and view scheduling confirmations. An additional
benefit of the service is the online capacity clearinghouse. Using the clearinghouse,
marketers can
swap their excess, upstream gas transportation capacity on one
flow path for needed capacity on a second path. The result? Marketers manage
the costs for holding slices of the utility’s
firm upstream transportation capacity.

SoCalGas Offers an Online Gas Imbalance Trading Exchange
Gas merchants cannot match deliveries exactly to daily customer demands. Why?
Weather and operating-dependent demands are unpredictable. However, across
the portfolio of utility customers, some marketers will hold excess deliveries
and others insufficient deliveries in their imbalance accounts. The system-wide
result is a smaller imbalance. Southern California Gas Co. offers merchants
the opportunity to benefit from its system, enabling the suppliers to post
and trade imbalances on its ENVOY Web site. To exchange an imbalance position,
a trading partner completes an online “trade ad”, listing information
such as the type of trade, the contact information, and volumes to be bought
or sold. Once posted, trading counterparties can then contact the listed gas
supplier, negotiating a satisfactory exchange to eliminate both parties’ imbalances.

By sitting at the center of a network, utilities can help their customers
and suppliers to lower their transaction costs, creating an effective incentive
for their customers to expand within the utility’s service area.

The CIS Market in Transformation

Customer information systems (CIS) is a hub for customer-facing and revenue cycle
processing activity with functional footprint covering operational and a segment
of collaborative customer relationship management. CIS is a mission-critical
enterprise application considered a core investment component of an energy
company’s IT portfolio. It is also the most expensive item in a CIO application
portfolio, taking up to 30 percent of an energy company’s application
budget.

The CIS market has reached its third maturity level. The first stage included
internally built custom solutions and remained a dominant CIS implementation
model until the mid-1980s. It was replaced by proliferation of one-off solutions
leveraged by system integrators (SI), for example: Customer 1, Service 2000,
and IBM’s (Nipsco) CIS for MVS. Then, in the mid-1990s, SIs began exiting
the CIS product market.

That created an opportunity for the independent software vendors (ISV).
Companies like SPL WorldGroup, SCT, Peace Software, Lodestar, Excelergy, Soluziona,
and
Open C entered the CIS product market
and started to build configurable CIS products aimed at meeting new requirements
of the transitioning energy markets and increased customer-centric focus required
for retail competition.

Although the total market is estimated below $1 billion worldwide, the significant
growth potential was estimated at up to 11 percent growth during the active
retail market restructuring. The growth rate attracted customer care and billing
providers from other deregulated verticals such as Kenan Systems, Custima,
and Convergys in
the telecom area, plus enterprise solution providers such as SAP, PeopleSoft,
and Oracle in the enterprise resource planning, and
Siebel in the customer relationship management field. They adapted their offerings
to meet energy markets’ need.

Concerned with functional complexity and lack of domain expertise, and sensing
overall lack of demand due to retail restructuring slowdown – market
growth turned out to be less than half the initial estimate – many of
them, in particular telecom vendors, have exited energy CIS market.

The Impact of Deregulation

The CIS function in the traditional integrated energy utility was centered
on revenue management while extending into the customer relationship management,
commodity management, and asset management areas just enough to support its
primary meter-to-cash business process focus (see Figure 1).

Energy retail deregulation created unbundling and bifurcation
of the distribution utility value chain, forcing companies to pursue either
energy retail or distribution
businesses.
Two distinct sets of business drivers forced the CIS footprint to diverge,
resulting in products with “CRM full” and “CRM light” functionality
that met the needs of retail and network companies, respectively.

Leveraging deregulation as the main catalyst for legacy CIS
replacement and addressing immediate market needs, vendors extended the functional
footprint
into the CRM space and created
a new set of customer-centric CIS products. To address commodity
risk exposure introduced by vertical unbundling, CIS vendors also extended
the product footprint into the commodity management space. Network companies
with no requirements to retain existing or acquire new customers mostly opted
to stay within the perimeter of the traditional premises-centric CIS systems,
eventually retrofitting them
to support required retail market interfaces.

The virtual standstill of retail market restructuring and the
consequent trend toward re-bundling the retail and distribution businesses
have created a misalignment
between the current
CIS footprint and the requirements of most integrated
distribution companies.

