Let the Sun Shine

The California Public Utilities Commission (CPUC) works to ensure California’s
energy supply is safe, reliable and reasonably priced. In the aftermath of the
energy crisis, the state’s energy agencies adopted aggressive energy efficiency
programs and renewable procurement goals to reduce energy use and the harmful
environmental impacts associated with conventional energy generation.

In January 2006, the CPUC created the largest solar program of its kind in
any state in the country – the California Solar Initiative (CSI) – a 10-year,
$2.5 billion program designed to help California move toward a cleaner energy
future and help bring the costs of solar electricity down for California consumers.
The goal of the program is to increase the amount of installed solar capacity
in the state by 3,000 megawatts (MW) before 2017.

California has long been a leader on environmentally sound approaches to the
provision of energy. The CPUC adopted formalized policies on renewable power
and energy efficiency in our energy action plans (EAP). The CSI continues this
tradition with an aggressive new program to promote solar development. We are
taking an important step to lay out a framework for an orderly, 10-year approach
to creating a sustainable solar industry. Our hope is that solar will become
a major part of California’s energy portfolio, to provide clean and inexpensive
distributed generation to millions of California consumers. Our plan is to offer
a subsidy now to push the deployment of an important part of our sustainable
energy future in the long run. This solar program simply offers one of the many
emerging alternatives to consumers concerned about a clean energy future.

This groundbreaking initiative represents the culmination of more than a year’s
worth of work by the PUC and the California Energy Commission (CEC), as well
as considerable work and many discussions in the California legislature and
Governor Arnold Schwarzenegger’s office. A collaboration of PUC and CEC staff
drafted two joint reports in 2005. The first report, issued in June 2005, addressed
key concepts related to implementing a statewide solar program, such as program
design, funding levels and an implementation schedule. A December 2005 report
proposed specific incentive levels, program elements and an oversight and administrative
structure and contained recommendations for integrating energy efficiency and
advanced metering activities with the CSI.

Local Actions Impact Global Solar Cost and Supply

California was an early adopter of solar technologies, supporting widespread
solar installations through a combination of favorable rates, rules and financial
incentives. California is the third-largest photovoltaic (PV) market in the
world but is relatively small in comparison to Japan and Germany. In addition,
other U.S. states and many countries are increasing their support for installation
of solar generation. California installed about 36 MW in 2004 compared with
more than 900 MW worldwide. Figure 1 shows the annual installed capacity for
the three largest programs and the rest of the world in the last six years.
The dashed line represents the annual manufacturing capacity of PV modules at
the end of each year. While it would appear that manufacturing capacity is increasingly
in surplus, in fact installations grew so rapidly during 2004 that capacity
was strained during the year, leading to widespread reports of module shortages
in California.

Given
the current size and future growth potential of the California solar market,
solar incentive policy development must now consider a broad number of factors,
including worldwide solar market conditions. Solar policy decisions made in
Germany, Japan and the rest of the world have an impact on global solar costs,
supply and availability and hence have impacts on California’s CSI program.
For example, incentive policies in Germany created high demand for PV systems
in a very short period, leading to the current supply and demand imbalance and
to increased equipment prices worldwide. In contrast, Japan has successfully
grown its PV market gradually over the past decade with minimal market disruptions.
Spain recently adopted a program similar to the German model.

Japan’s Solar Incentives Focus on the Residential Market

In 1994, Japan initiated a federal-level solar rebate program, providing incentives
of $9.00 per watt. Average system prices were about $20.00 per watt. The rebates
declined annually over the next 10 years; the 2004 rebate was about $0.45 per
watt. The program has grown to approve more than 70,000 applications in 2004,
which added about 300 MW of solar capacity in that year. Figure 2 shows the
average system price, rebate level and number of applications since 1994.

Participation
increased gradually, system prices in Japan declined substantially and the net
cost to the customer remained about the same. Today, the average installed system
price is $6.12/watt.

In 2006, federal rebates in Japan are scheduled to sunset, although some local
governments and entities will continue to support projects with local incentives.
The significance of the local incentives is not clear at this time. Annual federal
program funding peaked at about $250 million in 1999 and is currently declining
with the level of incentives, even with increased applications and has exceeded
$150 million in four out of 11 years. The 11-year program budget exceeds $1.5
billion.

Germany Utilizes Performance-Based Incentives

The electric utilities administer Germany’s solar incentive program. Incentives
are based on actual energy produced over a 20-year period, paid through a utility
“feed in” tariff, similar to a long-term electricity sales agreement. The program
initially provided low-interest loans, available at the applicant’s bank of
choice and administered through the German Reconstruction Loan Corporation.

Like California, Germany seeks to reduce CO2 emissions.[1] To that end, policy
makers reinvigorated an existing incentive program in January 2004 by increasing
feed-in tariffs and, removing restrictions on system size and participations.
Per-kilowatt-hour (kWh) purchase prices vary by customer class, system size
and physical configuration. Prices for roofmounted PV range from $0.70/kWh for
residential customers to $0.55/kWh for large commercial installations.[2] Building-integrated
systems receive an additional $0.06/kWh bonus. The purchase price for solar
kWh is scheduled to decline by 5 percent per year. Germany has no current plans
to alter the feed-in tariff, but terminated the lowcost loans in 2004.

Average residential system prices are about $6.40 per watt. The program installed
570 MW between 1999 and 2004, at a cost to date for the purchased electricity
of more than $1 billion. About 75 percent of the systems were installed in 2004,
due to the increased feed-in tariff.

PV incentives in Spain: Spain’s solar program is similar to the German model.
It utilizes a feed-in tariff for PV, and a separate lowinterest loan program.
Solar projects receive a guaranteed payment over 25 years of about $0.555/kWh
for systems up to 100 kW and about $0.30 per kWh for capacity sizes over 100
kW.[3] There is no cap on the number of systems that may take service on tariff.
Loans are limited, which has an impact on program participation. When loan funding
ends, applicants tend to wait for the next round of funding even though the
feed-in tariff alone makes a system purchase economical.

California Solar Initiative

The CSI includes the following provisions:

  • $2.5 billion over a 10-year period in rebates that will decline steadily
    over that same time frame. Funds will come from electric and gas distribution
    customers of investor-owned utilities and will go toward the installation
    of solar photovoltaics initially, with solar hot water heating and solar heating
    and cooling systems being added after workshops are conducted later this year.

  • The California Energy Commission will oversee one component of the program
    to focus on builders and developers of new housing to encourage solar installations
    in the residential new construction market. The PUC will oversee the remainder
    and majority of the CSI, which will cover existing residential housing, as
    well as existing and new commercial and industrial properties.

  • The program sets aside 10 percent of program funding for lowincome customers
    and affordable housing installations. The PUC will also explore the option
    of offering low-cost financing options to those types of installations in
    workshops this year.

  • The program includes an additional amount of up to 5 percent of the annual
    budget for potential research, development and demonstration activities, with
    emphasis on the demonstration of solar and solar-related technologies.

  • The program includes a requirement that solar incentive payments be made
    not just for installed capacity, but also with emphasis on the performance
    and output of the solar systems installed, to ensure that these solar investments
    are delivering clean energy as promised.

  • The program design requires all facilities that receive an incentive to
    undergo an energy efficiency audit (at a minimum) to identify more cost-effective
    energy efficiency investment options at the building. The PUC also intends
    to have further workshops to determine incentives for newly constructed buildings
    that participate in utility energy efficiency new construction programs and
    exceed the existing building standards by a certain threshold.

CSI Funding Requirements and Allocation

The CPUC adopted a budget for the CSI program of $2.5 billion over 10 years,
beginning in 2007, though rebate funding of $300 million is available during
2006 through the CPUC’s existing self-generation incentive program. The utilities
may recover associated revenues in applicable rate-making proceedings. The CPUC
set annual CSI budgets so that they are relatively high in the early years and
decline in later years as rebate levels fall and, hopefully, as the market’s
need for financial support decreases. The CPUC also will provide for funding
flexibility between program years in recognition of actual demand for funding.
Figure 3 provides a schedule describing the utilities’ collection of revenue
requirement, although expenditures may be higher or lower in any given year
according to the number and nature of project proposals.


The CPUC also allocated up to 10 percent of the total budget funding of $2.5
billion to administrative costs, which includes program evaluation and marketing
and outreach efforts.

Structure of Incentives

The two existing solar incentive programs (prior to the existence of the CSI)
managed by the CPUC and the CEC have provided payments on the basis of capacity,
with the exception of a small performancebased pilot at the CEC. For capacity-based
incentives, a project owner is paid the full incentive on the basis of the project’s
size as soon as it is installed. One potential problem with this incentive structure
is that it does not recognize power production or motivate good project management
or maintenance once the project is installed. Projects may even be removed without
penalty at any time.

Performance-based incentives (PBI), on the other hand, recognize good project
performance by paying the project owner on the basis of energy production levels.
Such a performance-based incentive structure will promote not only installation
of solar projects but also their efficient operation.

A good incentive program is one that promotes efficient operation of the solar
project to the extent such a program is effective and readily administered.

Energy Efficiency Requirements

The CPUC and CEC’s Energy Action Plan “loading order” requires optimization
of energy efficiency measures first, followed by demand response and renewable
energy. Consistent with the EAP loading order, the CEC’s 2004 and 2005 Integrated
Energy Policy Report recommends leveraging energy efficiency improvements in
new and existing homes prior to installing a solar system. New residential and
commercial buildings in California are required to meet standards that ensure
a certain level of energy efficiency is attained. These standards are updated
periodically to consider new energy-efficient technologies, practices and methods.
Typically the investor-owned utilities offer financial incentives to encourage
customers to install efficiency measures beyond what is required by the building
standards.

