Energy Service Providers (ESPs) seeking market entry in the United States
face an often-underestimated series of market barriers. Strong product
differentiation and favorable long-term wholesale energy supply contracts
represent important steps, but they are just the beginning for ESPs seeking
a substantial market presence. From the hurdles of gaining regulatory
approval in each state to the challenges of consumer education, ESPs must
navigate a time-consuming, resource-draining sea of business complexities
before ever powering a single light bulb or firing a single water heater.
Once operational, the obstacles continue – some say increase – with customer
service quality concerns, sales quotas, billing challenges, and trading
partner management.

Due to these high costs and the typically low commodity margins of a
competitive business, ESPs strive for cost savings in nearly every aspect
of their operation to achieve profitability. With cost cutting often comes
sacrifice, and in an increasingly competitive marketplace, under-allocating
funds to key operations such as sales, customer service, supply, and infrastructure
can ultimately prevent ESPs from achieving the customer-base scale required
for a sustainable business.

So how have successful ESPs achieved the scale they require while effectively
managing costs during the ramp-up period?

Success Means Fragmentation

Success has been found in specialization. From a greater market perspective,
it is referred to as fragmentation. Where once was found a single entity
managing its own operations from end-to-end – from trading and supply
to customer acquisition, from regulatory consult to IT Infrastructure
– now arise functional specialists, focusing on one key area and providing
that proficiency to complementary providers.

Dot-com storefronts and telesales masters have lowered customer acquisition
costs for every supplier with which they work. Online auctions have shortened
the sales cycle for large commercial and industrial (C&I) accounts from
weeks and months to a few short minutes. Wholesale suppliers have reduced
energy procurement overhead with long-term contracts and outsourced trading
and supply functions. Energy exchanges are creating fluid markets, reducing
overall commodity cost by increasing the economic utility of each Kilowatt
and Therm. Even customer service and billing costs have been lowered by
outsourced and managed services, Web-based billing, and automated Customer
Relationship Management.

In this fragmented market, each provider promotes itself not as a competitor,
but rather as a specialist – an organization dedicated to providing the
marketplace with the best capabilities available at a manageable cost
and with near-zero risk. By spreading fixed-cost infrastructure investments
over service to many partners, these providers effectively eliminate the
financial market barriers and many of the operational market barriers
facing ESPs in an inherently risky market.

Many ESPs continue to worry about competitive advantage in the context
of sharing a critical strategic resource such as a customer acquisition
solution or a trading and supply operation with other suppliers, asking
themselves “if I found the best provider in a given area, why would I
want my competitor to benefit from it as much as I do?” The answer is
simple: the provider in question is the best specifically because it is
a shared resource among many competitors. The ability to spread fixed
costs over many partners only scratches the surface of the benefits of
a shared specialist. Add to the cost savings the immeasurable benefits
embodied in the specialists’ expertise, their need to exceed partner expectations,
their need to continually improve their offerings, their need to continually
expand and deepen their mastery of their particular specialty, their ability
to reduce risk, and quite simply, their ability to completely remove one
more market barrier.

The specialist will benefit a number of suppliers, regardless of competitive
concerns; the only dilemma is whether the ESP in question is on or off
the list of those that gain.

Competitive advantage is not to be found in overburdening an operation
with a do-it-all-yourself strategy, any more than competitive advantage
is to be found by using a mattress for cash management instead of a bank.
Rather, competitive advantage in the restructuring retail energy market
of the United States can be found in assembling the most complete, cost-effective,
market-driven strategy for acquiring and serving energy consumers. Competitive
advantage can be found in identifying those few key differentiators that
are both demonstrable and defensible and establishing a business focus
geared solely toward exploiting those advantages.

An Example Serves the Point

ESP X develops an idea for billing that is identified as a demonstrable
and defensible competitive advantage and is called SuperBill. The question
now revolves around how to capitalize on SuperBill. Is the greatest advantage
to be exploited by developing the IT infrastructure that can support SuperBill
– technology advantage – or is the true advantage to be found in developing
an effective strategy for compelling consumers to choose SuperBill as
their billing option – marketing advantage?

Whether the ESP in question is the next great start-up or a well-established
unregulated subsidiary of an investor-owned utility, the answer can be
found in the same, proven adage that has been emblazoned in the history
books of failed companies everywhere: the best technology/idea in the
world is entirely useless without the sales and marketing infrastructure
to capitalize on it. The advocacy in this example is not one of necessarily
mastering marketing over technology, rather the point is that the issues
can be separated and tackled by the most capable organization, not simply
the internal organization.

The numbers back it up. Assume it costs $10 million to develop the technology
for SuperBill. Assume that of that $10 million, $9 million is spent on
those supporting systems, which, while necessary, are not directly responsible
for the provision of SuperBill. Now assume that Vendor Y offers a billing
solution that cost $10 million to develop and would require another $1
million to customize in support of SuperBill. Should Vendor Y have two
other clients using its product, even at a reasonable profit, Vendor Y
would be able to offer its billing solution, complete with the customization
required for SuperBill, to ESP X for a mere $5 million, half the cost
of developing SuperBill internally. This would free the other $5 million
for allocation to sales and marketing support for the promotion and widespread
adoption of SuperBill in the marketplace.

Figure 1

Vendor Y has eliminated 90% of the risk associated with deploying and
managing a new billing solution and should be expected to deploy SuperBill
in 10% of the time that would be required to develop it internally.

Additionally, because of prior experience with its other clients, and
because its supporting systems have been proven to function properly,
Vendor Y has eliminated 90% of the risk associated with deploying and
managing a new billing solution and should be expected to deploy SuperBill
in 10% of the time that would be required to develop it internally.

Conclusion

The $300 million U.S. energy market is attracting a great deal of attention.
It should still be considered a tabula rasa in that no one has cornered
the market. Low switch rates, volatile energy prices, and regulatory hurdles
are only part of the reason that restructured growth rates remain relatively
flat. Just as demand for bandwidth failed to surface until the supply
was available from providers like Qwest and Williams, so too should demand
for deregulated energy be expected to remain subdued until a supplier
can develop a comprehensive offering. In the absence of the billions of
dollars in capital allocated to Qwest and Williams for their network build-outs,
ESPs in the U.S. must look for creative measures to achieve the same level
of scale. Specialization and the use of other specialists hold the key
to achieving such scale in short order, at low cost, and with minimal
risk.