This misalignment is the real culprit for the low product demand
among energy companies in North America. Without deregulation as the main driver
for customer
centricity and improved energy product and service time to market, CIS products
offered on the market provide regulated energy companies with only incremental
performance improvements and cost reduction in customer care and billing – not
enough to justify costly replacement.

Integrated energy distribution companies require CIS products with functionality
that will extensively expand into the asset management area, which will enable
them to achieve significant performance improvement by optimizing complex business
processes, such as service order management/scheduling and optimization.

To achieve optimal utilization of the distribution asset (including
loss minimization), energy usage information should be included in the asset
optimization process
(e.g., transformer load management). However, these functionalities should
not be integrated into current products by inclusion on the data model level
and create an even larger monolithic CIS footprint. Driven by financial adversity,
energy companies are reluctant to invest in large enterprise systems and are
considering reaching operational excellence by leveraging legacy IT investment.

The Current State

Recently, we’ve witnessed a record-low demand for CIS
products among tier 1 energy companies in North America following the virtual
standstill of
retail deregulation and the disappearance of unregulated retail market demand
for customer care and billing during 2001-2002. Burdened by untenable debt
load and, in many cases, failed unregulated business ventures, energy companies
have signed only three significant CIS contracts during the past 24 months.
With legacy
CIS replacement costs averaging $50 per customer, energy companies facing low
credit ratings and reduced access to capital cannot make the ROI equation work.
This is placing extreme pressure on vendors and forcing them to seek new opportunities
by offering aggressive discounts or pursuing prospects in smaller mid-tier
and municipal utilities markets.

The 2003 CIS Conference held in Nashville, Tenn., reconfirmed the following
trends in the market:

Scaling Down
With North American Tier 1 markets virtually at a standstill, vendors
(of both products and solutions) are starting to scale down and pursue municipal
and non-energy utility opportunities. Although both markets have similar functional
requirements (e.g., revenue, customer, and order management), significant differences
in business drivers, technical infrastructures, and product implementation
models – combined with complex governance in the mid-tier and public
power markets – will force vendors to reassess their current go-to-market
strategies.

In addition to extending preconfigured products to address specific
CRM public-power market needs and multiservice billing requirements, vendors
must focus on lowering
total cost of ownership by providing delivery/implementation templates, hiding
architectural complexity, and simplifying product maintenance support and operation
requirements. An increased number of vendors in mid-tier markets will exert
additional pressure on incumbent vendors, forcing consolidation and raising
vendor viability concerns.

Compensation
To alleviate customers’ buying reluctance and make their solutions more
affordable, vendors continue to tout CIS product componentization, which can
enable phased implementation or offer an ability to extend the lifetime of
legacy systems by addressing main deficiencies (e.g., complex billing, credit
collection, call center productivity). Marketed by vendors as the new modular
approach, componentization is achieved
by partially configuring and packaging a portion of the existing product, rather
than re-architecting/modularizing products by breaking them into pieces that
can collaborate in a composite application environment using service-oriented
architecture.

When considering current offerings, users need to be aware of the shortcomings
of pseudo-componentized solutions, such as complex integration issues, the
difficulty of disabling legacy products’ functionality, and increased
product lifecycle costs.

Outsourcing
High costs and complex IT infrastructure continue to make customer care and
billing frequent outsourcing candidates by energy companies focused on operational
excellence. Despite the existence of numerous external service providers, low
product maturity and tenuous financial models continue to be key reasons for
low acceptance of externally sourced CIS solutions.

Alliance Data Systems, the largest outsourcing provider in the customer care
and billing space in energy, has reached leadership status via acquisitions
rather than organic growth, and subsequently has numerous CIS platforms (Indus
Banner, Excelergy, ConsumerLinx, Peace, Soluziona). The new business transformation
outsourcing (BTO) model touted by major IT service providers introduces a new
value proposition by taking a holistic view of the entire business process,
including process improvement.

However, its complexity, high risk, and long-term proposition
make BTO applicable only to energy organizations that are relatively mature
from
the perspectives of business process, IT, and operating models, making companies
that need it the most the least-viable candidates. Wipro is a leading outsourcing
and offshore development vendor that has infused its energy domain expertise
by acquiring the AMS energy practice. Wipro offers a wide spectrum of outsourcing
options for customer care and billing, ranging from operation of the sunset
product to full BTO.