Requiring existing commercial and residential buildings to retrofit energy
efficiency as a condition for solar rebates is more complex. Residential and
commercial buildings vary as to achievable energy efficiency levels, making
it more difficult to establish uniform requirements or standards. The CSI recommends
requiring an existing building constructed more than three years prior to the
reservation date to receive an energy audit and submit the results as part of
the reservation process for the system.

It is our hope that our solar initiative will become a model for the nation.
You can track our progress and any new developments on the CPUC’s website at
http://www.cpuc.ca.gov/static/energy/051214_ solarincentive.htm.

Endnotes

  1. California proposes to reduce greenhouse gas emissions to year 2000 levels
    by 2010; to 1990 levels by 2020; and to 80 percent below 1990 levels by 2050,
    according to Executive Order S-3-05 issued by Governor Schwarzenegger in June
    2005. Germany’s goal is to reduce emissions to 40 percent of their 1990 values
    by the year 2020.
  2. http://www.bsi-solar.de/english/information/EEG
  3. http://www.idae.es/index
  4. Totals do not include 2006 funding.

Update on Broadband Over Power Lines

Electric distribution utilities have come under increasing pressure to find
innovative ways to improve efficiency and generate new revenue. With the deregulation
of the electric power industry, separation of generation, transmission and distribution
has put more emphasis on the stand-alone performance of distribution systems
than in the past when electric utilities were more vertically integrated.

Historically, distribution has accounted for 28 percent of the costs of delivering
electricity, with generation and transmission accounting for 64 percent and
8 percent respectively.[1] Events such as the increasing congestion on transmission
grids and the blackout of 2003 have focused attention on transmission. Meanwhile,
distribution companies have been faced with the issues of aging infrastructure,
loss of valuable knowledge and skills in the utility workforce due to retirement,
increasing reliability and power quality issues, limited options to increase
revenue and an increasing gap between customer expectations and the ability
of the distribution utility to meet these demands, especially in the areas of
local grid reliability and power quality.

BPL Value Shift

To meet each of these challenges, some electric utilities have turned to broadband
over power lines (BPL). BPL makes use of digital signal processing technology
to implement advanced modulation techniques capable of overcoming the severe
shortcomings of electric distribution grids as communication media. BPL was
originally touted as a way for the utility to generate new revenue from existing
infrastructure by using the distribution wiring in conjunction with BPL to deliver
broadband digital services such as Internet connectivity to consumers.

While BPL was supposed to become a third alternative to digital cable and DSL
for consumer broadband service delivery, the utility industry view of its value
has shifted since its initial debut in the 1990s. The technology has gradually
improved, but its deployment and operational complexity and costs have remained
significant, and the business case for delivery of broadband services via power
lines has not proven adequate to justify an electric utility venturing into
an area removed from its core business.

A number of electric utilities have carried out pilot projects with various
BPL vendors, and some commercial ventures have been created to deliver consumer
broadband services via BPL. But increasingly, electric utilities are seeing
BPL as only one of many options to transport data for utility operations, especially
in the context of an intelligent power grid. PPL Utilities Corp of Allentown,
Pa., for example, cancelled its commercial BPL venture,[2] but CenterPoint Energy
of Houston, Texas, is exploring the use of BPL to support core utility functions
such as transporting electric meter data; supporting distributed sensors for
grid monitoring and diagnosis; and aiding in automatic outage detection and
localization.[3] In addition, the company is considering BPL as a mechanism
to enable advanced energy delivery services such as time-of-day rate structures
as well as off-peak usage discounting and remote energy management and load
shedding.

Positioning BPL

Positioning BPL has proven to be a challenging proposition for electric utilities
for several reasons. Electric utilities have traditionally been operated for
reliability and long-term stability and their primary mission still centers
on this concept. Utilities have therefore been uncomfortable with the degree
of risk that comes with a new technology. In addition, after the spectacular
implosion of the dot-com boom, new Internet-based business models (such as those
associated with early BPL efforts) have been viewed as counter to the current
“back to basics” trend in the electric utility industry. Furthermore, rapid
changes in the technology have made it a moving target in terms of costs and
performance, making analysis difficult.

The intense competition in the broadband delivery industry has also been a
significant concern, since the broadband provider concept would require the
electric utility or a third party wishing to use utility BPL infrastructure,
to compete against entrenched incumbents who have proven capable of increasing
service speeds to levels not supportable by practical BPL implementations. These
incumbents have made and are continuing to make large investments in infrastructure
and new services and are well ahead of BPL in terms of market penetration.

To date, there has been no utility industry consensus on standards or best
practices for BPL implementation, and benefits associated with BPL are not well
quantified. In many states, public utility commissions have set no definitive
policy regarding rate relief for BPL investment, although Texas and California
are exceptions. More than 20 communication technologies are available to carry
digital data, and BPL must compete with them for use in intelligent grid data
transport applications. In addition, many utilities have significant investment
in legacy communication systems and are reluctant to invest in yet another communication
infrastructure. Finally, radio amateurs have voiced strong opposition to BPL
on the grounds that the technology causes interference in radio frequency bands
used by amateurs, emergency services and government agencies.

Nonetheless, BPL can be a winning technology because it is able to deliver
modern network management capabilities and sufficient bandwidth to provide functionality
for present applications while providing expansion capacity for future functions.
BPL is still the subject of much research and development and, therefore, it
is reasonable to assume that there will be improvements in the overall capabilities
and costs of the technology, so that business cases will become easier to close
as the technology matures.

BPL can act as the data transport backbone for many core utility functions
in the areas of grid state measurement, meter data transport, power quality
and reliability measurement and monitoring, grid equipment state and health
monitoring, outage and failure detection and localization, and safety and security
applications. BPL is unique among broadband telecommunications technologies
in that it is embedded in the power system infrastructure itself. This makes
it the only data transport technology that can reach every electric utility
asset on a distribution grid. While other technologies may be able to reach
above-ground assets, only BPL provides a unified means to reach both above-ground
and underground assets for communications purposes. Underground distribution
poses an especially difficult problem for distributed sensing and control because
the wireless technologies are essentially ineffective here. This feature becomes
especially important as utilities extend asset management to include real-time
asset monitoring and as utilities extend grid and device-state monitoring to
improve system performance metrics such as SAIDI and SAIFI.

The architecture of BPL systems is such that BPL devices not only provide data
transport but are located ideally to make many of the key measurements that
support full grid observability. For example, BPL devices, properly designed,
could measure local AC voltage, current, and real and reactive power flow. They
could sample the AC current and voltage waveforms and then compute displacement,
distortion and total power factor as well as total harmonic distortion and total
demand distortion. They could compute and monitor distribution transformer demand,
including peaks, so that distribution transformer demand management could be
carried out with confidence. They could perform signal analyses to detect and
locate highimpedance faults. Existing BPL systems do not perform these functions
and are not likely to until BPL manufacturers realize that the potential for
BPL goes well beyond broadband communication. In addition, BPL could still become
a conduit for the delivery of specialized broadband-based services for utility
customers, including home automation and more flexible energy delivery rate
plans (e.g., time-of-day demand, etc.).

Business Transformation With BPL

The embedded nature and broad coverage characteristics of BPL can open the
door to a utility business transformation that goes well beyond the obvious
benefits of simple automated meter reading and outage location applications.
By increasing grid observability, the utility can change the fundamental way
it performs basic business functions, from inventory management to strategic
planning. The utility can move from the traditional focus on “keeping the lights
on” to a focus on true business drivers:

  • Delivery of high-quality power over a stable grid;
  • Asset utilization optimization and asset life cycle management;
  • Cost containment;
  • Optimal asset replacement/upgrade and expansion;
  • End-to-end power delivery chain integration;
  • Infrastructure security;
  • Ability to meet or exceed customer quality and performance
    expectations; and
  • Facilitating the still-evolving digital ecosystem.

Ultimately,
BPL can become a key portion of a grid intelligence system that supports these
business drivers by acting as the data transport layer (and possibly, to some
extent, as a smart sensor) in intelligent power grid architecture. If we embed
BPL as a data transport technology in the framework of an intelligent power
grid (see Figure 1), we provide a context for determining its value. BPL is
a unique telecommunications technology in that its intimate association with
the power grid gives it the potential to act both as data transport and as a
data source.

Seeing BPL in this way, utility business analysts and strategic planners can
balance its cost against the definable benefits of core utility functions enabled
by BPL and examine the costs of BPL compared to alternate technologies. To perform
a proper analysis, we must be careful to not only include the benefits of the
applications enabled by BPL but also do a careful accounting of the various
cost elements associated with BPL network deployment and operation. These include:

  • Network design cost;
  • Preliminary RF survey cost;
  • BPL equipment costs;
  • Head-end equipment costs;
  • BPL equipment installation cost;
  • BPL equipment installation project management cost;
  • Post-installation RF survey and system-tuning costs;
  • Backhaul communication installation cost;
  • Network operations center cost;
  • Backhaul monthly communication cost;
  • Network management cost;
  • Technical and help desk support cost; and
  • Maintenance and system refresh costs.

