Choice! by Chris Trayhorn, Publisher of mThink Blue Book, January 15, 2002 There are many disturbing practices and beliefs prevalent in the traditional electric and gas energy industry, but few more disturbing than the struggle between energy providers and energy consumers over choice. Even discussing the topic of choice is hazardous, but since I’ve titled this paper with that very nominalization, defining choice seems to be a rational and appropriate beginning. Choice is defined in Webster’s dictionary as “the power or opportunity of choosing.” The struggle over the opportunity of choosing has a history that begins with the initial formation of societies. We’ll track a bit of that history in a moment, but, for now, let’s appreciate that energy companies, called “utilities” when they are regulated monopolies, have had the historical advantage of choosing “for” their consumers. This is an enviable advantage for almost any enterprise. As a matter of fact, most companies in competitive markets utilize every available strategy (e.g., product differentiation, branding, packaging, marketing, etc.) to achieve the position of being able to choose “for” their target markets. Once attained, there is some evidence that the advantage of choosing “for” your customers is very difficult to give up. Historically, monarchies did not easily relinquish the right to choose for their subjects; nor did religious institutions, most forms of government, a variety of social orders (particularly cults), and so on. As choice is introduced to energy consumers, energy companies are no more prepared and anxious to relinquish the power or opportunity of choosing for their customers than any of these historical institutions. The most coveted relationship of the new energy companies (ex-utilities) is the customer relationship. There is a supreme struggle over who maintains this relationship as the energy companies vertically disintegrate into generation, transmission, distribution, retail marketing and energy services companies (or some combination of these segments). Distribution companies and retail marketing companies, for example, both want (and need) customer contact and customer data. But the sharing is less than open and willing, and mightily contested. The disintegrating utility wants to determine where the customer data remains and minimize how much of it is to be shared. There is a clear belief that there is an advantage in owning and managing this data — in spite of the reality that no one seems to be able to clearly define what this advantage is and how to exploit it. Real or imagined, customer information is presumed to be where the value of these companies really resides. In energy markets that are most advanced in de-regulation or liberalization, a new breed of energy company is emerging whose only value is in the customer relationship. These new enterprises eschew the ownership of pipes, wires, generators, transmission lines — the mainstay of returns in a rate regulated environment — and look to “owning the customer.” Owning the customer is a direct and irresoluble contradiction to relinquishing the “power or opportunity of choosing.” The concept of “owning the customer” is an invalid objective and, with the changes occurring across society in our increasing complex world, a strategy that is impossible to achieve and doomed to failure. Our hypothesis is that the customer can not be owned, but must be cultivated, catered to, respected, nurtured — in fact, loved — or they’ll go somewhere else to buy. Institutional Deconstruction Social institutions (educational, political, religious, economic, etc.) have the root goal of providing the rules of behavior that serve (or pretend to serve) the interests of individuals forming societies. The institutional rules prescribe what individuals give up to gain the benefit of the institution. As an institution, the utility monopoly described forfeiting the freedom of choice as the price the individual paid to gain access to cheap and reliable gas, electricity, water, and so on. Trust in social institutions follows a pattern of erosion as institutions fail to provide solutions that are socially viable. New institutions more responsive to the requirement of individuals grow to replace eroded institutions. Thus religious institutions of today are hardly shaped as they were in the Middle Ages and political institutions are moving generally in the direction of democracies. There is a considerable loss of confidence in contemporary institutions — leading to the formation of new solutions — a trend typically described as institutional deconstruction. An example of institutional deconstruction is the eroding dominance of educational institutions in the definition of what is correct and true information. The often very restrictive control over the dissemination of new (often controversial) information to general society (individuals) by educational institutions has been replaced by the virtually unrestricted dissemination of information, regardless of accuracy, via the Internet. Chat rooms are more powerful influencers than the library or the academic forum. Investor chat sites are more powerful than the 10-K corporate SEC filings in influencing how investors form their beliefs about the potential value of their investments. Institutional deconstruction is being driven by several strong global trends, but one dominant trend is acceleration in mass communication and the universal availability of affordable information technology, both of these providing vast quantities of real-time information (or misinformation). For example, trust in the political institutions of the electorate were seriously eroded in the United States in its recent presidential election when misinformation was communicated about the polling results on the East Coast, which impacted the vote in crucial locations on the West Coast. In addition, the polling institutions themselves proved to be woefully locked into obsolete technologies, which ultimately prevented an accurate count of the vote itself. The country remains uncertain of the real outcome of the election. The institutions surrounding energy are vulnerable