Putting Performance First

Poor financial performance in 2001-2003 has led utilities to re-examine their
management approach. Utilities that are making it out of the slump have implemented
new management techniques such as Six Sigma, balanced scorecard and centers
of excellence; and others have adopted business process outsourcing (BPO) as
part of their strategy. These companies have also found the need to address
not only financial, but operational performance. And in order to drive execution
of performance goals through the organization, technology plays a key role.

According to Kathleen Wilhide in IDC’s “Worldwide Financial and Business Performance
Management Applications 2004-2008 Forecast Update (July 2004),” business performance
management (BPM) consists of a set of analytic applications and software technology
infrastructure “designed to measure and optimize financial performance and/or
establish and evaluate an enterprise business strategy.” The core applications
within BPM suites include financial consolidation, which supports both statutory
and management reporting; planning and budgeting to support finance and operations;
and scorecarding/dashboard applications to drive not only key performance indicator
(KPI) reporting but strategy execution. Additional areas include forecasting
applications as well as activity-based costing/management supporting cost and
profitability management.

Perhaps the most important applications to support performance execution are
scorecarding/dashboards (scorecard) solutions. These applications support the
tracking of KPIs in alignment with the accountability and strategic goal structures
of an organization. While a portal merely allows access to data and analysis,
scorecards are role-based applications that drive visibility to all authorized
employees, based upon their individual role or accountability, of KPIs and related
strategic initiatives of the organization from high-level plans down to lower-level
action plans. The applications makes visible progress against goals, and facilitate
collaboration that enables employees to document progress or make course corrections
as often as makes sense (see Figure 1).

Let’s look at an example of how a scorecard application drives visibility and
accountability. The scorecard application can report the daily customer average
interruption duration index (CAIDI) indicator for organizational units such
as service center, district office or region. If the CAIDI is out of line with
target and made visible on a timely basis, employees can take action. For example,
a supervisor can authorize overtime to accelerate the restoration process. This
decision can be documented in the scorecard application and made visible organizationally.

Measurement based on objective data from multiple sources keeps organization
on track. Standard reports from single applications are no longer sufficient
to track progress. That leaves many mid level and senior managers to query various
applications and act as manual integrators to put together reports that are
less than timely and fairly subjective. A scorecarding/dashboard approach integrates
information from disparate applications and sources into an information repository
that crosses finance and operations. The whole premise of a scorecard methodology
is balance – looking not only at financial metrics, but also at customer, operational
and company innovation operations as well.

Analytics Are Required

Enterprise application integration and portals have helped utilities make strides
toward increasing visibility to data and information. However, analytic applications
provide process automation that support closed-loop decision support. For example,
the outage of a large generation unit or combinations of smaller units on a
transmission node can have a tremendous impact on the bottom line. At the most
competitive generation companies, high-level executives can see real-time generation
against capacity and drill down to MW production but – and here’s where analytics
are required – the real value is to see production within the context of market
opportunity for the fleet as a whole, and make adjustments accordingly.

Analytics put information in context and should lead to an understanding of
the root cause of a problem. For example, at one utility company the VP of energy
delivery was alerted that his unit was over budget. Drill-down capabilities
allowed him to determine that overtime was high. Business unit managers were
able to drill down further to find that job estimating was off. Finally, investigation
led to the conclusion that designers and construction crews were incompatible,
requiring a change in approach. The real value in analytics comes when these
applications facilitate decisions to make operational changes that positively
impact performance (see Figure 2).

Focus on Metrics

Wall Street tends to dote on financial metrics, such as earnings per share,
debt reduction, and merger potential. But those indicators are extremely sensitive
to operations, especially related to reliability. Witness the decline in regional
utility stock prices just after the 2003 blackout or the downgrades in credit
ratings of utility companies experiencing unusually high outage rates.

That is why utilities focus on operational metrics. For example, Progress Energy
recently announced that it had made significant improvement against its three-year
“commitment to excellence plan.” Among other things, it was able to improve
employee satisfaction and injury rates, improve reliability by more than 20
percent, improve its J.D. Power customer satisfaction rating and increase its
electricity reserve from 15 to 20 percent. These metrics address the employee,
regulator and ratepayer, in addition to the shareholder.

There is an important distinction between enabling operational performance
and enabling better operations across business units. For example, one utility
recently implemented a portal to facilitate outage restoration. Rather than
utilize the user interface of the outage management application, the utility
installed a portal that provides Web access to dispatchers, call center representatives,
customer contact, field crews and governmental affairs personnel on outage restoration
status during storm or other emergency conditions. While this visibility means
fewer calls to the dispatch center and speedier restoration, it does not display
performance or evaluate impact on the corporate bottom line. Many utilities
have gone as far as enabling better operations; few have gone as far as enabling
operational performance.

People and Process

There is a great deal of process work behind developing the right metrics.
It is part analysis of existing sensitivities, part negotiation. This is best
achieved by active communication between senior executive and mid level management
working groups. Rather than an ad hoc approach, a governance structure is required
because the object is to achieve continuous process improvement. According to
one CIO, “If you ever think you are done, you are not.”

Business units must do the hard work of coming up with a meaningful set of
limited objectives directly tied to corporate goals. Too many KPIs lead to a
lack of focus. According to one utility executive, “Effective results can be
obtained by developing a hierarchy of key measures linked to summarylevel metrics
that cover large work groups. But lower-level metrics help teams and individuals
see the linkage between their operational performance and business results.”

Metrics displays are only window dressing if there is not an incentive to use
them. For one utility company, BPM is so useful that plant operations personnel
are using it in their daily meetings. Another company has found that bonuses
or other incentives tied to performance metrics are what motivate individuals
and workgroups and lead to progress against goals (see Figure 3).

