Weathering the Perfect Storm

A “perfect storm” of daunting proportions is bearing down on utility companies: assets are aging; the workforce is aging; and legacy information technology (IT) systems are becoming an impediment to efficiency improvements. This article suggests a three-pronged strategy to meet the challenges posed by this triple threat. By implementing best practices in the areas of business process management (BPM), system consolidation and IT service management (ITSM), utilities can operate more efficiently and profitably while addressing their aging infrastructure and staff.

BUSINESS PROCESS MANAGEMENT

In a recent speech before the Utilities Technology Conference, the CIO of one of North America’s largest integrated gas and electric utilities commented that “information technology is a key to future growth and will provide us with a sustainable competitive advantage.” The quest by utilities to improve shareholder and customer satisfaction has led many CIOs to reach this same conclusion: nearly all of their efforts to reduce the costs of managing assets depend on information management.

Echoing this observation, a survey of utility CIOs showed that the top business issue in the industry was the need to improve business process management (BPM).[1] It’s easy to see why.

BPM enables utilities to capture, propagate and evolve asset management best practices while maintaining alignment between work processes and business goals. For most companies, the standardized business processes associated with BPM drive work and asset management activities and bring a host of competitive advantages, including improvements in risk management, revenue generation and customer satisfaction. Standardized business processes also allow management to more successfully implement business transformation in an environment that may include workers acquired in a merger, workers nearing retirement and new workers of any age.

BPM also helps enforce a desirable culture change by creating an adaptive enterprise where agility, flexibility and top-to-bottom alignment of work processes with business goals drive the utility’s operations. These work processes need to be flexible so management can quickly respond to the next bump in the competitive landscape. Using standard work processes drives desired behavior across the organization while promoting the capture of asset-related knowledge held by many long-term employees.

Utility executives also depend on technology-based BPM to improve processes for managing assets. This allows them to reduce staffing levels without affecting worker safety, system reliability or customer satisfaction. These processes, when standardized and enforced, result in common work practices throughout the organization, regardless of region or business unit. BPM can thus yield an integrated set of applications that can be deployed in a pragmatic manner to improve work processes, meet regulatory requirements and reduce total cost of ownership (TCO) of assets.

BPM Capabilities

Although the terms business process management and work flow are often used synonymously – and are indeed related – they refer to distinctly different things. BPM is a strategic activity undertaken by an organization looking to standardize and optimize business processes, whereas work flow refers to IT solutions that automate processes – for example, solutions that support the execution phase of BPM.

There are a number of core BPM capabilities that, although individually important, are even more powerful than the sum of their parts when leveraged together. Combined, they provide a powerful solution to standardize, execute, enforce, test and continuously improve asset management business processes. These capabilities include:

  • Support for local process variations within a common process model;
  • Visual design tools;
  • Revision management of process definitions;
  • Web services interaction with other solutions;
  • XML-based process and escalation definitions;
  • Event-driven user interface interactions;
  • Component-based definition of processes and subprocesses; and
  • Single engine supporting push-based (work flow) and polling-based (escalation) processes.

Since BPM supports knowledge capture from experienced employees, what is the relationship between BPM and knowledge management? Research has shown that the best way to capture knowledge that resides in workers’ heads into some type of system is to transfer the knowledge to systems they already use. Work and asset management systems hold job plans, operational steps, procedures, images, drawings and other documents. These systems are also the best place to put information required to perform a task that an experienced worker “just knows” how to do.

By creating appropriate work flows in support of BPM, workers can be guided through a “debriefing” stage, where they can review existing job plans and procedures, and look for tasks not sufficiently defined to be performed without the tacit knowledge learned through experience. Then, the procedure can be flagged for additional input by a knowledgeable craftsperson. This same approach can even help ensure the success of the “debriefing” application itself, since BPM tools by definition allow guidance to be built in by creating online help or by enhancing screen text to explain the next step.

SYSTEM CONSOLIDATION

System consolidation needs to involve more than simply combining applications. For utilities, system consolidation efforts ought to focus on making systems agile enough to support near real-time visibility into critical asset data. This agility will yield transparency across lines of business on the one hand, and satisfies regulators and customers on the other. To achieve this level of transparency, utilities have an imperative to enforce a modern enterprise architecture that supports service-oriented architectures (SOAs) and also BPM.

Done right, system consolidation allows utilities to create a framework supporting three key business areas:

  • Optimization of both human and physical assets;
  • Standardization of processes, data and accountability; and
  • Flexibility to change and adapt to what’s next.