Network design costs can be significant for BPL. Network designers must learn
the entire feeder system in the proposed BPL service area and identify solutions
for dealing with distribution transformers, switches, reclosers, capacitors
and other potential infrastructure impediments to proper BPL operation. It may
be necessary to install additional optical fiber runs or wireless links to complete
connectivity for the BPL network in some cases. These items may become apparent
only after network architects have performed a design study.

Since BPL deployments attract opposition from radio amateurs, it is prudent
for the utility to allocate costs for outreach to the amateur radio community
and plan for efforts to adjust the BPL system to notch out frequencies that
would cause interference with radio systems in the BPL service area. The utility
should perform and document a baseline RF survey before deploying BPL equipment.
Once the utility has deployed the BPL equipment, it should repeat the RF survey
and make any adjustments necessary to avoid interference problems. Involving
the amateur radio community in these processes can smooth the introduction of
BPL technology.

Conclusion

BPL is still an emerging technology with much to be done before it becomes
a mainstream electric utility tool. Standards are just beginning to emerge,
best practices are not yet defined and business cases are still inconclusive
or remain to be validated by actual experience.

We are now emerging from the peak of the hype cycle for BPL and are entering
into a period of practical refinement and application. As long as utilities
continue to focus BPL equipment vendors on issues of cost and functionality,
standards and interoperability and robust performance, then BPL should continue
to move toward its proper place as another tool for the electric utility to
apply to its operations.

Even though BPL is very unlikely to become a primary channel for delivery of
broadband connectivity to consumers, it still may find a role as a carrier of
broadband services to end users in areas where traditional providers do not
offer workable or affordable options and may eventually prove to be a prime
means of bringing specialized services to the home. It is clear, however, that
BPL’s greatest value will be as an enabler of intelligent grid functions that
support the distribution utility’s core business.

Endnotes

  1. U.S. Electric Utility Overview http://www.techadvantage.org/eprise/
    main/TechAdvantage2005/NRECA/Overview.ppt
  2. “End of Internet over Power Lines?” testmy.net. October 16, 2005.
    http://www.testmy.net/articles/article-186
  3. “CenterPoint, IBM Roll out Smart Grid in Houston” at http://www.leadingthecharge.
    com/stories/news-00137427.html and “CenterPoint Energy
    and IBM examine innovative ways to use broadband over power line (BPL)
    technology” at http://www.hoise.com/primeur/05/articles/weekly/AE-PR-
    08-05-43.html

 

Business Transformation Outsourcing’s Benefits

Energy and utility industry executives are increasingly called upon to improve service levels, increase responsiveness and optimize their cost structure. In short, executives in these industries, as well as in others, are being challenged to continuously get better, faster and cheaper. Traditional approaches to address these challenges involved securing transformational consulting services to design and implement new business processes, upgrading application portfolios and selectively leveraging global resourcing.

The evolution of the business transformation outsourcing (BTO) services marketplace now affords executives an alternative approach to procure transformed services to support their business. Providers maintain many key support services for the industries through institutionalized business process and technical solutions. Pre-architected global delivery models leverage the provider’s network of delivery centers to obtain the skills, capabilities and labor arbitrage advantages of global resourcing. Finally, building transformation into longer-term operating services contracts allows the provider to underwrite transformation investments required while delivering contractually agreed service levels for the “in scope” processes.

Leveraging BTO approaches from leading providers can be a vehicle to provide:

  • Improved returns and accelerated timing of those returns;
  • Increased management capacity as the service provider will provide services management oversight at agreed service levels;
  • Additional sources of capital available to underwrite transformation investments; and
  • Mitigation of transition and transformation risks managed from one external provider within a customized governance framework.

In summary, integrated service providers in the BTO marketplace are providing a holistic offering that has been traditionally procured separately by clients.

A number of recently completed and highly publicized transactions have been executed in the marketplace. Companies such as TXU, NiSource and Williams Energy have embraced BTO solutions to transform their businesses.

Managing Expectations

As we discuss BTO solutions with energy and utility industry executives who are contemplating embarking on a business transformation project, we see a number of early issues raised. Primary concern revolves around expectations management.

We find that client executive teams who have internally agreed upon their objectives and priorities for the BTO program are better prepared to evaluate recommendations. The more solidified and better communicated the program objectives and priorities are, the better a service provider can “adjust the dials” to customize a solution to meet the client’s requirements. This fine-tuning of a solution does not happen in a vacuum. The client team is an integral participant in helping to shape solutions, and having a solid starting point can accelerate the process. In addition, a clear statement of program objectives will allow the client and the provider to “test” solution alternatives against the program requirements.

So what do we mean when we suggest a clear understanding of objectives and priorities? Take the better, faster, cheaper example mentioned earlier. While generally, each of the concepts is important, can the client highlight the key overarching criteria that the program has to meet? Can the client define what success means? Having a clear picture of what the client is aspiring to achieve and considering trade-offs are imperative to being able to judge the success of the initiative.

Objectives and Service Delivery Areas

Another dimension is the client’s appetite for transformation. We often distinguish between business process outsourcing (BPO) – taking over operations of the client’s existing processes with incremental process improvements – versus business transformation outsourcing, or fundamental changes to the business processes, people and underlying technology supporting the client’s business. If you are looking more for BPO, a “lift and shift” strategy to obtain labor arbitrage benefits, certain providers may be better suited to provide such a solution. Similarly, if the client seeks more fundamental transformation, other providers will have the relevant industry, transformational and technical capabilities. While these are not mutually exclusive, we often find that a client leans one way or the other or has some preconceived objectives on a process-by- process basis.

Another key area we explore with clients is from where they would prefer their solutions and services to be delivered. Is there a particular concern regarding the extent of onshore versus offshore delivery? Is the client comfortable with near-shore solutions, or are they accustomed to global and offshore delivery of services? Many of the large BPO and BTO providers can tailor solutions to address particular client desires, recognizing that this “fine-tuning” may have some trade-offs in other dimensions of the overall solution.

As we work with our clients to address the process orientation of what should be in scope, we generally start with the assertion that more value can be achieved through a broader scope. Clients who are not as mature in the use of outsourced services generally tend to be more conservative in their initial efforts. However, we encourage clients to consider the breadth of the process, and engage the provider to explain how their solution can address your overall needs. Figure 1 depicts the major processes that energy and utility clients usually assess for prospective outsourcing initiatives.

Let’s quickly examine the scope of theses processes and how they might fit into a BTO initiative:

  • Procure to Pay – This process covers key supply chain, sourcing and some payment processing. Benefits that clients generally seek are strategic sourcing to drive down overall supply chain direct and indirect spend, and tools and analytics to provide companywide visibility to sourcing compliance.
  • Hire to Retire – Primarily within the Human Resources function, these processes support virtually all of the major processes required from on-boarding new recruits to managing the benefits and retirement processes for retiring staff. Key features of BTO solutions include added transformation across virtually all business processes, including providing high levels of self-service to the client’s staff, which generally enables customized services at a lower transaction cost.
  • Account to Report – Within the finance function, these processes warrant extensive dialogue, especially given the recent Sarbanes- Oxley legislation and Section 404 reporting requirements. We find that, in addition to technologies, controls and tools we have implemented to support globally resourced finance processes, a key focus on these processes involves a client’s control environment and how our solutions integrate within their overall risk management framework.
  • Meter to Cash – This area extends beyond the back office and is the primary connection for energy and utility companies with their clients. Meter to cash comprises the processes that extend from usage collection through payment. Some clients break the scope down into subprocesses such as billing, credit and collections or call center management, and consider outsourcing them on a stand-alone basis.
  • Common Processes and Information Technology Infrastructure – Solutions in each process area are often accompanied by outsourcing initiatives within the IT function of the business. Many of the leading BTO providers are also long-term traditional IT strategic outsourcing services providers and can often provide an integrated solution.

While there is no prescriptive model for the number or breadth of processes to be included for a particular company, as mentioned earlier, the greater the breadth, the greater the opportunity for a provider to generate more value in their solution. Also, the more scale in a transaction, the better the solution provider can provide access to capital as part of transformational investments, and this should not be dismissed, especially if using the program to assist in defraying investment capital is one of the client’s key objectives.

As the client contemplates a particular program – whether a “best of breed” approach or a broader effort with a single or primary provider makes sense – it should consider this: Many clients who start out on a single-process-tower, best-of-breed approach move toward a prime-aggregated or single-provider model. The reason is that the incremental benefits erode when the client considers multiple solutions, procurement, negotiation, transition and governance processes that it will need to establish to address multiple providers. In our experience, having a more strategic relationship with the primary provider allows the service relationship to not only withstand inevitable transition hiccups but will allow it to blossom into a strategic asset for the client.

Figure 2 highlights the core offerings of IBM’s overall BTO portfolio, and provides an example of the typical business processes supported through outsourcing. Note that there is a high degree of correlation between the core offerings and the key energy and utility industry processes that were mentioned earlier.

For providers that have integrated BTO and Strategic Outsourcing capabilities, virtually all of these processes and subprocesses are supported by applications transformation and technology transformation. Additionally, some providers also leverage financing services to accelerate value to clients.

Conclusion

We continue to see increased interest from the energy and utility industries in how BTO can provide a unique solution to address their performance, shareholder and transformation challenges. BTO is a new way to engage a full-scope provider to support the client’s objectives and priorities. Having a clear view of objectives is a critical starting point. Developing the scope of the program is also important as the client solicits and reviews offerings from providers.