Process Integration
To achieve operational efficacy after harvesting the low-hanging fruit of cost
reduction in customer care and billing, CIS products will need to integrate
the complex business processes that cross the borders of several enterprise
applications. Depending on the market, vendors are focusing on business process
integration that requires incorporation of the functions within the enterprise
CRM systems and commodity management environments.

In a regulated segment, to support the needs of energy companies
that manage both customers and distribution assets, the focus is
on integration with EAM. To support energy companies’ quests for operational
excellence, CIS products will need to go beyond current integration strategies
and create an integration infrastructure that will support composite application
environments capable of integrating business processes by using a combination
of native and external functions invoked as Web services. Examples include
SAP NetWeaver and Siebel Universal Application Network.

The Integration Challenge
Extension of the CIS footprint from traditional revenue management into the
CRM and commodity management spaces, which occurred during the past decade,
took place on the current generation of
CIS architecture mostly as three-tiered products. This functional extension
was achieved by expanding the CIS data model to include new objects from the
customer and commodity management spaces, creating a tight functional integration
by data model inclusion and creating CIS products with several hundred (up
to a thousand) entities in its database.

The new push for CIS footprint extension, driven by energy companies’ quests
for operational excellence, must be achieved by going beyond current integration
strategies (e.g., inclusion at the data model level, user exits, APIs, enterprise
application integration). To support the desire of energy companies to leverage
business processes embedded in legacy IT systems, integration infrastructure
must support a composite application paradigm. This will be achieved by integrating
business processes in a service-oriented architecture that is capable of orchestrating
native and external functions invoked as Web services.

Business Process Management
Current CIS applications, developed to support the need of unbundled retail/network
companies, cannot adequately support an operational excellence pursuit. To
achieve operational efficiency, after harvesting
the low-hanging fruit of cost reduction and process automation, integrated
distribution companies need applications that can be orchestrated beyond automated
workflow into cross-departmental process optimization. Ideally the goal of
complex process optimization should be achieved by leveraging existing applications
rather then creating the next generation of monolithic ERP-like environments
(which energy companies, driven by the sector’s
low credit rating and access to capital problems, are not likely
to pursue).
To achieve operational excellence through cross-departmental process optimization,
energy companies must explore business process management (BPM) technologies
as a vehicle that will transform current application portfolios into a service-oriented
architecture. Consequently, a CIS product’s ability to facilitate integration
into a BPM suite and a CIS vendor’s process optimization strategy must
be regarded highly during the evaluation phase.

Energy companies, enabled by recent developments and projected trends in enterprise
application integration, Web services, business process management, business
performance management, business intelligence, and next generation analytics
architecture that supports real-time analysis of key performance indicators,
will start transformation into real-time enterprises.

Through 2005, business process management will play the key role among technologies
enabling energy companies’ sense-and-respond transformation. In this
phase, leading CIS vendors will facilitate BPM use to orchestrate and optimize
complex cross-departmental processes by “beefing up” analytical
architectures and exposing KPIs for process optimization. For example, the
length and frequency of system interruptions could be used in scheduling crews
for restoration work.

Following the emergence of mature retail restructuring models,
and maturation of the Web services technology we expect leading vendors
to disaggregate monolithic CIS applications into services and rebundle them
into composite application environments using a combination of native functions
and external services – for example, Web services across enterprise and
business partner environments. New generation CIS business process management
capability within the composite architecture environment will be one of the
key requirements for energy companies focused on operational excellence.

Managing Customers for Value

Customer relationships are the most important asset of an energy retailer and
represent the value of an energy retail business. Yet how many retailers out
there can truly say they understand the total value
of their customer base, let alone the customer lifetime value (CLV) of every
customer?

In many ways, CLV is a holy grail for energy retailers striving
to manage their portfolio of customer relationships. Martin Yuill, utilities
analyst at Datamonitor, emphasizes: “Understanding customer lifetime
value and its associated profitability and loyalty dynamics is an important
trend amongst leading energy retail organizations. Those retailers who are
able to develop a competitive edge through leveraging detailed customer profitability
and loyalty information for strategic advantage will find themselves a step
ahead of their competitors.”