The Need for Consolidation

Many utility transmission and distribution (T&D) divisions exhibit this need for consolidation. Over time, the business operations of many of these divisions have introduced different systems to support a perceived immediate need – without considering similar systems that may already be implemented within the utility. Eventually, the business finds it owns three different “stacks” of systems managing assets, work assignments and mobile workers – one for short-cycle service work, one for construction and still another for maintenance and inspection work.

With these systems in place, it’s nearly impossible to implement productivity programs – such as cross-training field crews in both construction and service work – or to take advantage of a “common work queue” that would allow workers to fill open time slots without returning to their regional service center. In addition, owning and operating these “siloed” systems adds significant IT costs, as each one has annual maintenance fees, integration costs, yearly application upgrades and retraining requirements.

In such cases, using one system for all work and asset management would eliminate multiple applications and deliver bottom-line operational benefits: more productive workers, more reliable assets and technology cost savings. One large Midwestern utility adopting the system consolidation approach was able to standardize on six core applications: work and asset management, financials, document management, geographic information systems (GIS), scheduling and mobile workforce management. The asset management system alone was able to consolidate more than 60 legacy applications. In addition to the obvious cost savings, these consolidated asset management systems are better able to address operational risk, worker health and safety and regulatory compliance – both operational and financial – making utilities more competitive.

A related benefit of system consolidation concerns the elimination of rogue “pop-up” applications. These are niche applications, often spreadsheets or standalone databases, which “pop up” throughout an organization on engineers’ desktops. Many of these applications perform critical rolls in regulatory compliance yet are unlikely to pass muster at any Sarbanes-Oxley review. Typically, these pop-up applications are built to fill a “functionality gap” in existing legacy systems. Using an asset management system with a standards-based platform allows utilities to roll these pop-up applications directly into their standard supported work and asset management system.

Employees must interact with many systems in a typical day. How productive is the maintenance electrician who uses one system for work management, one for ordering parts and yet another for reporting his or her time at the end of a shift? Think of the time wasted navigating three distinct systems with different user interfaces, and the duplication of data that unavoidably occurs. How much more efficient would it be if the electrician were able to use one system that supported all of his or her work requirements? A logical grouping of systems clearly enables all workers to leverage information technology to be more efficient and effective.

Today, using modern, standards-based technologies like SOAs, utilities can eliminate the counterproductive mix of disparate commercial and “home-grown” systems. Automated processes can be delivered as Web services, allowing asset and service management to be included in the enterprise application portfolio, joining the ranks of human resource (HR), finance and other business-critical applications.

But although system consolidation in general is a good thing, there is a “tipping point” where consolidating simply for the sake of consolidation no longer provides a meaningful return and can actually erode savings and productivity gains. A system consolidation strategy should center on core competencies. For example, accountants or doctors are both skilled service professionals. But their similarity on that high level doesn’t mean you would trade one for the other just to “consolidate” the bills you receive and the checks you have to write. You don’t want accountants reading your X-rays. The same is true for your systems’ needs. Your organization’s accounting or human resource software does not possess the unique capabilities to help you manage your mission-critical transmission and distribution, facilities, vehicle fleet or IT assets. Hence it is unwise to consolidate these mission-critical systems.

System consolidation strategically aligned with business requirements offers huge opportunities for improving productivity and eliminating IT costs. It also improves an organization’s agility and reverses the historical drift toward stovepipe or niche systems by providing appropriate systems for critical roles and stakeholders within the organization.

IT SERVICE MANAGEMENT

IT Service Management (ITSM) is critical to helping utilities deal with aging assets, infrastructure and employees primarily because ITSM enables companies to surf the accelerating trend of asset management convergence instead of falling behind more nimble competitors. Used in combination with pragmatic BPM and system consolidation strategies, ITSM can help utilities exploit the opportunities that this trend presents.

Three key factors are driving the convergence of management processes across IT assets (PCs, servers and the like) and operational assets (the systems and equipment through which utilities deliver service). The first concerns corporate governance, whereby corporate-wide standards and policies are forcing operational units to rethink their use of “siloed” technologies and are paving the way for new, more integrated investments. Second, utilities are realizing that to deal with their aging assets, workforce and systems dilemmas, they must increase their investments in advanced information and engineering technologies. Finally, the functional boundaries between the IT and operational assets themselves are blurring beyond recognition as more and more equipment utilizes on-board computational systems and is linked over the network via IP addresses.

Utilities need to understand this growing interdependency among assets, including the way individual assets affect service to the business and the requirement to provide visibility into asset status in order to properly address questions relating to risk management and compliance.