As the client engages with a provider, it should explore the creative dimensions that a larger-scale BTO transaction can provide. For example, investment capital, joint go-tomarket opportunities and specific community initiatives are topics that can be addressed with clients during these transactions. BTO provides today’s energy and utility executives with a powerful new tool to help enhance overall business performance and address specific objectives.

 

Becoming an On-Demand Utility

A switch is flipped, and there is light. A knob is turned, and there is heat.
What industry can be more on demand than energy utilities? Becoming an on-demand
utility is not about physics. IBM’s CEO, Sam Palmisano, defines an on-demand
enterprise as one “whose business processes integrate end-to-end across the
company, and the key partners, suppliers and customers can respond with speed
to virtually any customer demand, market opportunity or external threat.”

Today, utilities are facing the same tough questions that other industries
have struggled with:

  • How well can we manage volatility within a quarter?
  • Can we reduce costs without cutting the muscle we need to invest in new
    opportunities?
  • What is the business value of each component of our business?
  • What is our “time to value” on investments?

Historically, utilities, like other industries, have been comprised of independent
businesses, defined by geography (or jurisdiction) or asset group such as generation,
transmission, distribution and enterprise resources (supply chain, human resources,
financial and information technology). Each business had its own bureaucracy
and culture. The enterprise also had big staffs that brought it all together.

In the on-demand world, if an enterprise is going to be responsive and flexible,
it needs to integrate horizontally and remove the seams and delays. Six keys
to becoming an on-demand utility are:

  • Define the core business – Determine the business and assets that make
    up a high-performance portfolio;
  • Improve business processes – Knock down the barriers and eliminate low-value
    activities;
  • Create a dynamic organization – Structure resources to perform and adapt;
  • Build a high-performance culture – Institute the measures and incentives
    to help achieve top-tier performance;
  • Establish strategic alliances – Partner with others to leverage strengths
    and share risk; and
  • Innovate – Continuously find new and better ways to serve the customer
    and reward shareholders

These six keys, in detail, are:

Define the Core Business

Defining the core business, which is part of building (or rebuilding) a high-performance
portfolio, is one of the most important and challenging elements in transforming
a utility. As a portfolio manager or investor, the utility must make choices
as to which businesses or assets it should acquire, which ones it should retain
and which ones it should shed. Attractive investments may be those for which
the enterprise sees high returns or sustainable growth. There may be strategic
advantages in owning certain businesses or assets versus others. The key is
to make the right decisions to shift the portfolio to the core group of businesses
on which the utility can build for many years.

As the operating manager, the utility must ask itself the following questions:

  • Can we operate these businesses/assets at superior performance levels?
  • How can we get sustainable productivity gains year after year?
  • What strategies and tactics must we employ to improve operations?

The goal or objective should be to retain or acquire only those businesses
that the utility can operate in the top tier of its peer group.

Finally, as a creditor, the utility must examine the risks associated with
the business or asset. What is the utility’s appetite for risk? How can risks
be managed? What hedges can and should be in place? In the end, it is not about
avoiding risk but helping to ensure that there is sufficient return on the investment
to warrant the level of risk.

Improve Business Processes

Improving business processes will require the utility to take a more horizontal
perspective. This means looking at processes on an enterprisewide basis instead
of just within the business unit or operating division. Historically, utilities
have structured processes on a geographic (regional) or asset (power plant)
basis. This has led to redundant organizations and systems. It also has diminished
the opportunity to transfer best practices internally.

To
optimize efficiency and accuracy, utilities should strive to centralize or standardize
as many activities as reasonable. Figure 1 shows that different types of activities
require different approaches. Activities that may benefit from economies of
scale should be centralized and perhaps outsourced. Those that, for regional
or strategic reasons, cannot be centralized can be standardized, providing for
some sharing of systems or other infrastructures. Those activities that are
responsive to changing requirements or that require unique capabilities may
benefit from scope economies through centralization opportunity.

Putting the pieces together in the right structure is just the starting place.
Eliminating unnecessary handoffs and low-value steps can create more savings
and reduce the opportunity for error. Appropriate process controls can help
ensure quality and performance levels.

One key element often overlooked, however, is process integration. This means
integrating processes with other processes, organizations and systems. The goal
is seamlessness, moving across the enterprise without a pause, significantly
reducing processing time while lowering cost. To enable end-to-end integration
of processes, many utilities are beginning to shift from traditional stand-alone
best-of-breed systems and tools to integrated suites.

Create a Dynamic Organization

Perhaps the biggest barrier to becoming an on-demand utility is organization.
The traditional siloed or vertical organizational structure that has evolved
in the utility industry over the years perpetuates inefficiency. In the past,
work has been initiated, planned, scheduled, executed and closed within the
organization of one operating center. Other operating centers, within the same
system, often would accomplish the same tasks, using different processes and
tools.

The on-demand utility will centralize (systemwide) work initiation, planning
and even scheduling. This will allow the utility to prioritize work, standardize
around best practices and schedule work to be executed in the most efficient
way. Work execution and closure will likely be decentralized according to geography,
but with the onset of mobile dispatch technologies, the geographies will have
a much larger footprint. This is the horizontal organization; it is organized
around function.

Another key to the on-demand organization is flexibility. New regulation –
the Energy Policy Act of 2005, fuel prices, industry consolidation, technology,
an aging workforce and many other factors – will continue to drive change. Utilities,
like other industries, are facing cost pressures while regulators and customer
demands are increasing. As the industry becomes more volatile and faces increasing
changes, utilities must learn to adapt more quickly.

The flexible organization:

  • Is flat – With fewer layers, decisions are made quickly and action is rapid;
  • Has a significant variable component – Through increased utilization of
    contract workers and service providers, the utility can ramp up and ramp down
    quickly without bureaucratic onboarding and severance programs;
  • Has a solid financial base – The enterprise can absorb near-term volatility
    without extreme financial strain;

  • Is open – Communication flows freely, and issues are raised without fear
    of consequence; and
  • Collaborates across disciplines – There are no empires and no turf wars;
    recognition and reward are based on performance, not scope.

By having a flexible organization, utilities will be better able to accommodate
changes.

Build a High-Performance Culture

A performance-based culture underpins the on-demand utility. A performance-based
culture is characterized by the following:

  • Performance metrics are based on value creation;
  • Ambitious performance targets are set according to enterprise strategy and
    goals;
  • Metrics and targets are communicated to the workforce in such a manner that
    each person measured can understand his or her contribution to the success
    of the organization;
  • Results are measured and reported consistently;
  • Significant incentives are provided for superior performance; and
  • There are clear and known consequences for inadequate performance.

It is impossible to overstate the importance of performance management. Many
great plans have failed because of poor implementation. The utility industry
has often been characterized as a slow-moving bureaucracy with no reward (from
the regulator) for improved performance. Today’s utilities are beginning to
see opportunities through incentive-based rate models. They also are seeing
consequences for poor performance as betterperforming utilities look to make
acquisitions where value can be released through improved work practices.

Establish Strategic Alliances

Alliances provide an opportunity for the enterprise to accelerate transformation.
For example, leveraging the strength of others may be more viable than developing
new competencies. Other industries such as technology, telecommunications and
transportation have found that the most effective way to create new products
and access markets is through alliances.

In the utility industry, alliances can provide flexibility through contract
services and outsourcing. Supplier alliances and buyer cooperatives can provide
utilities with purchasing power, and alliances with associations and lobby organizations
can provide influence. In addition, alliances can provide savings by leveraging
combined scale and scope.

Unfortunately, alliances can also provide losses if managed improperly. There
are many lessons to be learned about alliance management. What is an effective
alliance strategy? What are the objectives of the parties involved, how do they
align and what are the incentives? What mechanisms must be put into place to
manage alliances? These questions and many more should be explored before entering
into an alliance.

Innovate

Innovation is a bigger concept than invention. It’s what happens when invention
intersects with insight – when some new technology or capability is applied
to an industry or to the particular circumstances of a client. That’s when unique
value is created.

Simply put, innovation can:

  • Spawn new markets, products and services;
  • Fuel growth;
  • Improve performance;
  • Reduce risk; and
  • Create value for the company, its customers, its employees and its investors.

Automated meter management, broadband over power lines, sensor technologies
and other components that comprise the intelligent network are causing changes
in operation. Asset management concepts and improved work management systems
are improving investment decisions and work efficiency. Many innovations are
occurring in the industry today, and many more will emerge in the future.

To leverage innovation, the on-demand utility will:

  • Measure and realize the value of innovation;
  • Work with customers to create and deliver innovations that are important
    to them;
  • Align innovation with business strategy for growth and further efficiency;
    and
  • Manage people for effective innovation, creating communities and ecosystems.

Doing so will help enable utilities to be better positioned for the future.

Conclusion

Transformation
to an on-demand utility is a journey, not a destination. To begin the journey,
utilities must set priorities, build a foundation and grow from there.

Figure 2 shows a transformation road map for becoming an on-demand utility.
The steps include the following:

  • Develop Foundation Initiatives – These are the initiatives that address
    fundamental problems or gaps that must be overcome to allow the transformation
    to begin;
  • Develop Transition Initiatives – These initiatives often are the largest
    and usually represent the bulk of the transformation effort;
  • Develop Achievement Initiatives – These initiatives solidify the transformation
    and position the transformed company for longterm growth; and
  • Develop Continuous Improvement Initiatives – These initiatives are permanent
    and help ensure that the transformation and the resulting benefits are sustained
    and leveraged.

