Survival Skills for Utility Mergers by Chris Trayhorn, Publisher of mThink Blue Book, May 15, 2006 The recent surge in merger, acquisition and divestiture activity in the U.S. utilities industry has come as no surprise to leaders in the industry who have long anticipated the repeal of the Public Utility Holding Company Act (PUHCA), a depression-era law that restricted ownership of franchised utilities. With the passage of the Energy Policy Act of 2005 and the subsequent repeal of PUHCA, electric utilities can now be owned by non-franchise utility entities and no longer need to demonstrate interconnection between operating companies. The clear path toward consolidation was also reinforced by global trends in the energy industry, such as increasing raw energy prices, more stringent environmental regulations and the continuous quest for synergies and lower costs to meet the expectations of Wall Street. Distribution companies with local service requirements and regulatory scrutiny of cost and service delivery are searching for increased economies of scale, improved reliability and power quality and enhanced customer service levels through strategic combinations that cross state and regional boundaries. Despite the optimistic projections of value creation for shareholders, surveys of business leaders, as well as popular sentiment, indicate that the majority of mergers failed to achieve financial goals set by top management and roughly half destroyed shareholder value.[1] Business consultants focused on the energy and utilities industry are concerned with the poor financial results as well as perceptions of decreased service quality and, perhaps most crucially, the potential consequence of further delaying needed investment in energy infrastructure. Study of management actions both pre- and post-merger and correlation of characteristics of both successful and not-so-successful corporate transformations have led consultants to develop a systematic approach to both identifying and delivering value. Doing the Deal Right Versus Doing the Right Deal Although conventional wisdom holds that the seeds for successful value creation are planted in boardrooms during the strategic negotiations and financial engineering of the pre-merger phase, analysis of the results of hundreds of corporate combinations clearly indicates that the activities that follow on the heels of the deal announcement are actually more crucial in determining long-term success. In other words, doing the right deal can only succeed by doing the deal right, which means early and continuous focus on many issues which do not get much attention in boardroom meetings. Here is an analysis of both the key pre- and post-completion activities and the resultant integrated approach to assist utilities in maintaining focus on both value generation and realization. This approach harnesses the resources of merging companies and establishes clear channels of communication for tracking and reporting crucial integration activities (see Figure 1). Our experience has shown that the majority of obstacles to successful value realization arise during the integration planning and implementation phases, often long after headlines of the deal have disappeared. The reasons are many and are inherently understandable, but, time and again, companies make decisions, and in many cases fail to make decisions, crucial for successful organizational transformation. Some examples include a lack of clear goals and timetables, inability to devote quality resources to planning and management of the transformation, delays due to work overload, pervasive resistance to change, lack of project management approach and discipline and lack of experience in driving transformational value that has an impact on bottom-line results. Our integrated framework for supporting utility integrations is based on a relentless focus on driving the benefits envisioned by the executive deal makers as well as identifying and unlocking additional areas of value often hidden in legacy organizations. Our experience providing support to thousands of organizations in integration processes led us to identify the key problems faced by managers and executives. In turn, we developed methods and tools to assist our clients. Driving Value Through Integration The complexity factor of mergers and acquisitions between utilities is greater than corporate transformations in other economic sectors due to numerous factors inherent in utility operations and regulation. In addition to common deal-specific factors such as size, geographic footprint and legacy corporate cultures of the organizations, utilities also must deal with industry-specific factors, such as intensive state regulation, a maturing workforce, aging asset base and varied labor agreements. As managers and executives attempt to manage these issues, in addition to delivering reliable and safe energy to our homes and businesses 24/7/365, it is no wonder that executing complex merger integrations is a challenge. The top reasons the full potential of expected value from utility mergers is not realized include: Managers must maintain focus on day-to-day operations and respond to unplanned events such as storms and forced outages; Executives have difficulty providing sufficient support to drive the organizational and process changes required to realize synergies; No formal programs are created for tracking benefits and holding people accountable for delivering the planned savings; and Performance metrics and incentives for senior and middle managers focus on operations/engineering rather than financial results. The solutions to these and other challenges involve the rapid initiation of an integrated cross-organizational approach, the creation of clear implementation plans with specific results, definition of roles and assumption of responsibilities, the adoption of project management discipline and an unwavering focus on driving value to the bottom line. Lessons learned from both successful and unsuccessful mergers have contributed to the specific approaches and tools introduced below. Rapid initiation of cross-organizational involvement and communications Speed is crucial as organizations lay the groundwork for integration activities. Quickly establishing a communications strategy, encompassing elements of both general and targeted messaging, is critical in managing the anxiety that accompanies times of uncertainty. The lack of specific answers should not dissuade an active communications program. Experience has shown that the presence of a communications program alone reduces the level of anxiety. It is even helpful in the early stages to communicate what is not known and the plan for issue resolution. Even in the integration of acquisitions of much smaller entities, inclusion of professionals from both organizations in a combined integration team is a powerful message to the existing workforce. The recognition of cultural strengths, identity and values in planning and implementation activities can lead to reductions in the level of attrition due to fear of the unknown and targeted poaching by competitors during transition. Transformation, not accumulation The goal of most mergers and acquisitions is to create a new organization that is greater than the sum of its parts. But this goal is not achievable right away and can only be accurately evaluated over several