Corporate Governance Fuels a Cultural Shift

The convergence of IT and operational technology is changing the relationship between the formerly separate operational and IT groups. The operational units are increasingly relying on IT to help deal with their “aging trilogy” problem, as well as to meet escalating regulatory compliance demands and customers’ reliability expectations. In the past, operating units purchased advanced technology (such as advanced metering or substation automation systems) on an as-needed basis, unfettered by corporate IT policies and standards. In the process, they created multiple silos of nonstandard, non-integrated systems. But now, as their dependence on IT grows, corporate governance policies are forcing operating units to work within IT’s framework. Utilities can’t afford the liability and maintenance costs of nonstandard, disparate systems scattered across their operational and IT efforts. This growing dependence on IT has thus created a new cultural challenge.

A study by Gartner of the interactions among IT and operational technology highlights this challenge. It found that “to improve agility and achieve the next level of efficiencies, utilities must embrace technologies that will enable enterprise application access to real-time information for dynamic optimization of business processes. On the other hand, lines of business (LOBs) will increasingly rely on IT organizations because IT is pervasively embedded in operational and energy technologies, and because standard IT platforms, application architectures and communication protocols are getting wider acceptance by OT [operational technology] vendors.”[2]

In fact, an InformationWeek article (“Changes at C-Level,” August 1, 2006) warned that this cultural shift could result in operational conflict if not dealt with. In that article, Nathan Bennett and Stephen Miles wrote, “Companies that look to the IT department to bring a competitive edge and drive revenue growth may find themselves facing an unexpected roadblock: their CIO and COO are butting heads.” As IT assumes more responsibility for running a utility’s operations, the roles of CIO and COO will increasingly converge.

What Is an IT Asset, Anyhow?

An important reason for this shift is the changing nature of the assets themselves, as mentioned previously. Consider the question “What is an IT asset?” In the past, most people would say that this referred to things like PCs, servers, networks and software. But what about a smart meter? It has firmware that needs updates; it resides on a wired or wireless network; and it has an IP address. In an intelligent utility network (IUN), this is true of substation automation equipment and other field-located equipment. The same is true for plant-based monitoring and control equipment. So today, if a smart device fails, do you send a mechanic or an IT technician?

This question underscores why IT asset and service management will play an increasingly important role in a utility’s operations. Utilities will certainly be using more complex technology to operate and maintain assets in the future. Electronic monitoring of asset health and performance based on conditions such as meter or sensor readings and state changes can dramatically improve asset reliability. Remote monitoring agents – from third-party condition monitoring vendors or original equipment manufacturers (OEMs) of highly specialized assets – can help analyze the increasingly complex assets being installed today as well as optimize preventive maintenance and resource planning.

Moreover, utilities will increasingly rely on advanced technology to help them overcome the challenges of their aging assets, workers and systems. For example, as noted above, advanced information technology will be needed to capture the tacit knowledge of experienced workers as well as replace some manual functions with automated systems. Inevitably, operational units will become technology-driven organizations, heavily dependent on the automated systems and processes associated with IT asset and service management.

The good news for utilities is that a playbook of sorts is available that can help them chart the ITSM waters in the future. The de facto global standard for best practices process guidance in ITSM is the IT Infrastructure Library (ITIL), which IT organizations can adopt to support their utility’s business goals. ITIL-based processes can help utilities better manage IT changes, assets, staff and service levels. ITIL extends beyond simple management of asset and service desk activities, creating a more proactive organization that can reduce asset failures, improve customer satisfaction and cut costs. Key components of ITIL best practices include configuration, problem, incident, change and service-level management activities.

Implemented together, ITSM best practices as embodied in ITIL can help utilities:

  • Better align asset health and performance with the needs of the business;
  • Improve risk and compliance management;
  • Improve operational excellence;
  • Reduce the cost of infrastructure support services;
  • Capture tactical knowledge from an aging workforce;
  • Utilize business process management concepts; and
  • More effectively leverage their intelligent assets.

CONCLUSION

The “perfect storm” brought about by aging assets, an aging workforce and legacy IT systems is challenging utilities in ways many have never experienced. The current, fragmented approach to managing assets and services has been a “good enough” solution for most utilities until now. But good enough isn’t good enough anymore, since this fragmentation often has led to siloed systems and organizational “blind spots” that compromise business operations and could lead to regulatory compliance risks.

