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. IBMs 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 utilitys 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. Todays 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. Its 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. Thats 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.