The cornerstone of the foundation is leadership commitment. Many, if not most,
transformation efforts starve from lack of attention by senior leadership. The
CXO announces the project, names a project leader and then vanishes. The organization
sees that the senior leadership has moved to other priorities and assumes that
the transformation is no longer important. For a true transformation to succeed,
the CXO must designate herself the project leader and maintain visible, active
engagement throughout the effort. After all, it is always easiest to lead from
the front and not the sideline.

 

Talkin’ ’Bout our Generation

Energy independence has been an increasingly popular goal in the United States.
However, “a goal without a plan is just a wish,” said Antoine de Saint-Exupery.
While there may be growing agreement that a plan is necessary, there is far
less agreement regarding its contents. Meanwhile, U.S. energy demand continues
to rise, driven almost exclusively by population growth. The problem of the
future of the U.S. energy industry will not solve itself; it is currently exacerbating
itself, with a little help from its friends.

U.S. energy consumption has grown at a rate of approximately 1 percent per
year over the past decade; approximately the same as the rate of population
growth. Electric consumption has grown at a rate of approximately 2 percent
per year over the period, or approximately twice the rate of population growth.
U.S. population is expected to reach 300 million during 2006. Continued growth
at the present rate would result in a population of approximately 450 million
by 2050. If current energy consumption trends continue through 2050, energy
consumption would be expected to increase by approximately 50 percent and electric
consumption would be expected to approximately double.

The substantial projected growth in U.S. energy consumption would occur against
the backdrop of:

  • a rapid global increase in energy consumption, driven primarily by the developing
    countries;
  • constrained refinery capacity, combined with more complex requirements for
    refinery output;
  • restrictions on exploration and production affecting approximately 40 percent
    of estimated U.S. domestic oil and gas resources;
  • constrained energy transmission facilities and increased resistance to the
    construction of new transmission facilities;
  • an aging electric-generating fleet, challenged by growing governmental pressure
    to increase efficiency and reduce emissions;
  • increasing governmental and environmentalist pressure to expand the use
    of renewable forms of energy; and
  • growing international pressure to reduce the emissions of greenhouse gases,
    primarily CO2.

The impacts of these factors have been reflected in rising world oil prices;
rising domestic natural gas and propane prices; hurricane-related supply, refinery
and pipeline capacity shortages and resulting price spikes; and the shifting
of some energyintensive production operations to overseas locations.

Generation X

Varying end uses compete for supplies of all types of energy in the U.S. economy.
Oil is used to produce transportation fuels, as a chemical feedstock and, to
a lesser degree, for residential, commercial and industrial heating. Natural
gas and propane are used for residential, commercial and industrial space and
water heating; process heating; as chemical feedstock; and increasingly (in
the case of natural gas) as a power-generation fuel. Coal is used primarily
as a power-generation fuel, although it is still used for some industrial process
heating. Nuclear energy is used exclusively for power generation. Of the renewable
energy sources, ethanol is used primarily as a gasoline additive; solar energy
is used for space and water heating and for power generation; and wind, geothermal
and hydro are used primarily for power generation. This competition for energy
has had the greatest impact recently on the natural gas market, where growing
demand for natural gas for electric power generation has increased prices, threatened
supply shortages and raised wellhead and retail prices.



The expanded use of coal as a power-generation fuel has met increasing resistance
because of concerns about the resulting pollutant emissions and because coal
has the highest carbon/hydrogen ratio of all fossil fuels, and thus makes the
greatest contribution to the production of greenhouse gases. The continued use
of coal as a generating fuel is being challenged in many older coal-fueled power
plants, because of its lower efficiency and the general absence of pollution-control
equipment to reduce the emissions of sulfur and nitrogen oxides. Over the past
10 years, the U.S. EPA has taken a far more aggressive posture regarding what
constitutes a major overhaul of these older coal plants which would trigger
New Source Performance Standards review of these plants. As a result, some power
plant owners have elected to convert older generators to burn natural gas to
reduce emissions, rather than installing expensive pollution control systems
on these older power plants – while others have continued to perform minimal
maintenance and repair, rather than battle with the EPA regarding whether more
extensive maintenance and repair should trigger New Source review. The development
of integrated-gasifier combined-cycle coal generation offers the potential to
dramatically reduce emissions from coal-fired power plants, but has relatively
limited impact in reducing CO2 emissions. Research is continuing on approaches
to capturing and permanently fixing the CO2 emitted by coal-fired and other
fossil-fueled power plants, but none of these approaches has been demonstrated
commercially.

Most new electric power-generating facilities constructed in the United States
in the past decade have been natural gas combinedcycle turbine generator plants.
Their combination of higher efficiency and the lower carbon/ hydrogen ratio
of the natural gas fuel results in a reduction of ~50 percent in CO2 emissions
per unit of electric power generated. These plants are operated primarily during
the summer months, when electric demand and consumption are highest. Therefore,
the gas consumption required for the operation of these plants competes with
the demand for natural gas to be pumped into storage to meet peak winter spaceheating
demand. This increased demand for natural gas, combined with restrictions on
natural gas exploration and production, has resulted in rapid and dramatic increases
in natural gas prices for all end uses.

Stalled Solutions

Nuclear power generation currently provides approximately 20 percent of U.S.
electricity. However, no new nuclear generation has been constructed in the
nation in 25 years. There remains widespread concern about the possibility of
a nuclear accident, as well as about the possibility of nuclear plant sabotage
by terrorists resulting in a release of radioactive material from the plants.
Several nuclear plants in the United States have reached their original design
lives. Some have been retired, while others have been subjected to extensive
life-extension projects to keep them in service. The U.S. Department of Energy’s
failure to meet schedules for long-term storage of spent nuclear fuel rods is
another issue facing many nuclear plant operators, which are reaching the limits
of their ability to store spent fuel rods on site.

Renewable sources including hydroelectric dams, geothermal steam plants, wind
turbines and solar photovoltaic systems comprise the remainder of the current
U.S. generating mix. The expansion of hydroelectric generation is limited by
the small number of potential large generation sites and environmental resistance
to the construction of new hydroelectric dams. There is also growing pressure
from the environmental community to eliminate some existing hydroelectric facilities
because of their impacts on fish migration and spawning, as well as other issues.
Geothermal generation, particularly from dry hot rock, represents perhaps the
largest and potentially most reliable source of renewable generation. However,
the technology required to drill the required injection and recovery wells to
the required depths is not currently in commercial use. Wind and solar generation
are growing rapidly, but from a very small installed capacity base. Both are
intermittent sources of power, which require conventional backup to avoid grid
interruptions. Both wind and solar generation could be combined with energy
storage technologies to deal with the intermittent nature of their output. However,
the required storage technologies are also not in commercial service at this
time.

The daunting challenge facing the U.S. energy industry is to meet growing demand
reliably and at reasonable prices in the face of diminishing supplies of fossil
fuels worldwide, restricted domestic resource access, aging infrastructure,
constrained transmission facilities, environmental pressure to reduce CO2 emissions,
immature renewable generation technologies and resistance to the construction
of new facilities. The challenges facing the transportation sector are even
more daunting than for the other sectors, in that there is no established alternative
to petroleum as a transportation fuel. Ethanol and bio-diesel cannot reasonably
expand to replace petroleum. Hydrogen is not an energy source, but rather an
energy carrier which must be separated from oxygen or other compounds using
some other form of energy. Electricity has limited value as a transportation
fuel in the absence of an order-of-magnitude improvement in battery storage
technology.

Potential Sources

One existing technology which has the potential to meet much of the growing
need for electric power is nuclear generation. Despite persistent safety concerns,
nuclear electric generation has an excellent safety record in the United States,
as well as in most of the rest of the world. Nuclear generation in the United
States has a history of very high capital costs, largely resulting from construction
delays and plant redesigns during the construction process. One U.S. nuclear
generator was constructed and fueled, but was not permitted to begin commercial
operation because of concerns regarding the evacuation plan in case of a nuclear
emergency. While these issues were difficult and expensive to tolerate in a
regulated utility rate-base environment, they would be absolutely intolerable
in nonutility installations funded by private capital. The potential of nuclear
energy to meet the growing energy needs of the nation will be severely limited
if issues regarding power plant siting, environmental review and approval, construction
permitting and operational licensing cannot be resolved in a timely, efficient
and effective manner. Some combination of advanced power plant designs, design
standardization, fast-track review and approval, and streamlined oversight will
be necessary to allow nuclear generation to reach its potential.

Another shorter-term approach to meeting growing U.S. energy and chemical feedstock
needs is the increased importation of liquefied natural gas (LNG). Again, despite
persistent safety concerns, the safety record of the LNG industry worldwide
is excellent. However, like nuclear power plants, LNG terminals are faced with
siting issues and environmental approvals. Also, increased reliance on LNG would
require the construction of new pipeline facilities from the LNG receiving terminals
to the markets to be served. These pipelines would be faced with the same siting
and environmental hurdles as new power plants, new or expanded electric transmission
facilities, the LNG terminals and other related energy facilities.

One important factor which could further complicate the expansion of U.S. energy
supplies is the imposition of carbon emissions limits which could result from
U.S. adoption of the Kyoto Accords, or legislative imposition of emissions limits
as proposed by Senators John McCain and Joe Lieberman. Both of these approaches
require absolute reductions in carbon emissions, rather than per capita reductions,
which impose far greater real reductions in emissions on a growing economy such
as that of the United States.