to the identical crisis. Trust in energy institutions is at a low point, making the provision of accurate information subject to distrust as misinformation. Utilities seeking to communicate with energy consumers in the California markets this summer suffered ridicule and accusations of misrepresentation at the hands of their own customers. It is also possible that utilities themselves, sustaining technological solutions that can not keep pace with the rapidly changing energy markets, could suffer the same loss of confidence as the Florida polling institutions — doing too little too late to preserve their credibility with constituents. Internet sites and chat rooms that feature dialogue and opinion about the future of the energy markets, new energy initiatives, available energy options and market opportunities will all have a powerful influence over how energy consumers ultimately exercise their power or opportunity of choosing. Thus information freely available, some totally untested, about the appropriateness of the structure of new energy institutions can, and probably will, influence the future shape of the energy industry. This has powerful meaning for how new energy companies define their customer and how they prepare to service this customer. The notion of “owning the customer” is dangerously close to the paradigm of the monopoly market structure — regaining, by some device, the territorial “franchise to serve.” The traditional utility paradigm allowed the utility to assume, for their customer, the power and opportunity to choose. After all, the comp lexity of producing, transmitting, and distributing electrons or therms is beyond the grasp of the typical energy consumer and choosing for them makes real sense. How can the consumer be expected to make a choice that represents the proper system safety or the quality of the commodity delivered? True, the energy consumer is probably the last person qualified to determine system safety or the quality/reliability of the electrons and therms. But this is not what they want to choose — this is not why they want the power or opportunity of choosing. Over the past 75 years, few institutions have deconstructed more rapidly than the institution of the utility. Regulated utilities and their regulators around the globe have systematically eroded energy consumer trust in the ability of a monopoly enterprise to deliver least cost service to their captive society (the franchise). Utilities have been the focal point for abuse by capitalists whose sole objective is to achieve monopoly market status. Operating utilities have been combined into abusive holding companies with cash and resources drained off until they were forced into bankruptcy. Reconstituted and re-organized utilities have demonstrated an inability to achieve available operating efficiencies and minimize costs. Utilities have become, at the hands of regulators, instruments of social policy with rates designed to administer the distribution of the cost of service in ways dissociated with real costs, angering various groups of energy consumers. Egregious mistakes committed by the utilities have invariably been put to the regulators for cost recovery and honored, leading the public to distrust virtually any basis for a rate increase put forward in today’s regulatory environment. One might ask, what is left to trust? The Opportunity of Choosing There is no more profound result of the general availability of information through technology than the shift of power from institutions to individuals. This impact is more profound than simply the availability of information to the masses, or the ability to derive intelligence by processing this information. What the individual has at his fingertips is the complete picture of the market and the options presented to him by the market. Regardless of whether this picture is today available to energy consumers matters little. The fact is it will be available to them soon enough. They will act on their complete picture of their energy options. And they will react to this picture in relation to every other market picture available to them. The energy markets of the future will be designed by the energy consumers and must be responsive to their preferences regardless of what the new emerging energy institutions might prefer. Any attempt to usurp the “power or opportunity of choosing” by any segment of the energy markets will fail miserably. The ultimate shape of the global energy markets and the business processes that come to dominate this market cannot be foretold. There is no “seer” whose vision of this energy future is so systematically thought through that it presents a blueprint for success to the aspiring new energy institutions (e.g., wholesale moguls, retail giants, distribution network magnates). But this does not mean that these institutions will not emerge. Creating the Innovation Engine The greatest danger for energy companies, regulated or deregulated, emerging or traditional, is their inability to innovate in response to emerging consumer trends. Energy companies need to listen to signals provided by their commercial, industrial and residential consumers and have the ability to respond. The ability to respond has been a serious deficiency for the energy industry throughout its history. The ability to listen and lead in the delivery of new solutions has been largely absent. This is the point of the concept of the innovation engine. To survive and prosper in the face of the rapidly changing rules (and institutions) in today’s globalizing energy markets requires an unprecedented ability to assimilate and analyze consumer wants, the ability to change rapidly in response to consumer preferences and market signals, and the ability to develop new solutions that are defined and preferred by energy consumers. Leaders in the energy industry must adhere to the principle of ib4e, innovation before excellence. The traditional paradigm of pursuing excellence in existing business processes may lead to failure in a market where business processes are changing at rates that render the focal point of such a strategy obsolete — that is, the business processes