As Yuill highlights, CLV intrinsically links customer profitability and customer
loyalty. Customer profitability evaluates revenue, margin, and cost-to-serve
at the individual level to determine each customer’s profit contribution.
Customer loyalty evaluates the expected length
of each customer relationship and the underlying dynamics. CLV incorporates
both individual customer profit contribution and the expected length of the
customer relationship (loyalty) to determine
the value of each customer relationship in today’s dollars. Once a retailer
understands the value of each customer relationship and the drivers behind
it, enormous opportunities are created for managing and increasing that value.

What is important to understand is that CLV is forward looking.
It is not an evaluation of past profitability or performance of a customer
relationship. It does not matter if a customer was acquired six months ago,
is still in the red due to their acquisition cost, and has added little value
during that period. Nor does it matter if a customer has been with the retailer
for 10 years and has added enormous value to the bottom line during that time.
The respective past values have already been attributed, received, and consigned
to the past. CLV references historical profitability and loyalty as indicators
to future performance, and evaluates that future performance from a zero-value
base.

The platform for CLV analysis is the customer information system (CIS), a primary
operational system in an energy retailer’s IT application portfolio.
An advanced CIS is a rich mine of up-to-the-minute transaction and customer
interaction data. When combined with analytical models for customer profitability,
loyalty, and lifetime value, the CIS has the potential to transform operational
data into strategic knowledge far beyond an energy retailer’s traditional
horizons.

An advanced CIS captures detailed customer loyalty and customer profitability
information that enables energy retailers to determine who is a profitable
customer and who is a loyal customer today, and what characteristics individual
customers are expected to show going forward. The retailer can then work with
its salespeople and customer service teams to develop strategies to retain
its most profitable customers and seek to change the behavior of the unprofitable
and
less loyal customers.

Profitability and Loyalty

Recent Peace research has sought to ascertain whether customer profitability
measures leveraged in other industries apply consistently to the energy retail
sector. One such measure is the whale curve of profitability that is typically
found in other business sectors such as printing and haulage. The whale curve
depicts the profit contribution profile of a customer base and highlights that
typically 20 percent of customers can actually contribute up to
300 percent of overall customer base profitability, and that another 20 percent
of customers can erode 200 percent of the bottom
line (see Figure 1). Peace’s analysis of utility cost-to-serve factors
including calls to call centers, billing frequency, and collection activity,
as well as revenue drivers such as energy usage and pricing is yielding energy
retail results consistent with the whale curve used in other industries.

The ultimate business value, however, is not simply to recognize
that there are profitable, break-even, and loss-making customer relationships
within a customer base, but to identify which customers are in which profitability
segment in order to focus business resources to increase individual and overall
profitability. It is by applying customer profitability and energy-industry-specific
analytical technology to CIS data that enables energy retailers to identify
which customers are actually profitable.

Peace research is also looking more deeply into understanding energy customer
loyalty drivers. Figure 2 displays a selection of customer traits that contribute
to the evaluation of individual customer loyalty.

If a retailer is able to accurately answer these questions and determine
what makes a customer satisfied or dissatisfied and attribute ratings to each,
it
will be able to apply an analytical customer loyalty model to build a picture
of individual customer loyalty and provide comparisons across the entire customer
base. It can help identify which customers and groups of customers a retailer
should
be focusing retention initiatives on in order to build loyalty.

Customer Value Quadrants

Figure 3 shows how customer profit contribution and loyalty combine
to determine CLV.