The convergence of IT and operational technology (with its attendant convergence of asset management processes) represents a challenging cultural change; however, it’s a change that can ultimately confer benefits for utilities. These benefits include not only improvements to the bottom line but also improvements in the agility of the operation and its ability to control risks and meet compliance requirements associated with asset and service management activity.

To help weather the coming perfect storm, utilities can implement best practices in three key areas:

  • BP technology can help utilities capture and propagate asset management best practices to mitigate the looming “brain drain” and improve operational processes.
  • Judicious system consolidation can improve operational efficiency and eliminate legacy systems that are burdening the business.
  • ITSM best practices as exemplified by ITIL can streamline the convergence of IT and operational assets while supporting a positive cultural shift to help operational business units integrate with IT activities and standards.

Best-practices management of all critical assets based on these guidelines will help utilities facilitate the visibility, control and standardization required to continuously improve today’s power generation and delivery environment.

ENDNOTES

  1. Gartner’s 2006 CIO Agenda survey.
  2. 2. Bradley Williams, Zarko Sumic, James Spiers, Kristian Steenstrup, “IT and OT Interaction: Why Confl ict Resolution Is Important,” Gartner Industry Research, Sept. 15, 2006.

Utility Mergers and Acquisitions: Beating the Odds

Merger and acquisition activity in the U.S. electric utility industry has increased following the 2005 repeal of the Public Utility Holding Company Act (PUHCA). A key question for the industry is not whether M&A will continue, but whether utility executives are prepared to manage effectively the complex regulatory challenges that have evolved.

M&A activity is (and always has been) the most potent, visible and (often) irreversible option available to utility CEOs who wish to reshape their portfolios and meet their shareholders’ expectations for returns. However, M&A has too often been applied reflexively – much like the hammer that sees everything as a nail.

The American utility industry is likely to undergo significant consolidation over the next five years. There are several compelling rationales for consolidation. First, M&A has the potential to offer real economic value. Second, capital-market and competitive pressures favor larger companies. Third, the changing regulatory landscape favors larger entities with the balance sheet depth to weather the uncertainties on the horizon.

LEARNING FROM THE PAST

Historically, however, acquirers have found it difficult to derive value from merged utilities. With the exception of some vertically integrated deals, most M&A deals have been value-neutral or value-diluting. This track record can be explained by a combination of factors: steep acquisition premiums, harsh regulatory givebacks, anemic cost reduction targets and (in more than half of the deals) a failure to achieve targets quickly enough to make a difference. In fact, over an eight-year period, less than half the utility mergers actually met or exceeded the announced cost reduction levels resulting from the synergies of the merged utilities (Figure 1).

The lessons learned from these transactions can be summarized as follows: Don’t overpay; negotiate a good regulatory deal; aim high on synergies; and deliver on them.

In trying to deliver value-creating deals, CEOs often bump up against the following realities:

  • The need to win approval from the target’s shareholders drives up acquisition premiums.
  • The need to receive regulatory approval for the deal and to alleviate organizational uncertainty leads to compromises.
  • Conservative estimates of the cost reductions resulting from synergies are made to reduce the risk of giving away too much in regulatory negotiations.
  • Delivering on synergies proves tougher than anticipated because of restrictions agreed to in regulatory deals or because of the organizational inertia that builds up during the 12- to 18-month approval process.

LOOKING AT PERFORMANCE

Total shareholder return (TSR) is significantly affected by two external deal negotiation levers – acquisition premiums and regulatory givebacks – and two internal levers – synergies estimated and synergies delivered. Between 1997 and 2004, mergers in all U.S. industries created an average TSR of 2 to 3 percent relative to the market index two years after closing. In contrast, utilities mergers typically underperformed the utility index by about 2 to 3 percent three years after the transaction announcement. T&D mergers underperformed the index by about 4 percent, whereas mergers of vertically integrated utilities beat the index by about 1 percent three years after the announcement (Figure 2).

For 10 recent mergers, the lower the share of the merger savings retained by the utilities and the higher the premium paid for the acquisition, the greater the likelihood that the deal destroyed shareholder value, resulting in negative TSR.

Although these appear to be obvious pitfalls that a seasoned management team should be able to recognize and overcome, translating this knowledge into tangible actions and results has been difficult.

So how can utility boards and executives avoid being trapped in a cycle of doing the same thing again and again while expecting different results (Einstein’s definition of insanity)? We suggest that a disciplined end-to-end M&A approach will (if well-executed) tilt the balance in the acquirer’s favor and generate long-term shareholder value. That approach should include the four following broad objectives:

  • Establishment of compelling strategic logic and rationale for the deal;
  • A carefully managed regulatory approval process;
  • Integration that takes place early and aggressively; and
  • A top-down approach for designing realistic but ambitious economic targets.