superannuate before excellence is possible, making the adoption of new emerged business processes far more important than rendering them perfect. Building the organization that innovates — that continually re-invents itself in response to changed consumer-driven market models — is the worthy paradigm in today’s energy markets. And building this innovation engine requires a redefinition of the people, processes and technology that are employed within the energy company (utility) to define and deliver service to customers. The Pursuit of Monopoly It is a truism that every competitor seeks a monopoly. When we speak of moving the energy industry toward competition we mean, in classical economics, six things. We mean to create an energy market that has: • A standardized product • Many sellers and many buyers • No government intervention • No barriers to entry or exit (e.g., franchises, geographic restrictions) • Free and equal access to information Given these conditions, we have a market that, as though guided by an invisible hand, will allow the self-interest of the market participants to force a market price equal to marginal cost — the lowest price to entice sellers to make the commodity available to buyers. Sellers don’t like this market structure. By definition they are put in a market where the minimum necessary profits to survive are provided. Every one of these sellers is going to spend considerable time and energy seeking a market structure (e.g., monopolistic competition, oligopoly or monopoly) where better profits can be earned. A good example of an industry sector seeking monopoly status is the enterprise resource planning suppliers to the energy industry. The trend in the current market is for ERP and CRM suppliers to converge. Each of the ERP vendors is either developing their own CRM solution or acquiring one in the effort to provide a full (and fully integrated) back- and front-office suite of solutions to their clients. Unfortunately these come with either a proprietary technology, or toolset, or both. Furthermore, in an attempt to reduce competition, these suppliers promote a single company solution as superior to a best-of-breed strategy, virtually ignoring the rapidly improving enterprise application integration technologies. The strategy of the ERP vendors is relatively simple: eliminate competition from the CRM vendors by acquiring them (fewer sellers, more market influence), promote proprietary technologies and toolsets (create barriers to entry and exit), and further eliminate competition by creating fear, uncertainty and doubt around alternative EAI and best-of-breed solutions (which differentiate their product by becoming unique and non-standardized). Three of the six requirements of a competitive market are the target of this strategy, and the result is, at best, a monopolistically competitive market, and, at worst, an oligopolistic or a monopolistic market. To see the potential destructive power of an oligopoly, study the gaming of the California markets over this past year by wholesale energy suppliers. The issue isn’t that this is wrong. It is a natural strategy of competitors in a competitive market. And it is a strategy that will occupy the attention of the new energy institutions. Let me iterate that there is some evidence that the advantage of choosing for your customers is very difficult to give up. Respecting Choice This essay calls for new energy institutions to discard the objective of ‘owning the customer’ and adopt the strategy of serving the customer — respecting their power and opportunity to choose. After all, it is not as though the energy institution can usurp this power. Individuals in the new society, with their technology and access to information, will demand choice and they will have it. The issue is how quickly and effectively can the energy institutions of the new millennium respect this transition of power to the individual. Respecting the customer will not be an easy task. It will require a redefinition of most, if not all, of the business processes surrounding the management of the interests of the energy customer. It will require a new agility and a new sensitivity to customer preferences. It will require a whole new set of practices aimed at anticipating the direction of energy customer preferences and offering options, in advance of clearly defined requirements, that move customers more quickly in directions of their choice. Such is the stuff of competitive advantage — innovative solutions to which consumers flock. Consumers respond not because their choice has been eliminated, but because the option is so compelling that the majority of them exercise their power to choose. We sell customer management products and services directly into the energy market. We have the opportunity to touch and feel many customer management strategies. Our research painfully reveals that the energy industry has taken only a very small step from the monopoly paradigm of old to the “own the customer” paradigm of today. Certainly the confusion around deregulation — the insanity of the false markets determined by political and regulatory experiments with the economics of competition — make evolution to customer centricity more difficult. When the markets are truly competitive, consumers, as they do in a competitive market, will greatly accelerate market evolution towards their preferences. But there is an opportunity today for energy market leaders to respect the customer’s right to choose. This very simple principle, and the strategies that evolve from its application, may be the most telling determinant of long-term success in the global energy markets. Filed under: White Papers Tagged under: Utilities About the Author Chris Trayhorn, Publisher of mThink Blue Book Chris Trayhorn is the Chairman of the Performance Marketing Industry Blue Ribbon Panel and the CEO of mThink.com, a leading online and content marketing agency. He has founded four successful marketing companies in London and San Francisco in the last 15 years, and is currently the founder and publisher of Revenue+Performance magazine, the magazine of the performance marketing industry since 2002.