For example, let’s look at the Kyoto Accords, which would have required the
United States to reduce CO2 emissions 7 percent below 1990 emissions levels
by 2012. Since the U.S. population is increasing at a rate of ~1 percent per
year and is producing a corresponding increase in energy consumption, U.S. energy
consumption and associated CO2 emissions will have increased by ~25 percent
by 2012 compared to 1990, increasing the total required reduction in emissions
to ~32 percent below what they otherwise would have been. This is an impressive
reduction in itself. However, what is more important in understanding its significance
is that a reduction of this scale is not achievable with improvements in the
efficiency of existing coal-fired generation, or the adoption of the more efficient
IGCC coalfueled design. It would be barely achievable in the transportation
sector by replacing all existing gasoline-fueled vehicles with comparable hybrid
vehicles. Finally, it is totally unachievable, beginning in 2006, without retiring
billions of dollars in existing facilities and equipment before the end of their
economically useful lives.

The reduction targets set by the Kyoto Accords are only phase one of a multiphase
effort to stabilize CO2 concentrations in the atmosphere at a level of ~450-550
parts per million. Ultimately, achieving this goal would require an approximate
95 percent reduction in U.S. per capita carbon emissions. A reduction of this
scale is achievable, based on current commercially available technology, only
with a virtually full-scale conversion to nucleargenerated electricity, including
electrolytically generated hydrogen for all transportation requirements.

This discussion leads to one overarching recommendation: “Don’t begin vast
programs with half-vast ideas.”

 

Relationship Manager Needed

Connection, communication and commitment are the cornerstones of a good affiliate marketing relationship.

I’m looking for someone to share my life with. My life is busy, complicated and filled with people who are looking to me for advice on relationships. I spend all day helping others make meaningful relationships, only to come back the next day and start all over again. I’m not in it to make a match for myself, but to help everyone around me make a match. Why, you may ask. The answer is quite simple: As an affiliate manager, that’s my job.

I manage affiliate marketing relationships for an online personals site. I’ve managed affiliate relationships for a number of years, and I’ve come to realize that what I do for work feels a lot like dating. For instance, every day I search for someone special who shares my goals and is willing to work as hard as I am to reach them. I look for someone who knows that an affiliate relationship must be built on communication, and sometimes compromise. I want to find someone with whom, in the end, I hope to make a successful match to ensure a long-term commitment.

As an affiliate manager, I recruit people and companies to join my program, and these affiliates recruit others to join the site. These two objectives are inexorably linked. The stronger a bond I create with my affiliates, the harder they will work for me. I believe in my affiliates and, above all else, I believe that I should invest as much as I can into establishing quality affiliate relationships.

I would like to share five essential tips that have helped me build successful and profitable relationships with my affiliates.

Provide Attractive Creative

It is important for an affiliate program to have fresh, well-designed creative in a variety of sizes and styles. Many affiliates judge the value of a program by the way its creative looks. It’s important to remember that a program’s creative reflects not only on the quality of the program, but also on the quality of an affiliate’s site. After all, affiliates’ sites are your first line of defense, and establishing trust and rapport with their visitors is vital.

In a lot of ways, this is like searching through your closet and picking out your best-looking outfit, getting a haircut and washing the car before you pick up a date for a nice night out. If you don’t look like you care about how you present yourself or the way you feel about your affiliation, it’s going to be difficult for your relationship to take root and bloom.

Communicate

Communication is the cornerstone of any great relationship. Not only does communication take patience, it also requires that we listen to the needs and concerns of others; it’s a two-way street. Affiliate managers need to make sure that they ask their affiliates for tips and suggestions and give advice accordingly.

If something is working well for your company, share it with your affiliates. If you’re an affiliate stuck in a rut, call your affiliate manager and talk to them about looking at your site to find ways to push the needle. In the words of recently retired Loyola University Chicago professor John Powell, “Communication works for those who work at it.” If you work at communicating with your counterparts, you will be able to increase your earnings and give your affiliates incentive to remain loyal to your program.

If you work with a network that does not share affiliates’ personal contact information such as phone numbers and email addresses, this may be a little more difficult. However, you can still make sure that you provide affiliates with the easiest ways for them to contact you. Give them all of your email addresses, phone numbers, instant message handles and, if you operate a blog, the blog’s URL. But don’t let that be all. Most networks still allow you to send out emails, newsletters and promotional offers, so take advantage of this. It is important to make sure that your communication is of the highest quality and will add value to your affiliates’ promotional efforts.

Be Available and Accessible

I am constantly receiving email and phone calls from affiliates who are so grateful that we make ourselves available to them. Nearly every night before I go to bed, I check my email; when I have new messages, I try to respond to them as soon as possible. A number of our affiliates run their sites as a side business and usually work on them after-hours. Therefore, if I can expedite my responses and make an affiliate’s work easier, our program will benefit.

Be Honest and Up Front

Never make promises you can’t keep. This is the quickest way to destroy relationships. When you are honest and up front about expectations and goals, both sides will be more willing to foster that perfect team of manager and affiliate. Give More Than You Receive In a very real way, being an affiliate manager is like being a big brother to hundreds of people. My job is to fight for the needs of my affiliates. If an affiliate needs more creative, then it’s the manager’s job to make sure the affiliate gets it. Above all else, managers should always be looking for ways to give more to affiliates – more time, more commissions, more of whatever they need.

Gone forever are the days when affiliate managers and affiliates could ignore one another and remain successful. Relationships in the affiliate marketing world take a lot of work and must be managed well in order to succeed. If you want your affiliates to work for you, start working for them. Do more than send monthly newsletters or mass emails, although those are a good start. Constantly review affiliates’ sites and look for ways to improve them or to help affiliates with any errors they may not be aware of. Then call each of your main affiliates and those with potential to be top affiliates. Develop that personal relationship and help them to grow their programs.

We would be smart to keep in mind the words of entrepreneur and author Dr. John C. Maxwell: “If your focus is on what you can put into people rather than what you can get out of them, they’ll love and respect you – and those attributes are great foundations for building relationships.”

JAMES GREEN is customer acquisitions manager and heads up the affiliate program for MingleMatch, Inc., a division of Spark Networks plc. Originally from Utah, Green formerly worked for 10xMedia and 10xMarketing.

The Importance of Being Creative

Creativity was not an inherent talent in Neanderthal man. It was, fortunately, part of our makeup by the time homo sapiens came into being. People may not think they have the capacity to be creative, but Michael Ray, a Stanford University professor who teaches a course on this subject, disagrees. He contends that creativity exists within everyone, including guerrilla affiliates.

Professor Ray believes that when people can’t tap into their creativity, that doesn’t mean it doesn’t exist. Instead, it means that the creativity is being suppressed by what he calls the voice of judgment – what I call the inner censor. That’s what gets the blame for destroying self-esteem and slowing down sales by affiliates.

According to Ray, there are five qualities of creativity: intuition, will, joy, strength and compassion. Four tools stimulate those qualities: faith in your own creativity, absence of judgment, precise observation and penetrating questions. He and I agree wholeheartedly that creativity is not one great eureka moment that produces a brilliant idea. Instead, it is a way of life.

That’s the way it ought to be with every guerrilla affiliate. Almost every creative professional knows very well that true creativity is not the result of inspiration, but instead comes from hard work and focus. I’ve authored or coauthored 44 books, and not one of them has come from a moment of inspiration.

If I waited for that flash of inspiration, I’d still be laboring over page one of my first book. The idea is to be able to create by reaching deep into yourself and not to wait for a bright light to flash inside your head. If you do opt for that bright light, you’re in for a long, dark wait.

Memes and Marketing

Your job as a guerrilla affiliate is to come up with a winning meme – a symbol that conveys an idea, such as international traffic symbols do. Unlike a logo, your meme should be one that not only identifies your business and communicates something about the quality that you offer, but expresses it in terms that suggest a benefit.

If you’re looking for creativity heaven, you’ll find it right inside of yourself. And you’ll see that your meme will not only be the result of your creativity, it will also serve as the nucleus of creativity for all your future marketing.

Would the great artists, musicians, dancers and writers throughout history have been creative guerrilla marketers? My guess is that they would have – because they did not wait for inspiration, but instead knew where to find it inside of themselves.

A powerful meme is of extreme value to a company that markets online because it conveys at a glance what that company is about. In addition, it can be used on a website and as part of a link. But many online marketers are so wrapped up in technology that they are accustomed to finding their inspiration outside of themselves rather than within. After all, it’s outside of themselves that technology has always resided.

But the rules are different for creativity with true guerrilla affiliates. It resides inside of them – if only they’d look long and hard enough.

The Making of a Meme

In the mid-80s, the telecommunications wars were being waged with ferocity and nonstop telemarketing. All the phone companies had been striving for a point of difference. My guess is that some copywriter in some ad agency was one of many working to give his or her client an edge.

Research showed that one of the benefits that could be offered by a phone company was clarity of sound. Said copywriter most likely pondered this concept and then tried to recall how people refer to clear sound. “So quiet, you could hear a pin drop” came to mind. That spurred the birth of Sprint’s meme, a graphic depiction of a pin dropping next to a telephone, which immediately suggested sound quality.

Since that time, Sprint has been using its meme wisely and consistently, in true guerrilla fashion. Even when the company merged with Nextel, the pin-drop meme was blended into part of the new logo. Ideally, Sprint will be able to stay with that meme for a long time, or at least until research shows that clear sound is taken for granted. Unlike Y2K, which was a short-lived meme, the pin dropping can be a meme with longevity – the best and most powerful kind.