  • Golden customers: These are a retailer’s best
    customers. They have significant potential to enhance value going forward.
    Retailers
    require retention strategies that will reinforce the retailer’s
    positive image and keep the customer loyal for the length of time they
    continue
    to be profitable.
    This might include online payment options for those who work in an office
    or add-on services (such as energy audits, various types of warranties,
    and lighting) that foster an image of the company as an essential energy
    solutions provider.
  • Mercurial customers: These include a retailer’s “butterfly” customers
    who flit from retailer to retailer. They are highly profitable, but might easily
    switch supplier given the right opportunity. In this case, a retailer armed
    with CLV information might strive to enhance loyalty with targeted retention
    programs addressing specific factors influencing the customer’s
    propensity to switch. This might include a committed contract term
    at an attractive
    price, the introduction of convenient electronic bank transactions,
    and online bill
    payments that enhance customer stickiness and affinity programs such
    as frequent flier miles or charitable donations. The goal is to move
    these
    customers in
    the direction of, if not into, the golden quadrant over time.
  • Marginal customers: These are customers on the borderline
    of profitability or unprofitable and are not expected to be with the retailer
    for
    very long. Nevertheless, one would expect at least some of these customers
    to have
    the potential to move toward
    the golden quadrant. A retailer should not view all customers in this
    segment through a negative lens. A retailer might examine segments within
    this
    quadrant for potential to build both loyalty and profitability.
  • Faithful customers: These customers are what some in the industry have
    labeled the “barnacles”: loyal customers who have always been
    with the retailer and have no intention of switching. An example
    of such a customer
    might be one who uses little power on their single product offering,
    and the
    overhead of the billing, payment, and customer care transactions
    is, and will always be, more
    than the margin on revenue. Facing a small or negative CLV, a retailer
    can decide whether it can influence the profit contribution upward
    through a
    lower-cost relationship or by up-selling additional products to
    increase revenue and margin.

Every Customer Is Different

As the customer value quadrants highlight,
CLV and its associated loyalty and profit dynamics raise some interesting
questions. A retailer might ask: “Do we have a strategy for new customer
acquisition and retention that provides optimal
profit and value for the company? When a customer shouts, should
we always jump, and how high?” Sometimes it makes sense to temper the knee-jerk
reaction by considering just how valuable that customer will be over the
lifetime of their relationship.

A retailer treating all customers the same
risks suffering a double blow. First, resources can get squandered
on unprofitable customers and, second, profitable ones can get short
shrift
and become
less satisfied. With accurate per-customer cost and revenue information,
and a
deeper understanding of a customer’s loyalty drivers, energy retailers
will be able to target investments at loyalty and profitability improvement
objectives
that focus on the appropriate customers, products, and channels.

The Future for CIS

Understanding the dynamics of individual
customer loyalty, profitability, and value has
however proved difficult for many retailers in
the past. Many previous CLV strategies have floundered, overcome
by too much data, too
much complexity, too many intangibles, and the
lack of systems equipped to support a CLV focus. Today, CLV has become
feasible with advanced
CIS systems that drill down into deeper customer insights, and shed
light on the lifetime value of each customer.

CLV analysis need not incur the time and cost of collating and incorporating
every last piece of data at the outset. Early results can be attained
from informed selections of data that can highlight major value drivers
in specific
business and customer segments that can then be fed back
into the system to enhance value going forward. The customer is the
retailer’s
most valuable
asset, and understanding and managing this
value is entirely feasible with the right technology and the right
approach.

Economic Development Partnering

Regulated utilities compete every day. They try to persuade other corporations
to locate operations within the utility’s service area.

Today, all corporations evaluate their global choices, appraising such factors
as taxes, workforce quality, and transportation services. Company executives
with energy-intensive operations also evaluate energy costs and services.

High-tech companies, for example, spend 10 to 15 percent of their operating
budget to power computers, cleanrooms, and laboratory spaces. Just within a
small state like Massachusetts, a pharmaceutical laboratory has a choice between
two biotechnology centers, one in Cambridge served by NSTAR and another in
Worcester served by Massachusetts Electric Co. To attract development, Mass
Electric touts its low distribution rates, energy-efficiency programs, network
reliability, and customer service. The utility also advertises its New Choices
Program, which provides customers contact information on qualified commodity
suppliers.

Economic development competition is increasing. Utilities need to do more to
create a compelling case for businesses to expand within their service territories.

The Case for Economic Development

Why should a distribution monopoly, with a regulated rate of
return, care about customer growth? First, the regulated return
isn’t guaranteed. Public utility regulators may disallow rate increases
when ratepayer costs become too high. To keep rates low, utilities must attract
large commercial and industrial (C&I) customers, spreading utility fixed
costs across more deliveries. New or
expanding businesses also spur secondary growth, increasing
the employment base that supports new residential housing and
small businesses.

The second economic development benefit is higher utility earnings, especially
between rate cases. Why? Greater sales revenues increase the use of the utility’s
capacity. Also, unlike risky investments in non-core utility businesses like
speculative energy trading, economic development investments offer predictable
revenues and earnings growth.

