Survival Skills for Utility Mergers

The recent surge in merger, acquisition and divestiture activity in the U.S.
utilities industry has come as no surprise to leaders in the industry who have
long anticipated the repeal of the Public Utility Holding Company Act (PUHCA),
a depression-era law that restricted ownership of franchised utilities. With
the passage of the Energy Policy Act of 2005 and the subsequent repeal of PUHCA,
electric utilities can now be owned by non-franchise utility entities and no
longer need to demonstrate interconnection between operating companies.

The clear path toward consolidation was also reinforced by global trends in
the energy industry, such as increasing raw energy prices, more stringent environmental
regulations and the continuous quest for synergies and lower costs to meet the
expectations of Wall Street. Distribution companies with local service requirements
and regulatory scrutiny of cost and service delivery are searching for increased
economies of scale, improved reliability and power quality and enhanced customer
service levels through strategic combinations that cross state and regional
boundaries.

Despite the optimistic projections of value creation for shareholders, surveys
of business leaders, as well as popular sentiment, indicate that the majority
of mergers “failed to achieve financial goals set by top management and roughly
half destroyed shareholder value.”[1] Business consultants focused on the energy
and utilities industry are concerned with the poor financial results as well
as perceptions of decreased service quality and, perhaps most crucially, the
potential consequence of further delaying needed investment in energy infrastructure.
Study of management actions both pre- and post-merger and correlation of characteristics
of both successful and not-so-successful corporate transformations have led
consultants to develop a systematic approach to both identifying and delivering
value.

Doing the Deal Right Versus Doing the Right Deal

Although conventional wisdom holds that the seeds for successful value creation
are planted in boardrooms during the strategic negotiations and financial engineering
of the pre-merger phase, analysis of the results of hundreds of corporate combinations
clearly indicates that the activities that follow on the heels of the deal announcement
are actually more crucial in determining long-term success. In other words,
“doing the right deal” can only succeed by doing the deal right, which means
early and continuous focus on many issues which do not get much attention in
boardroom meetings.

Here
is an analysis of both the key pre- and post-completion activities and the resultant
integrated approach to assist utilities in maintaining focus on both value generation
and realization. This approach harnesses the resources of merging companies
and establishes clear channels of communication for tracking and reporting crucial
integration activities (see Figure 1).

Our experience has shown that the majority of obstacles to successful value
realization arise during the integration planning and implementation phases,
often long after headlines of the deal have disappeared. The reasons are many
and are inherently understandable, but, time and again, companies make decisions,
and in many cases fail to make decisions, crucial for successful organizational
transformation. Some examples include a lack of clear goals and timetables,
inability to devote quality resources to planning and management of the transformation,
delays due to work overload, pervasive resistance to change, lack of project
management approach and discipline and lack of experience in driving transformational
value that has an impact on bottom-line results.

Our integrated framework for supporting utility integrations is based on a
relentless focus on driving the benefits envisioned by the executive deal makers
as well as identifying and unlocking additional areas of value often hidden
in legacy organizations. Our experience providing support to thousands of organizations
in integration processes led us to identify the key problems faced by managers
and executives. In turn, we developed methods and tools to assist our clients.

Driving Value Through Integration

The complexity factor of mergers and acquisitions between utilities is greater
than corporate transformations in other economic sectors due to numerous factors
inherent in utility operations and regulation. In addition to common deal-specific
factors such as size, geographic footprint and legacy corporate cultures of
the organizations, utilities also must deal with industry-specific factors,
such as intensive state regulation, a maturing workforce, aging asset base and
varied labor agreements. As managers and executives attempt to manage these
issues, in addition to delivering reliable and safe energy to our homes and
businesses 24/7/365, it is no wonder that executing complex merger integrations
is a challenge.

The top reasons the full potential of expected value from utility mergers is
not realized include:

  • Managers must maintain focus on day-to-day operations and
    respond to unplanned events such as storms and forced
    outages;
  • Executives have difficulty providing sufficient support to
    drive the organizational and process changes required to
    realize synergies;
  • No formal programs are created for tracking benefits and
    holding people accountable for delivering the planned
    savings; and
  • Performance metrics and incentives for senior and middle
    managers focus on operations/engineering rather than
    financial results.

The solutions to these and other challenges involve the rapid initiation of
an integrated cross-organizational approach, the creation of clear implementation
plans with specific results, definition of roles and assumption of responsibilities,
the adoption of project management discipline and an unwavering focus on driving
value to the bottom line. Lessons learned from both successful and unsuccessful
mergers have contributed to the specific approaches and tools introduced below.

Rapid initiation of cross-organizational involvement and communications

Speed is crucial as organizations lay the groundwork for integration activities.
Quickly establishing a communications strategy, encompassing elements of both
general and targeted messaging, is critical in managing the anxiety that accompanies
times of uncertainty. The lack of specific answers should not dissuade an active
communications program. Experience has shown that the presence of a communications
program alone reduces the level of anxiety. It is even helpful in the early
stages to communicate what is not known and the plan for issue resolution.

Even in the integration of acquisitions of much smaller entities, inclusion
of professionals from both organizations in a combined integration team is a
powerful message to the existing workforce. The recognition of cultural strengths,
identity and values in planning and implementation activities can lead to reductions
in the level of attrition due to fear of the unknown and targeted poaching by
competitors during transition.

Transformation, not accumulation

The goal of most mergers and acquisitions is to create a new organization that
is greater than the sum of its parts. But this goal is not achievable right
away and can only be accurately evaluated over several years. Where the envisioned
value is based on synergies, economies of scale and new ways of doing business,
transformational change of parts or entire areas of operations and support becomes
crucial.