years. Where the envisioned value is based on synergies, economies of scale and new ways of doing business, transformational change of parts or entire areas of operations and support becomes crucial. A transformational approach to integration does not focus only on short-term cost reduction but defines a process of continuous change focused on clear strategic objectives. Components of the transformation may include streamlining, automation, centralization, decentralization or outsourcing of processes, each with their pros and cons. Typical post-merger transformation targets include the following organizational areas: Procurement Focus on leveraged buying, strategic sourcing, reduction of maverick purchases and streamlining of administrative processes; Finance and administration Reduction of closing cycles by up to 50 percent;[2] Human resources Streamlined and improved quality of employee support and reduction of investment in systems as percentage of HR budget; Customer care and billing Reductions of 25 percent in customer interaction costs, reduced time from meter to cash and acceleration of recovery and reduction of bad debt;[3] and Technology Optimization of infrastructure, increased flexibility, enhanced resilience and improved flow of information throughout the organization. Definition of Project and Organizational Roles and Responsibilities The first rule to be observed by business leaders of corporate transformation is clear: Maintain focus on your customers. They are still No. 1. Although with the chaos and inherent stress of the transformation, it may not always seem to be a critical path, proactively managing customer concerns can reduce concern in the community and reduce levels of inquiries and complaints. The community, regulatory commissions and local government and public services are also customers and deserve careful attention throughout the process. Key to effectively leading the transformation project is putting someone in charge. Integration and transformation activities require strategic planning and detailed actions over many months and, often, years, and should receive the full-time focus of accomplished managers. The wider transition team often includes other full-time members as well as a larger group of part-time members or specialists who assist in addressing specific aspects of the transition. Involving professionals from diverse areas of the companies is important in establishing momentum for organizational change. Team members require training and guidance throughout the course of transformation to assist in handling the emotional roller coaster that accompanies participation in a merger or acquisition. Helping to Ensure Project Management Discipline The cross-functional complexities of integrations span a wide range of technical, legal, engineering, systems, financial and personnel issues. Constant changes in requirements, priorities and, often, executive direction, require firm guidance as well as flexibility in adaptation. As such, the traditional engineering approach of many utilities does not lend itself well to success. We have successfully introduced goal-directed project management (GDPM) methods in widely varied integration efforts. These methods are based on risk assessment tools, clear measures for evaluation and prioritization of initiatives (i.e., which activities to continue and which to stop) as well as robust documentation and performance reporting processes. Methods and tools appropriate for the needs of utilities at various stages of the merger and integration process assist in establishing an integrated road map leading to a clearly defined goal. The essence of GDPM focuses on evaluating hundreds of items that contribute to merger complexity, developing action plans for each, assigning individual or team responsibilities and providing managerial support and resources for teams to execute. An important methodology utilized is called radical prioritization, which provides analysis and management information on which existing activities and projects to prioritize, which to continue and which to suspend (see Figure 2). Radical prioritization provides the continuity between the topdown goals envisioned in the merger/acquisition and engages and aligns the organization to focus on attainment of these goals. The complex interaction of transformation teams, financial analysis and ongoing operational priorities are evaluated across both organizations, enabling value-based decisions which take into account both internal and external priorities and maintain a clear focus on achieving business results. Coordinating the sheer number of moving parts and steering the organization through both internal and external resistance requires a steady hand and executive support to make tough decisions necessary to break down barriers and eliminate obstacles from the path forward. Frequent re-evaluation of the relative priorities of actions and concise management dashboard reporting enable clear, objective and consistent communications throughout both organizations. Relentless Focus on Driving Value One important key to ensuring the realization of value and contribution of dollars to the bottom line is a focus we call benefits realization. This method identifies value enablers at the initial stage of project formation. Traditional approaches emphasize transformation or integration levers, but our focus on quantifiable results enables early prioritization of producing bottom-line results to guide the formation of work teams as well as correct prioritization of issues and dependencies linked to dollars. Benefits realization focuses on three key steps: validating financial projection and identifying additional potential benefits, developing and implementing plans for realization of benefits and producing processes and scorecards for tracking benefits and correcting underrealization on a regular basis. These steps enable integration and transformation efforts to be linked to the bottom line and to clearly present financial impacts to areas of operations over many years in the future. Benefit scorecards are also often linked to measures of quality and satisfaction to enable more detailed impact analyses. As previously mentioned, internal focus on transition and integration efforts often wanes as the news of the deal fades and employees become adjusted to a new reality. Adherence to wellplanned implementation plans lessens as employees assume new job roles, managers and priorities. It is at this phase that many of the projected benefits fail to materialize in the absence of a rigorous benefits realization program that reflects a long-term company focus (often five to 10 years in the future) despite short-term priorities and changes in leadership. Conclusion Lessons learned from hundreds of utilities and thousands of companies globally that have navigated the turbulent waters of integration and transformation are assisting utilities in achieving their strategic objectives and in producing measurable financial returns. The future will be brightest for the fittest of utilities those that are able to thrive and grow in an increasingly competitive market. Driving results from integration planning through execution will be a tangible measure of their success. Endnotes BusinessWeek IBM Business Consulting Services analysis, 2006. ibid. 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.