GETTING IT RIGHT: FOUR BROAD OBJECTIVES THAT ENHANCE M&A VALUE CREATION

To complete successful M&As, utilities must develop a more disciplined approach that incorporates the lessons learned from both utilities and other industrial sectors. At the highest level, adopting a framework with four broad objectives will enhance value creation before the announcement of the deal and through post-merger integration. To do this, utilities must:

  1. Establish a compelling strategic logic and rationale for the deal. A critical first step is asking the question, why do the merger? To answer this question, deal participants must:
    • Determine the strategic logic for long-term value creation with and without M&A. Too often, executives are optimistic about the opportunity to improve other utilities, but they overlook the performance potential in their current portfolio. For example, without M&A, a utility might be able to invest and grow its rate base, reduce the cost of operations and maintenance, optimize power generation and assets, explore more aggressive rate increases and changes to the regulatory framework, and develop the potential for growth in an unregulated environment. Regardless of whether a utility is an acquirer or a target, a quick (yet comprehensive) assessment will provide a clear perspective on potential shareholder returns (and risks) with and without M&A.
    • Conduct a value-oriented assessment of the target. Utility executives typically have an intuitive feel for the status of potential M&A targets adjacent to their service territories and in the broader subregion. However, when considering M&A, they should go beyond the obvious criteria (size and geography) and candidates (contiguous regional players) to consider specific elements that expose the target’s value potential for the acquirer. Such value drivers could include an enhanced power generation and asset mix, improvements in plant availability and performance, better cost structures, an ability to respond to the regulatory environment, and a positive organizational and cultural fit. Also critical to the assessment are the noneconomic aspects of the deal, such as headquarters sharing, potential loss of key personnel and potential paralysis of the company (for example, when a merger or acquisition freezes a company’s ability to pursue M&A and other large initiatives for two years).
    • Assess internal appetites and capabilities for M&A. Successful M&A requires a broad commitment from the executive team, enough capable people for diligence and integration, and an appetite for making the tough decisions essential to achieving aggressive targets. Acquirers should hold pragmatic executive-level discussions with potential targets to investigate such aspects as cultural fit and congruence of vision. Utility executives should conduct an honest assessment of their own management teams’ M&A capabilities and depth of talent and commitment. Among historic M&A deals, those that involved fewer than three states and those in which the acquirer was twice as big as the target were easier to complete and realized more value.
  2. Carefully manage the regulatory approval process. State regulatory approvals present the largest uncertainty and risk in utility M&A, clearly affecting the economics of any deal. However, too often, these discussions start and end with rate reductions so that the utility can secure approvals. The regulatory approval process should be similar to the rigorous due diligence that’s performed before the deal’s announcement. This means that when considering M&A, utilities should:
    • Consider regulatory benefits beyond the typical rate reductions. The regulatory approval process can be used to create many benefits that share rewards and risks, and to provide advantages tailored to the specific merger’s conditions. Such benefits include a stronger combined balance sheet and a potential equity infusion into the target’s subsidiaries; an ability to better manage and hedge a larger combined fuel portfolio; the capacity to improve customer satisfaction; a commitment to specific rate-based investment levels; and a dedication to relieving customer liability on pending litigation. For example, to respond to regulatory policies that mandate reduced emissions, merged companies can benefit not only from larger balance sheets but also from equity infusions to invest in new technology or proven technologies. Merged entities are also afforded the opportunity to leverage combined emissions reduction portfolios.
    • Systematically price out a full range of regulatory benefits. The range should include the timing of “gives” (that is, the sharing of synergy gains with customers in the form of lower rates) as a key value lever; dedicated valuations of potential plans and sensitivities from all stakeholders’ perspectives; and a determination of the features most valued by regulators so that they can be included in a strategy for getting M&A approvals. Executives should be wary of settlements tied to performance metrics that are vaguely defined or inadequately tracked. They should also avoid deals that require new state-level legislation, because too much time will be required to negotiate and close these complex deals. Finally, executives should be wary of plans that put shareholder benefits at the end of the process, because current PUC decisions may not bind future ones.
    • Be prepared to walk away if the settlement conditions imposed by the regulators dilute the economics of the deal. This contingency plan requires that participating executives agree on the economic and timing triggers that could lead to an unattractive deal.
  3. Integrate early and aggressively. Historically, utility transactions have taken an average of 15 months from announcement to closing, given the required regulatory approvals. With such a lengthy time lag, it’s been easy for executives to fall into the trap of putting off important decisions related to the integration and post-merger organization. This delay often leads to organizational inertia as employees in the companies dig in their heels on key issues and decisions rather than begin to work together. To avoid such inertia, early momentum in the integration effort, embodied in the steps outlined below, is critical.
