Industry Transformation: The New Competitive Landscape

The global energy industry is experiencing extraordinary transformation. The
forces of deregulation, increased competition, simultaneous unbundling and convergence
of traditional business models, globalization, and the rise of e-business are
driving radical changes in global energy markets. As a result, a new competitive
landscape is emerging, exerting tremendous pressure on the utility industry
and rendering the traditional utility model obsolete. Winners in this new environment
will transform their organizations based on a new business agenda.

Foremost on this new agenda is the growing awareness of shareholder expectations
and the need to increase and drive shareholder value through the business. Looking
ahead, a heavy emphasis will be placed on cost reduction and asset management
as companies attempt to enhance the efficiency of their existing business models
while simultaneously positioning themselves for growth. Growth will come in
three forms. First, increased awareness of the customer and the need to leverage
branding to enhance market positioning will drive the development of customer-focused
businesses, products, and services. Second, acquisitions, divestitures, and
corporate restructuring will provide a basis for realizing growth opportunities
through geographic expansion, new customer solutions, and enhanced focus and
scale around core competencies. Finally, e-business and emerging technology
solutions will provide both the “backbone” and “platform for change” that enable
utilities to transform and realign their business models with changes in the
industry. In response to this new agenda and the changing competitive landscape,
energy companies are realigning themselves around new go-to-market structures
and strategies focused on growth and specialization in different areas of the
value chain.

To be successful, each strategy will need to focus on core competencies demonstrating
“best-of-breed” performance. Similarly, key support functions, such as finance,
information technology, and human resources need to be aligned with the overall
strategy. The remainder of this article focuses on defining the emerging role
of the utility CFO in support of the new agenda, identifying key challenges
for finance, and outlining a blueprint for transforming the finance function
to meet the challenges of the business.

The Emerging Role of the Utility CFO

The role of finance is expanding as CEOs and business unit managers demand
that finance executives serve as partners in setting strategy, achieving business
goals, dealing with emerging issues, and as finance becomes embedded in the
heart of the business. Utility chief financial officers need to be “leading
architects of their corporation,” trusted business partners and play a key role
in setting strategies and implementing business change. Consequently, the utility
financial executives of the future will play vital roles in areas once considered
outside the province of finance — restructuring the business, leveraging
e-commerce, enhancing corporate reputation and brand equity, optimizing customer
relationships, and driving corporate transformation. Never have the qualities
of leadership, innovation, and creativity, along with the ability to deliver
tangible results in the business, been more in demand from utility finance professionals.

Figure 1 – The New Energy Enterprise Industry Role Map

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Key Challenges: The CFO Agenda

Given this hefty role and its associated responsibilities, where should utility
CFOs focus their attention? While the importance of the finance function has
grown, uncertainty has increased about how to best realize its potential. While
areas of focus will vary based upon specific business models and strategic agendas,
CFOs of leading energy companies are focused on a number of key business challenges.
These challenges and associated implications for finance include:

• Generating Shareholder Value — Creating and managing shareholder
value is a strategic imperative of the new competitive landscape. However, shareholder
value as a single goal is insufficient. The broader challenge is to create value
concurrently while balancing and capitalizing on other key stakeholder relationships,
including customers, employees, regulators, and strategic partners. What are
the sources of value creation? How can value creation be institutionalized in
the planning, performance management, and governance processes? How can value
management be integrated into business operations?

• Realizing the Benefits from Mergers and Acquisitions (M&A) —
In the past few years, there has been an explosion in the number and size of
M&A transactions in the utility industry. Mergers, acquisitions, and joint ventures
have become standard methods of seeking growth as the industry consolidates.
How does finance ensure that the value promised in the merger is ultimately
delivered? How can the integration process be managed effectively?

• Planning for Value — Global strategies must be executed regionally
and across business units. Processes to promote desired behavior must work their
way through an increasingly complex organization if value is to be delivered.
How does finance ensure that strategy is implemented throughout the organization?
How does finance bridge strategy, process, and the implementation through planning
and budgeting? How can we thread a value philosophy throughout the planning
and performance management processes?

• Re-examining the Role of the Corporate Center and Administrative and
General (A&G) Functions — Corporate centers have tended to evolve over
time, rather than being designed purposely. Today, penetrating questions are
being raised about the corporate center and its role in creating or destroying
value. The end of the 1990s saw most of the fat trimmed out of frontline operational
units; now it is the turn of the corporate center. How should finance be organized
in the future? What is its role in assuring that the corporate center creates
value? How are A&G functions best aligned across corporate, business unit, and
shared service organizations?

• Leveraging E-Business Opportunities — Almost overnight, the
Internet and other forms of e-commerce have created not only a vast new marketplace
for information, services, and goods, but also innovative ways to conduct business.
How does finance help to forge and implement an Internet strategy? How does
finance develop and communicate the longer-term business case for e-business?
How will the Internet impact transaction processing?

• Looking Beyond ERP — Large investments in enterprise resource
planning (ERP) systems are coming under the microscope. Some have fallen short
of their promise; others just do not go far enough. Many utility CEOs are asking
CFOs and CIOs, How can I maximize the return on my investment in ERP? How does
finance assemble the most effective portfolio of information and knowledge management
systems? What new decision support processes are possible? What form will future
knowledge and intellectual management systems take?