A Balanced Scorecard

One utility has taken a balanced scorecard approach since the late 1990s. It
replaced a previous effort that focused on making KPIs visible to senior business
executives. The company started by looking at all of its operational metrics,
including those that were team or individually focused and those that were locally
managed. Teams culled those into business unit level and enterprise dashboard
metrics. Group and individual incentives tied to these metrics were added to
ensure that the organization was actively moving in the right direction.

For the IT unit alone there were hundreds of operational measures and dozens
of service level agreements with service providers and outsourcers. These were
culled to measures underlying the IT performance index:

  • Operational performance;
  • Planning and business unit alignment;
  • Customer satisfaction (in this case the internal customer); and
  • Performance versus budget.

Employee bonuses and other incentives are tied to:

  • Corporate financial results;
  • Safety; and
  • IT operational performance.

IDC has found that tying performance management efforts to compensation is
a best practice, but many companies are reluctant to do so – the culture shift
is a challenge, and organizations must be ready to defend the consistent calculation
of KPIs.

Since 1999, this utility has improved both financial and operational performance,
growing earnings per share by 70 percent. Earnings growth is attributed to a
combination of factors, including increased sales, positive rate actions, effective
management of operations and maintenance costs, and accretion from share repurchasing.
Although no formal study has been made correlating the balanced scorecard strategy
with these results, it is not a stretch to conclude that implementation of BPM
technology is making a significant contribution. A recent study by IDC showed
that BPM initiatives earn an average ROI of 129 percent – and when organizations
taking part in the study correlated balanced scorecard initiatives to the improvements
in the measures that they surfaced through the process, which were operational
in nature, the ROI in many cases was far higher than the average.

Reaching for Understanding

Energy Insights has predicted that in 2005, utilities will get serious about
business process outsourcing. According to Energy Insights’ “Top Ten Predictions
for the Energy Industry in 2005,” released in January 2005:

Interest in BPO will be driven primarily by financial pressures including
the need to achieve M&A synergy savings and the friction between a “back to
basics” strategy, which decreases the ability to grow revenues, and earnings
growth objectives of 5-10 percent, requiring a sharp focus on cost cutting.
Leading indicators include … [the] record setting deal between TXU and Capgemini
… valued at $3.5 billion over 10 years, and the 10-year deal between Entergy
Solutions and Alliance Data Systems. … BPO will become the norm instead of
the exception, especially in shared services such as finance, HR, supply chain
and IT as well as for customer service and billing.

A utility cannot truly evaluate BPO without an understanding of its own performance
metrics. BPO vendors offer business process outcomes. To structure a deal, at
a minimum, a utility will need to understand what outcomes are desired and if
they reduce costs through outsourcing those processes. BPO vendors also offer
hundreds of measurement possibilities; however, only the utility will know which
one of these will have significant impact on performance. For example, BPO vendors
may measure the cycle time to produce a utility bill. But does reduction in
cycle time really matter to the bottom line?

Once committed, BPM is required to monitor and manage the outsourcers’ performance.
In the case study above, the IT performance index links not only CIOs (business
unit and shared service), but IT service providers and BPOs.

The Technology Is Mature

There is a wide range of products on the market that support BPM. Most vendors
have a suite of BPM solutions that integrate financial consolidation, planning/budgeting
and scorecards/dashboards. The niche vendors with a BPM/BI heritage include
Hyperion, Cognos and SAS accompanied by enterprise resource planning (ERP) application
vendors such as SAP or Oracle/PeopleSoft that have also developed a BPM suite.
PerformanceSoft is a vendor that successfully delivers only scorecards/dashboards.
Utilities also use portal products by Plumtree along with homegrown analytics
to build their own dashboards. Operational scorecarding/dashboards in the industry
includes vendors such as Obvient and SAS.

Recommendations

It is an old saw that to be successful, initiatives need corporate backing,
but this is one initiative that will not work without corporate initiation and
ongoing commitment. IT can certainly support this effort with technology. IT
can also act as leadership in this realm, as it is perfectly situated by virtue
of supporting a majority of the business units in a utility company.

For BPM to work, utilities must focus on the following:

  • Focus on the cultural aspects of formalizing BPM initiatives first – technology
    can’t make it happen without management support and a cultural shift.
  • Invest in information technology, especially BPM, but take a staged approach;
    perhaps piloting a solution initially in one business unit such as delivery.
  • Use business process modeling to support the process of defining metrics
    and process re-engineering.
  • Get the organization laser-focused on a few key corporate priorities and
    the operational metrics that support them. Too many key performance indicators
    lead to a lack of focus.
  • Information integration is the hardest part of any BPM initiative, but is
    key to providing the analysis needed to effect decision making. Work toward
    presenting drill-down capabilities into further detail on what is being measured,
    not just for executive management, but also for those responsible for operations.
  • If a single ERP system is prevalent, BPM applications deliver a business
    intelligence architecture that facilitates integration across applications
    and can be a good first step. A more robust BI strategy may be in order to
    integrate information from many disparate systems.
  • Continue to push vendors to develop analytic solutions specifically designed
    for the utility market – or verticals within that market.
  • Enable push instead of pull. Employees will visit a report center only when
    needed. According to Henry Morris, group vice president and general manager
    for integration, development and application strategies at IDC, “Web-based
    enterprise portals are ideal environments for displaying a dashboard and delivering
    additional contextual information such as relevant news and access to documents.
    Since portals define user access rights in terms of roles in an organization,
    different displays can be directed to different types of users.”