The tale of Sprint is one of creativity in action. It should serve as inspiration to you as an affiliate. That copywriter was probably not aiming to win awards or accolades. Instead, the motivation was to communicate a meaningful benefit to consumers, something instantly conveyed by the visual of a pin dropping. In just a flash, viewers and readers got the point – no pun intended. This kind of creativity is rare. But it’s the kind you’ll need in our increasingly competitive marketing environment.

The Meaning of Creativity

Because creativity is so misunderstood in marketing circles, astonishing sums of money are wasted. Truly creative marketing does not have to be attractive, but should come on strong to key prospects, attractiveness aside. It takes into consideration the lifetime value of a customer rather than the instant gratification of a quick sale.

My advice to you as a guerrilla affiliate is to trust the creativity that you already have and use it to communicate with your prospects and your current clients. Don’t think that it is not in your possession, because it definitely is – and if you use it, you’ll have an enormous edge over those people who think they are not creative.

Remember that for an affiliate, the true measure of creativity is profitability. If your communication efforts garner compliments, earn sales and win awards, but don’t generate profits, they are not creative. If your communication efforts result in pats on your back and high fives, but don’t generate profits, again, they are not creative.

Creativity for affiliates is proven when the bottom line gains beauty. All of your creativity must be directed toward accomplishing this – and it is not easy. I have had many clients enjoy record-breaking numbers of responses to their offers, record-breaking sales figures and record-breaking traffic to their sites, but they were losing money as those things happened. That is not creativity. That is not guerrilla marketing.

These people took their eyes off of the bottom line and focused on the wrong criteria. I hope you will always maintain your bottom-line focus and realize that it is that very line that is the lifeblood of your business. It is the reason you are in business in the first place.

As an affiliate, true creativity is your shining light toward increasing your revenue. Let it shine. And let those revenues reflect it.

JAY CONRAD LEVINSON is the acknowledged father of guerrilla marketing with more than 14 million books sold in his Guerrilla Marketing series, now in 41 languages. His website is www.guerrillamarketingassociation.com.

From Maui, With Love

A comprehensive but dated Hawaiian travel site gets a modern makeover.

Break out your favorite Hawaiian shirt and toss a lei around your neck – we’re headed to Maui! Well, Maui.us, anyway. Unfortunately, when we found the three-year- old online travel guide, it was wilting faster than a week-old hibiscus. But don’t fret – we can revive this online travel site.

They say content is king, and I agree. If you want to garner a loyal audience, you need to present the content that audience is seeking (with frequent updates, I might add). Maui.us CEO John Bottomley said he spent thousands of hours building his site. With an interactive map, a comprehensive activity guide, a meticulous hotel directory and a slew of other exclusive features, Maui.us certainly has all the content it needs to become “the major travel gateway to the island of Maui” that Bottomley always dreamed it would be.

Still, Maui.us is hardly generating the new traffic, repeat visitations or conversions Bottomley anticipated when he launched the site in 2002. So while content may be king, let’s not forget to invite conversion design, his lovely and talented queen, to the luau. Conversion design is the process of designing to meet business objectives, such as converting traffic into sales.

The Problems

In order to live up to its potential, Maui.us needs to exude the authority, trust and credibility that people expect from a major travel gateway. The site must also instantly communicate its compelling offerings and make it crystal clear why visitors need them. Finally, to make the conversion design transformation complete, we need to place more emphasis on the site’s top moneymakers. Bottomley says that these are, in order of importance, the custom vacation builder, hotel bookings and the activities guide.

The bottom line is that Maui.us lacks visual appeal, which can be assessed within 50 milliseconds, according to a report published in the Behaviour & Information Technology journal. That suggests that Web designers have about 50 milliseconds to make a good impression. Keeping that in mind, here’s a list of shortcomings we can remedy to make those first 50 milliseconds really count.

Outdated appearance. The site’s outdated graphics and cliche island imagery leave users wondering whether the site is still active. Savvy travelers today are flooded with online options, and they refuse to waste their time on a site that might be outdated. Remember, they are looking for information and resources they weren’t able to find at the first five Maui sites they visited. We need to make visitors feel confident that Maui.us can provide the answers they need.

Inconsistent and cryptic site wide navigation. In our last two makeovers, we pointed out a common problem: too many items in the main navigation. While that is also an issue at Maui.us (count a whopping 12 items), the even bigger problem is inconsistent placement and appearance of the main navigation. On an 800 x 600 browser, you actually have to scroll down to see the nav. What’s more, the placement and arrangement of the links changes from page to page.

Then there are the cryptic icons; so cryptic that users “don’t think to click on them,” says Lisa Ramos, sales director for Sostre & Associates. (Ramos just happens to be planning a trip to Hawaii in a few months, making her exactly the audience that this site needs to woo.) “The icons just look like part of the design,” she notes. “At first, I thought the site only offered hotel and air search. That discouraged me from exploring the site further.”

Wide text columns. It’s hard enough to read text online. By taking your column of text and stretching it across the length of your Web page, you’re essentially guaranteeing that no one will read it. Just for fun, here are the numbers for some top information websites: MSNBC articles feature text columns that are 460 pixels wide, BBC articles post at 405 and Yahoo news stories come in at about 550. Compare that to Maui.us, which stretches its text columns to almost 700 pixels wide. As a general rule, the maximum width for columns of text should be around 500 pixels.

Poor use of photos. Occasionally you can get away with using poor images. I’ve even been known to discourage the use of gratuitous images in conversion design. But come on – we’re talking about Maui here. If there was ever a time to leverage photos and imagery, this is it. Images help to create an emotional response, and that’s what people want when they’re planning a Hawaiian vacation. After all, it’s not often that someone needs to make a trip to the middle of the Pacific Ocean, so we must encourage the emotional desire to take the trip of a lifetime.

The Solutions

Now that we’ve identified the issues, let’s get to work. Our first step was to go to iStockphoto (www.iStockphoto.com). When you need great images, and you have a limited budget, this is the place to go. iStockphoto offers professional-quality photos and illustrations for ridiculously low prices (about $1 each for Web quality). A search for the term “Maui” yields 462 mostly professional images of the stunning Hawaiian isle. After downloading a few that didn’t work out, we settled on a relaxing scene from Big Beach, Maui.

Next, we whittled the navigation options down to five. We kept the links to the seven other items, but we worked them in toward the bottom of the page to reduce viewer confusion. Next, we placed the main navigation right at the top of the page, like most websites, so it wouldn’t jump around as users moved from page to page. Last but not least, we worked a little conversion design magic to give the site a more current look, while maintaining our focus on the big three income generators. After all, that’s what conversion design is all about.

When Bottomley submitted his site, his original goal was to “make a top-ranking site that MUST be as beautiful as the natural beauty of Maui itself!” Of course, meeting that challenge is surely impossible (have you ever been to Maui?), but I believe we’ve brought the site much closer with this new design. The real proof will come with the increased number of users that decide to use Maui.us for vacation planning.

Would you like to get a free home page or landing page design for your website and see it featured in this article? To be considered, please send your name, company, contact information (phone, email, etc.), a brief description of your business and its goals and, of course, your URL, to bydesign@sostreassoc.com. Please put “Revenue’s By Design Makeover” in the subject header.

PEDRO SOSTRE is principal and creative director at Sostre & Associates, a Miami-based consulting and development firm that also promotes affiliate programs on its network of websites, including Audio-BookDeals.com, EquestrianMag.com and iTravelMag.com. Sostre is currently working on a book about his concept of conversion design, scheduled for release in summer 2006. For more information, visit conversionpublishing.com.

The Passion of the Site

All the planning in the world won’t make up for a lack of interest.

My financial services affiliate site has hit the skids. Let’s take stock and I’ll show you how it ended up in the poorhouse.

Before I launched the site, I did my research. I discovered that the highestpaying merchants in Commission Junction’s Financial Services category rose to the top when results were sorted by sale. In early February of this year, for example, E-Loan paid a hefty $150 commission per funded motorcycle loan and $60 to $90 per funded auto purchase loan. Commissions for a qualified mortgage refinance application were between $50 and $75.

E-Loan defines a “qualified application” as one with “all necessary fields filled in, including a valid name and social security number for a loan product that can be offered by E-Loan or one of its partner lenders.”

Talk about easy money! Referred visitors to the E-Loan site don’t have to buy a thing. As long as they can type their information correctly into the application form blanks, you could be raking in the big bucks.

In addition, I found that Google AdSensor did especially well with financial sites. When Google AdWords recommends that advertisers place a minimum bid of $5 for keywords like “credit card” and “loans” just to get their ads displayed, AdSense revenues on the same terms are rich and rewarding.

And goodness knows there was no shortage of credit demand. According to Overture’s Keyword Selector Tool, almost 900,000 surfers searched for terms including the phrase “credit card” in December 2005. About the same number searched for “loan,” while the keyword “mortgage” topped the charts with 1,317,728 queries in the same month. One might conclude that the number of credit seekers is inflated during the Christmas spending frenzy. But how many more people need credit solutions when the bills arrive in January?

Furthermore, the market for credit certainly showed no sign of decline. According to an ACNielsen survey released on Jan. 24, Americans are among the world’s most cash-strapped people. After basic living expenses are paid and discretionary items bought, nearly a quarter of Americans (22 percent) have no money left at the end of the month. At 19 percent, Canadians came in a close third behind Portugal, which tied the U.S. for first place.

Let’s review: high commissions and a huge, hungry market – that should have been a one-way ticket to Easy Street. Maybe the site was the problem.