    • Announce the executive team’s organization early on. Optimally, announcements should be made within the first 90 days, and three or four well-structured senior-management workshops with the two CEOs and key executives should occur within the first two months. The decisions announced should be based on such considerations as the specific business unit and organizational options, available leadership talent and alignment with synergy targets by area.
    • Make top-down decisions about integration approach according to business and function. Many utility mergers appear to adopt a “template” approach to integration that leads to a false sense of comfort regarding the process. Instead, managers should segment decision making for each business unit and function. For example, when the acquirer has a best-practice model for fossil operations, the target’s plants and organization should simply be absorbed into the acquirer’s model. When both companies have strong practices, a more careful integration will be required. And when both companies need to transform a particular function, the integration approach should be tailored to achieve a change in collective performance.
    • Set clear guidelines and expectations for the integration. A critical part of jump-starting the integration process is appointing an integration officer with true decision-making authority, and articulating the guidelines that will serve as a road map for the integration teams. These guidelines should clearly describe the roles of the corporation and individual operating teams, as well as provide specific directions about control and organizational layers and review and approval mechanisms for major decisions.
    • >Systematically address legal and organizational bottlenecks. The integration’s progress can be impeded by legal or organizational constraints on the sharing of sensitive information. In such situations, significant progress can be achieved by using clean teams – neutral people who haven’t worked in the area before – to ensure data is exchanged and sanitized analytical results are shared. Improved information sharing can aid executive-level decision making when it comes to commercially sensitive areas such as commercial marketing-and-trading portfolios, performance improvements, and other unregulated business-planning and organizational decisions.
  4. Use a top-down approach to design realistic but ambitious economic targets. Synergies from utility mergers have short shelf lives. With limits on a post-merger rate freeze or rate-case filing, the time to achieve the targets is short. To achieve their economic targets, merged utilities should:
    • Construct the top five to 10 synergy initiatives to capture value and translate them into road maps with milestones and accountabilities. Identifying and promoting clear targets early in the integration effort lead to a focus on the merger’s synergy goals.
    • Identify the links between synergy outcomes and organizational decisions early on, and manage those decisions from the top. Such top-down decisions should specify which business units or functional areas are to be consolidated. Integration teams often become gridlocked over such decisions because of conflicts of interest and a lack of objectivity.
    • Control the human resources policies related to the merger. Important top-down decisions include retention and severance packages and the appointment process. Alternative severance, retirement and retention plans should be priced explicitly to ensure a tight yet fair balance between the plans’ costs and benefits.
    • Exploit the merger to create opportunities for significant reductions in the acquirer’s cost base. Typical merger processes tend to focus on reductions in the target’s cost base. However, in many cases the acquirer’s cost base can also be reduced. Such reductions can be a significant source of value, making the difference between success and failure. They also communicate to the target’s employees that the playing field is level.
    • Avoid the tendency to declare victory too soon. Most synergies are related to standardization and rationalization of practices, consolidation of line functions and optimization of processes and systems. These initiatives require discipline in tracking progress against key milestones and cost targets. They also require a tough-minded assessment of red flags and cost increases over a sustained time frame – often two to three years after the closing.

RECOMMENDATIONS: A DISCIPLINED PROCESS IS KEY

Despite the inherent difficulties, M&A should remain a strategic option for most utilities. If they can avoid the pitfalls of previous rounds of mergers, executives have an opportunity to create shareholder value, but a disciplined and comprehensive approach to both the M&A process and the subsequent integration is essential.

Such an approach begins with executives who insist on a clear rationale for value creation with and without M&A. Their teams must make pragmatic assessments of a deal’s economics relative to its potential for improving base business. If they determine the deal has a strong rationale, they must then orchestrate a regulatory process that considers broad options beyond rate reductions. Having the discipline to walk away if the settlement conditions dilute the deal’s economics is a key part of this process. A disciplined approach also requires that an aggressive integration effort begin as soon as the deal has been announced – an effort that entails a modular approach with clear, fast, top-down decisions on critical issues. Finally, a disciplined process requires relentless follow-through by executives if the deal is to achieve ambitious yet realistic synergy targets.