• Managing the “Virtual Finance” Organization — Investments
in technology, process improvements, and outsourcing are sharply reducing the
size of the finance function, but expectations for performance are increasing.
What is the role of finance in a “virtual” organization, and how does finance
itself become more “virtual?” How does finance respond to change while maintaining
financial risk management standards with fewer people? How does finance attract,
reward, develop, and retain the best people?

Addressing these interdependent challenges effectively requires a new level
of competence, enhanced tools, and many new skill sets. The primary role of
finance must shift from keeping score to providing the knowledge and capabilities
necessary to enhance decision support and drive value.

Meeting the Challenge

Recognizing the broader role in supporting these business challenges, leading
finance organizations are developing new financial management models focused
on transforming finance into an integrated business partner (Figure 2). Transformation
strategies have typically followed two different, although not mutually exclusive,
paths:
• Redeploying resources to reduce overall costs and enhance decision support
(Finance Effectiveness Model).
• Re-aligning finance functions based on key roles and responsibilities,
creating a virtual finance community across the business (Business Alignment
Model).

Figure 2 – The Transformed Finance Vision

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The Finance Effectiveness Model

The Finance Effectiveness Model focuses primarily on key financial processes
and technology solutions to increase the efficiency of transactional and reporting
processes while enhancing the value of information and decision support capabilities.
Financial processes can be grouped into Transactional Processing (accounts payable,
billing, time and expense, fixed asset accounting), Reporting and Control (general
ledger, closing, compliance reporting), and Decision Support (planning and budgeting,
financial forecasting, management reporting, cost accounting). The approach
to redesigning these processes and leveraging technology varies across each
category.

Redesigning transactional processes focuses heavily on achieving low costs and
efficiency through increased automation and the consolidation of activities
across the business. They are typically the greatest candidates for shared service
models or outsourcing. Heavy automation, data capture, and integration with
operational processes through enhanced ERP capabilities provide the basis for
improvement.

On the other hand, reporting and control processes require a high degree of
integrity in order to translate data into business information and maintain
effective compliance with external reporting requirements. While low costs and
efficiency are still important, the emphasis of these processes is to ensure
that there is a central point of control for information and to maintain “one
version of the truth.” Redesign efforts typically focus on standardizing a chart
of accounts, integrating or consolidating multiple general ledgers, and improving
information delivery and reporting.

Decision support processes focus on using information to enhance value and making
effective business decisions. Redesign efforts are less focused on efficiency
gains and more focused on utilizing information and decision support tools to
maximize business value. Improvement solutions are focused on management information
capabilities, use of predictive analytics, and data warehouse/data mining.

The Business Alignment Model

The Business Alignment Model focuses on achieving greater alignment
across corporate and business unit finance functions and ensuring clear lines
of responsibility and accountability across core finance roles. This approach
is more prevalent in instances of corporate separation, restructuring, or M&A
activity as finance functions are realigned along with the business structure.
Key finance activities are organized across three key roles.

Corporate or “central finance” is focused on two objectives — providing
overall corporate governance and driving value through the portfolio of businesses.
It consists of a small core group or “center of excellence” that sets corporate
direction, evaluates and funds business strategies, manages the overall risk
profile, and evaluates performance relative to overall value creation. Key activities
include setting strategy, developing policy, setting enterprise goals, and coordinating
across businesses to achieve strategic objectives.

Business unit finance is focused on enhancing decision support through
forward-looking analysis and interpretation of results rather than transactional
processing or historical reporting. Relying on a “single book of record” as
the basis for management information, business unit finance consists of distributed
teams that provide dedicated planning and analytical support to business units.
Key activities include analyzing business results, planning and forecasting,
project and investment evaluation, and profitability analysis.

Shared service models can be constructed in a number of ways, varying
from distributed processing networks to fully consolidated organizations residing
at a corporate or services company level. To be effective, they are enabled
by consistent practices and heavy levels of automation. Business services groups
are managed typically as stand-alone business units with market-based pricing
and service level agreements established to operate the unit as a competitive
entity. Implementing this model requires the creation of a virtual finance community
that enables sharing of best practices, consistent career development and training,
effective processes and integration across each role, and a robust technology
environment.

Achieving the Vision

Starting with an understanding of key business strategies and the requirements
for finance to support the business, the transformation process must address
several key enablers to achieve the role of an integrated business partner (Figure
3).
Core financial processes must be integrated with the overall business model
with an end-to-end design that maximizes efficiency and effectiveness. Organization
design decisions must consider the relationship between corporate and business
unit finance requirements and the role of each. Similarly, skill sets and individual
capabilities must be addressed as increased complexity requires both business
and financial acumen. Integrating core and emerging technologies still remains
a critical strategy particularly with the evolution of e-business and Web capabilities.
Finally, ensuring a continuous improvement mentality through ongoing education
and a communication program regarding the transformation process is critical
to shaping the organizational culture.

Figure 3 – The Transformation Path

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Conclusion

The very nature of finance in the energy industry is undergoing change. New
tools, techniques, and concepts are transforming the whole discipline, requiring
a new level of competence, capabilities and skills, new working processes, and
increasing use of emerging technologies across the finance community.

Leading finance organizations are responding to this change with various technology
and process initiatives. Regardless of the paths chosen, several key principles,
described in this article, are clear as finance organizations develop their
agendas for the future.