The Right Stuff

When you visit the site, you see a nice design that includes the requisite number of pictures of people jumping for joy.

Site navigation is consistent throughout and the categorical structure is simple, limiting a visitor’s choice to credit cards, credit repair, credit reports, debt consolidation and loans on the first tier. Specific credit card and loan types are made available on the second tier.

Because we didn’t want to overwhelm visitors with too many complicated options, an Editor’s Top Pick is included at the top of every product page, and the number of choices per category is limited.

Informative articles including “What To Consider Before Approaching Lenders” and “5 Killer Steps to Avoid Credit Card SCAMS” are posted to educate and motivate users to visit merchants who will help ease their financial burden. Credit card and savings calculators are available to figure out how long it will take to pay off loans and how much interest can be earned from saving. A glossary defines unsecured credit card, balance transfers and more than 35 other important financial terms and concepts. Contact, Privacy Policy, Disclaimer and About Us pages are all in place.

Last but not least, there is an opt-in form on every page that offers a chance to sign up for my newsletter, “FREE Money-Saving Tips & Credit Advice.” Subscribers receive an eight-part e-course delivered over a period of three weeks. The e-course covers topics such as applying for credit, mortgage lending and debt consolidation. It also goes into moneysaving hints and tips, how to repair bad credit, and saving for retirement.

So far, so good. The site is rich in information and other incentives to keep visitors interested. After receiving the last installment of the e-course, however, subscribers never hear from me again.

What a mistake! Especially since building relationships by regularly communicating with my subscribers has always been the lifeblood of my affiliate marketing business. Even my merchant partners confirm that my lists are some of the most productive they’ve ever seen.

Readers of my affiliate marketing newsletter or book will attest to the fact that I harp constantly about the need to establish a trust relationship with their audiences. During site reviews, I tell webmasters who haven’t placed a lead-capture form on their site to either build a list or go out of business. Those who act on the warning see their conversion rates soar. For example, one webmaster whom I convinced to install a lead-capture form later remarked, “Holy cow dung! I’ve already got 1,000 subscribers and make $2,500 whenever I send a broadcast. Thank you, Ros!”

OK, he didn’t say “cow dung,” but the rest of the message is verbatim.

The Root of the Problem

So, why didn’t I follow my own advice and write a regular newsletter for my credit and loan site?

Well, I discovered that chasing the almighty dollar doesn’t work. When I ignored my first rule of business, “follow your passion,” the second rule, “build relationships,” was impossible to follow without unacceptable compromise.

Although I am passionate about helping people improve their financial situation and can write all day long about wealth-building strategies and techniques, the dry-as-toast subject of credit and loans doesn’t exactly fuel my fire. Call me Pollyanna, but the thought of encouraging debt just feels wrong.

While I could hire a ghostwriter to write a year-long broadcast series, proofreading the material would be a huge yawn, and this Pollyanna would balk at the sham. Worse, I’d live in perpetual dread of having to research and answer subscribers’ questions.

Boredom, drudge work and dread. My goodness, but doesn’t that sound exactly like a J-O-B? What a foolish choice to make when I already had a proven formula for highly profitable affiliate sites.

Learn from my mistake. Pick a topic you love, chat with newsletter subscribers who share your interests, and then say, “Goodbye debt, hello AAA credit ratings!”

By the way, if you are passionate about the credit and loan niche, I know of a slightly-used website in which you might be interested.

ROSALIND GARDNER is a super-affiliate who’s been in the business since 1998. She’s also the author of The Super Affiliate Handbook: How I Made $436,797 in One Year Selling Other People’s Stuff Online.

The Search Tug of War

The balance of power between merchants and affiliates is shifting.

Welcome to my first column – Mary O’Brien set a high standard that I hope to live up to. I’ve been working in search technology since the 1980s, so I can help you understand what lies behind some of the search advice you receive. I initiated IBM’s search marketing program back in 2001, and I also understand a merchant’s perspective on affiliate marketing. Search engines are complicated beasts, but a little knowledge can give you a leg up on your competition.

Let’s dive into the topic at hand: the issue of branded keywords in paid search marketing campaigns. In the earliest days of affiliate marketing, most merchants didn’t understand the importance of search marketing or, if they did, they didn’t know how to succeed at it. In those bygone days, merchants were happy to – in effect – outsource their search marketing.

How times have changed. Search marketing is big business now – the prime way that affiliates attract visitors to their websites. But it’s also one of the biggest ways that merchants drive traffic to their sites. And those merchants are no longer asleep at the switch. They are keenly aware of the competition their affiliates pose for searchers’ clicks, and they are starting to take action.

The Organic Search Front

Merchants are beefing up their organic (also known as natural) search marketing efforts. Some were embarrassed to find that their affiliates ranked ahead of them even for searches containing their own brand names. Merchants have many organic search improvement techniques at their disposal, but one is symptomatic of the tug of war between merchants and affiliates: the search-friendly affiliate tracking system.

Affiliate tracking systems are at the heart of the relationship between affiliates and merchants. Each affiliate codes a link on its site to the merchant’s site that transmits the affiliate’s identifier. When a visitor clicks the link, that identifier is transmitted and the merchant’s affiliate tracking system credits any purchases made by that visitor to the affiliate, so that the proper commission can be paid. So far, so good.

What makes this more interesting is that search engines have their own agenda for links. Google and other search engines raise a page’s authority based on its incoming links. Search engines calculate authority by analyzing the number and quality of links to the site from other well-respected (high-authority) sites. Pages higher in authority tend to rank higher than other pages in an organic search. For search queries that match many pages on the Web, a page’s authority is often the most important determinant of where it ranks, so search marketers care deeply about acquiring those precious inbound links to their pages.

It would seem that merchants would benefit greatly from all those inbound affiliate links. But, mostly, they don’t. That’s because traditionally (if any business this young can have a tradition), affiliate tracking has been performed using links that search engines don’t assign any credit for. Some affiliate tracking systems use JavaScript links that can’t be seen by the search spiders that constantly scour

have increasingly sought to control their affiliates’ paid search campaigns by adding new restrictions to their affiliate agreements, banning the use of the merchant’s trademarks and other brand names in any paid search marketing campaigns by their affiliates.

Studies by MarketingSherpa indicate that this practice is on the rise. Just 21 percent of merchants restricted their affiliates’ paid search campaigns in January of 2005, but that figure had zoomed to 39 percent by August of the same year.

Just 21 percent of merchants restricted their affiliates’ paid search campaigns in January of 2005, but that figure had zoomed to 39 percent by August of the same year.

pages on the Internet. Other tracking systems use temporary redirects (also known as 302 redirects), which are designed to shift a page’s URL for a short time – and search engines don’t credit any authority to a page that may soon disappear. Only permanent redirects (also known as 301 redirects) transmit their value to the linked-to merchant pages, because the search engine expects each permanent page to have a long life – making it a strong candidate for a search result.

As you can imagine, savvy merchants are beginning to migrate to these “search-friendly” 301-based tracking systems. So far, this trend is just a trickle, but you should expect to see more and more merchants wake up and “think links.” As they do, those merchants’ organic search rankings will get a boost, making it that much harder for affiliates to outrank them.

The Paid Search Front

This is a two-front war, with organic search in many ways the less hard-fought of the pair. Over the past year, merchants

These merchants argue that searchers using trademark names have already made a brand decision, and should be brought directly to the merchant’s site. They see no reason to pay an affiliate a fee for bringing them a customer who was trying to come to the merchant in the first place. These merchants are happy for affiliates to conduct paid search campaigns using generic keywords devoid of brand and trademark names – those keywords are bringing the merchants customers that might have gone to competitors.

You can see the trend here. Merchants began with a laissez-faire attitude about paid search, allowing affiliates free reign to use any keywords in their campaigns, happy to make the extra sales. Now, merchants are increasingly clamping down because they want those sales for themselves. Not only do they save the fees they’d have to pay to the affiliates, but they may be able to bid lower for their branded keywords because they’ve reduced the number of companies that can bid against them.

Unfortunately, no matter what a merchant does to block its affiliates from buying branded keywords, competitors can’t always be blocked, because the merchant has no control over them. The merchant can buy just one ad per branded keyword, but the search engines always show several ads on each result screen. Although the merchant might have the top paid spot, who has the rest of the spots?

Before that merchant began blocking its affiliates, the bulk of those other ads were likely from its affiliates. Searchers who clicked on those affiliate ads (and bought) were still buying from the merchant, even if the merchant had to shell out higher fees than if the searchers had purchased without coming through an affiliate.

But Randy Antin, search marketing manager of Travelocity, notes that when his company restricted its affiliates from bidding on branded keywords, “the spaces in the bidding were soon replaced by our competitors’ affiliates.” Searchers clicking anything other than Travelocity’s single ad might end up buying from a competitor. Yahoo has recently changed its policy to block competitors from using trademarks, but it remains to be seen if other search engines will follow suit.

Some merchants believe they should treat search results the same way they would treat shelf space in a grocery store – by filling it with their product. Those merchants might decide not to block affiliates from bidding on branded keywords because they want every paid search result to sell their product, whether it is direct from the merchant or through an affiliate. Although merchants and affiliates must work together to be successful, it’s inevitable that they’ll have channel conflicts – especially in search marketing practices.

MIKE MORAN is an IBM Distinguished Engineer and the manager of IBM.com Web Experience. Mike is also co-author of the book Search Engine Marketing, Inc. His website is www.mikemoran.com.