Finally, economic development rates and services keep
utilities competitive, retaining industrial customers seeking to disconnect
from the pipes and wires infrastructure to obtain
better service or lower prices. Economic bypass was especially prevalent
prior to deregulation when corporate
energy managers installed dual fuel systems and constructed on-site co-generation
systems.

Become the Network of Choice

Distribution utilities are network businesses, connecting
fragmented energy buyers and suppliers. As Nicholas Economides
of the Stern School of Business points out in The Economics of Networks, the
economic value of the network increases as more companies – customers
and merchants – transact business
across the network.

To create customer loyalty to the distribution system, utilities
must invite, rather than repel, service providers. With greater variety of
offerings, C&I customers will more likely find services that meet their
operating goals. Distribution utilities cannot provide the full range of services
by themselves. Why? Public utility regulators restrict utilities to offering
only basic rate services, segmented into a few customer classes.

Large C&I customers want customized attention. They expect all vendors,
including distribution utilities, to understand their business needs, offering
new ideas that improve productivity. Some corporate purchasers like General
Motors want commodity purchases tied to spot market prices. Other companies
like Dow Chemical value earnings predictability, seeking hedged prices to control
natural gas feedstock costs. Commercial building owners, however, look for
assistance to finance and install the best available energy-efficiency technologies
to lower building energy use.

To reach tough business buyers with different needs, utilities
must market and operate open networks, becoming magnets for three types of
partner connections: corporate executives and real estate developers; trade
allies like architects, engineers, and developers; and energy service merchants.
Utility executives should think like executives at Amazon.com or Simon Property
Group, the largest
owner of shopping malls. Both companies attract customers because they draw
a large selection of quality merchants, which brings more customers, each reinforcing
the growth of the other. Mall owners
offer a shopping environment that concentrates buyers and sellers to maximize
transactions.

By facilitating transactions, utilities capture system-wide
market information, which they should package into new
distribution services to improve partner experiences and meet customer preferences.

Distinctive Business Cluster Scenarios

Focusing on the economic development of customers and partners requires utilities
to create a bold new marketing position. Many utilities have bits and pieces
of an economic development package, but few utilities create a unified brand
experience that expresses a compelling message to C&I executive decision-makers.

To reposition their companies, utility executives should develop a unique
brand promise targeted to specific business clusters within
their service territory. Each metropolitan region serves a different set
of clustered businesses such as financial services, semiconductors, aerospace,
chemicals, or food processing. Each cluster business shares similar strategic
and operating goals. For example, Detroit’s automobile cluster may want
utility partnerships that provide expertise in power technologies for robotic
welding, automated machine tools, and fuel cells, while New York City’s
financial services cluster requires uninterrupted power with minimal voltage
fluctuations.

The first step toward cluster marketing is learning the business challenges
facing C&I customers through one-on-one executive meetings and focus group
sessions with facility managers. Utility
key account managers should develop the initial survey questions based on prior
customer experiences, identifying customer requirements for budget control,
industrial competitiveness, operating reliability, and environmental goals
(see sidebar, “Sample Customer Research Questions”).

After meeting with customers, the utility should then develop several user-experience
scenarios, one for each business cluster. The user scenario captures the complete
set of preferences for how the customer wants to buy, control, use, and pay
for energy services. For example, real estate investment trusts may want “smart
communications,” such as aggregated electronic bills with drill-down
Web site views of hourly energy use and demand for each building and lessee
sub-meter. To control costs, these building owners may also be willing to pay
for meter information that tracks tenant power use and demand, flagging sub-meter
data that exceeds normal levels or jumps outside of pre-set benchmarks. To
keep their tenants fully informed, owners may also
want to be paged about the estimated duration of power outages after
a hurricane or blizzard.

Help Business Partners Succeed

Utilities should identify the best performing partners, the ones that bring
new customer connections or increase customer satisfaction with the utility’s
network. Successful partners provide the services that best fulfill each scenario
brand promise. Just as many utilities have installed customer information systems
(CIS) to better track and serve customer needs, they should add partner relationship
management (PRM) systems. Why? Utilities should shape the quality of their
network services by supporting their top trade allies, directing resources
like
co-opt advertising funds and key account referrals on a merit basis.
To improve partner effectiveness, utility-specific PRM solutions should:

Capture and Report Customer Satisfaction
Utilities should build trust with customers by hosting customer ratings of
supplier experiences, similar to the eBay and Barnesandnoble.com style ratings.
Small to medium-sized C&I customers benefit by knowing which lighting contractors
or commodity suppliers deliver services on time, on budget, and with accurate
bills. Rating suppliers also creates a Darwinian competition that eliminates
low-quality vendors, leaving only the best vendors connected to the utility’s
business partner ecosystem.