A transformational approach to integration does not focus only on short-term
cost reduction but defines a process of continuous change focused on clear strategic
objectives. Components of the transformation may include streamlining, automation,
centralization, decentralization or outsourcing of processes, each with their
pros and cons. Typical post-merger transformation targets include the following
organizational areas:

  • Procurement – Focus on leveraged buying, strategic sourcing, reduction
    of maverick purchases and streamlining of administrative processes;
  • Finance and administration – Reduction of closing cycles by up to
    50 percent;[2]
  • Human resources – Streamlined and improved quality of employee support
    and reduction of investment in systems as percentage of HR budget;
  • Customer care and billing – Reductions of 25 percent in customer interaction
    costs, reduced time from meter to cash and acceleration of recovery and reduction
    of bad debt;[3] and
  • Technology – Optimization of infrastructure, increased flexibility,
    enhanced resilience and improved flow of information throughout the organization.

Definition of Project and Organizational Roles and Responsibilities

The first rule to be observed by business leaders of corporate transformation
is clear: Maintain focus on your customers. They are still No. 1. Although with
the chaos and inherent stress of the transformation, it may not always seem
to be a critical path, proactively managing customer concerns can reduce concern
in the community and reduce levels of inquiries and complaints. The community,
regulatory commissions and local government and public services are also customers
and deserve careful attention throughout the process.

Key to effectively leading the transformation “project” is putting someone
in charge. Integration and transformation activities require strategic planning
and detailed actions over many months and, often, years, and should receive
the full-time focus of accomplished managers. The wider transition team often
includes other full-time members as well as a larger group of part-time members
or specialists who assist in addressing specific aspects of the transition.

Involving professionals from diverse areas of the companies is important in
establishing momentum for organizational change. Team members require training
and guidance throughout the course of transformation to assist in handling the
emotional roller coaster that accompanies participation in a merger or acquisition.

Helping to Ensure Project Management Discipline

The cross-functional complexities of integrations span a wide range of technical,
legal, engineering, systems, financial and personnel issues. Constant changes
in requirements, priorities and, often, executive direction, require firm guidance
as well as flexibility in adaptation. As such, the traditional engineering approach
of many utilities does not lend itself well to success.

We have successfully introduced goal-directed project management (GDPM) methods
in widely varied integration efforts. These methods are based on risk assessment
tools, clear measures for evaluation and prioritization of initiatives (i.e.,
which activities to continue and which to stop) as well as robust documentation
and performance reporting processes. Methods and tools appropriate for the needs
of utilities at various stages of the merger and integration process assist
in establishing an integrated road map leading to a clearly defined goal.

The
essence of GDPM focuses on evaluating hundreds of items that contribute to merger
complexity, developing action plans for each, assigning individual or team responsibilities
and providing managerial support and resources for teams to execute. An important
methodology utilized is called radical prioritization, which provides analysis
and management information on which existing activities and projects to prioritize,
which to continue and which to suspend (see Figure 2).

Radical prioritization provides the continuity between the topdown goals envisioned
in the merger/acquisition and engages and aligns the organization to focus on
attainment of these goals. The complex interaction of transformation teams,
financial analysis and ongoing operational priorities are evaluated across both
organizations, enabling value-based decisions which take into account both internal
and external priorities and maintain a clear focus on achieving business results.

Coordinating the sheer number of moving parts and steering the organization
through both internal and external resistance requires a steady hand and executive
support to make tough decisions necessary to break down barriers and eliminate
obstacles from the path forward. Frequent re-evaluation of the relative priorities
of actions and concise management dashboard reporting enable clear, objective
and consistent communications throughout both organizations.

Relentless Focus on Driving Value

One important key to ensuring the realization of value and contribution of
dollars to the bottom line is a focus we call benefits realization. This method
identifies value enablers at the initial stage of project formation. Traditional
approaches emphasize transformation or integration levers, but our focus on
quantifiable results enables early prioritization of producing bottom-line results
to guide the formation of work teams as well as correct prioritization of issues
and dependencies linked to dollars.

Benefits realization focuses on three key steps: validating financial projection
and identifying additional potential benefits, developing and implementing plans
for realization of benefits and producing processes and scorecards for tracking
benefits and correcting underrealization on a regular basis. These steps enable
integration and transformation efforts to be linked to the bottom line and to
clearly present financial impacts to areas of operations over many years in
the future. Benefit scorecards are also often linked to measures of quality
and satisfaction to enable more detailed impact analyses.

As previously mentioned, internal focus on transition and integration efforts
often wanes as the news of the deal fades and employees become adjusted to a
new reality. Adherence to wellplanned implementation plans lessens as employees
assume new job roles, managers and priorities. It is at this phase that many
of the projected benefits fail to materialize in the absence of a rigorous benefits
realization program that reflects a long-term company focus (often five to 10
years in the future) despite short-term priorities and changes in leadership.

Conclusion

Lessons learned from hundreds of utilities and thousands of companies globally
that have navigated the turbulent waters of integration and transformation are
assisting utilities in achieving their strategic objectives and in producing
measurable financial returns. The future will be brightest for the fittest of
utilities – those that are able to thrive and grow in an increasingly competitive
market. Driving results from integration planning through execution will be
a tangible measure of their success.

Endnotes

  1. BusinessWeek
  2. IBM Business Consulting Services analysis, 2006.
  3. ibid.