Track Trade Ally Performance Against Utility Goals
Utilities should create scenario-specific balanced scorecards for tracking
contractor results in the PRM system. For a gas utility, metrics for a heating
and plumbing contractor should include the number and types
of gas-fired appliances installed in commercial buildings, adherence to gas
utility safety regulations, timeliness in communicating and meeting construction
milestones, quality of work, certified experience with
each business cluster’s operating needs, and success selling energy-
efficient technologies.

Coordinate Economic Development Marketing
As distribution utilities build closer relationships with high-performing partners,
utility managers should use the partner relationships to create uniquely compelling
total energy cost management, quality,
and reliability packages. By analyzing demand and use profiles for each cluster,
the utility can combine demand-side management
and co-opt advertising budgets with incentives from trade allies to develop
a customized proposal for the business customer’s evaluation team. Using
a PRM exchange, potential general contractors can request bids from qualified
sub-contractors to drive better bargains
in their proposals.

Use B2B Exchanges

Opportunities to create new revenues will emerge as utility executives move
toward a network business model. By evaluating
the information needs of all connected parties, utilities should gain
a unique vantage point to spot efficiency gains across the portfolio
of customer and partner transactions. Utility managers should look for new
ideas that maximize the value of embedded information locked away in corporate
databases or the paper files of customer account managers. Several utilities
already operate online exchanges to facilitate cost-effective communications
between utility schedulers, suppliers, and partners.

Early examples of information exchanges include:

Connecticut Light and Power Offers Online Meter Data Service
Each day, electricity merchants schedule power deliveries to meet their business
customers’ next day, hourly demand profile. If the
next day’s actual demand increases unexpectedly, the power supplier is
forced to buy wholesale spot market supplies at prices that can jump as much
as 10 times higher than their contracted generation prices. To help power marketers
manage costs, Connecticut Light
and Power sells three levels of meter data services: standard silver, gold,
and platinum. With platinum service, marketers can go online
to view and download hourly data by meter, account, or aggregated grouping.
The service also includes 13 months of online historical data, which suppliers
or customers can view graphically or in report format. Using the historical
data, suppliers can input specific customer-load profile data into their forecasting
algorithms, improving their ability to estimate customer loads based on seasonal
and operational conditions.

Union Gas Provides an Online Gas Scheduling Exchange
With its new unbundled gas storage service, Union Gas expected thousands of
daily emails and faxes from its half-million customer accounts seeking to schedule
and balance gas deliveries. To efficiently manage the daily transaction overload,
Union Gas built Unionline, a Web-based service that enables marketers to electronically
nominate daily gas volumes and view scheduling confirmations. An additional
benefit of the service is the online capacity clearinghouse. Using the clearinghouse,
marketers can
swap their excess, upstream gas transportation capacity on one
flow path for needed capacity on a second path. The result? Marketers manage
the costs for holding slices of the utility’s
firm upstream transportation capacity.

SoCalGas Offers an Online Gas Imbalance Trading Exchange
Gas merchants cannot match deliveries exactly to daily customer demands. Why?
Weather and operating-dependent demands are unpredictable. However, across
the portfolio of utility customers, some marketers will hold excess deliveries
and others insufficient deliveries in their imbalance accounts. The system-wide
result is a smaller imbalance. Southern California Gas Co. offers merchants
the opportunity to benefit from its system, enabling the suppliers to post
and trade imbalances on its ENVOY Web site. To exchange an imbalance position,
a trading partner completes an online “trade ad”, listing information
such as the type of trade, the contact information, and volumes to be bought
or sold. Once posted, trading counterparties can then contact the listed gas
supplier, negotiating a satisfactory exchange to eliminate both parties’ imbalances.

By sitting at the center of a network, utilities can help their customers
and suppliers to lower their transaction costs, creating an effective incentive
for their customers to expand within the utility’s service area.

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.