Gas and electric utilities face wrenching change in the next several years as regulators and demanding customers push for open competition and improved service.
Utility companies around the world are having to change. Deregulation, privatisation, globalisation and convergence are the key drivers of change (see "Driving Forces",). These changes will have a profound effect on the way the industry defines itself as the lines between industries and geographies blur. Consequently, these companies are redefining their business models, their value propositions to customers and how they operate. Cultural alignment, customer relationships, markets and portfolios, and operational efficiency are the factors that determine not only success but also survival.
All these changes are having an effect on the information technology required. IT that was adequate five years ago could be a liability today and will have disastrous business consequences in five years time. This presents a significant challenge for the CIO community in raising the awareness within their organisations that IT is already a source of strategic and competitive differentiation. Any new technology provides a competitive advantage for two to three years at the most. As technology adoption rates increase, competitive advantage declines. The technology wave model below shows the approximate timing and some of the key technologies in each wave.
Into the future, the life cycle of new technology will continue to shrink. More importantly however, potential competitive advantage will continue to increase exponentially. Consequently, the utility CIO and CTO will be under increasing pressure to deliver those technologies and related benefits ahead of the competition.
Information and technology are changing the rules for utilities. As the changes accelerate, the effective use of enabling technologies such as enterprise application integration (EAI), wireless and mobile computing, and customer relationship management (CRM) to operate in an increasingly digitised economy is already a strategic differentiator. Moreover, these technologies are fast becoming necessary in merely keeping pace with the competition.
Efficiency vs Growth.
Operational efficiency is probably the area where most utilities have focused their technology investments in the past. Improving the cost structure through process re-engineering and better technology has already led to significant gains for many companies. However, the achievements so far are merely low-hanging fruit. Future viability will require constant review and innovation. Having the "house in order" will enable the release of some savings and cash to fund strategic growth initiatives.
The utilities that serve large numbers of customers have relatively high fixed costs. Much of that fixed cost is related to technology. This clearly makes this type of utility a scale/volume business. The need for increased volume is directly related to the need to spread fixed costs over a higher volume in order to drive down the average cost-to-serve, leading to improved profitability and improved price-competitiveness.
This has dramatic implications for information technology in the sense that it must be scalable in order to capture the economies of scale without having to run stand-alone facilities, systems and processes. This is particularly an issue with billing systems, call centres and service management systems. If these systems in particular cannot cope with much higher volumes, then the sought-after benefits will not be realised. The need to provide higher levels of availability and redundancy increases as a single system failure will have an impact on the entire customer base. In the 24 x 7 Internet world, it's an issue that cannot be ignored or covered by manual work-arounds.
Technology also has a key role in driving down the variable cost-to-serve. Using technology to automate re-engineered processes leads to both cost savings and quality improvements. Continual improvement and reinvestment of cost savings in the next wave of improvement will lead to sustainable competitive advantage in the form of increasing profitability and increasing customer satisfaction.
In the asset-intensive sectors of the industries, the use of wireless, mobile and wearable computing technologies will yield labour productivity improvements, quality improvements, safety improvements and faster response and resolution times. Continual improvement and expansion of the communications networks will lower the cost and improve the service, making technology applications such as home automation and universal interval meter-reading economically viable. Re-engineering the business processes and re-architecting the information technology to handle straight-through processing and close to real-time portfolio position tracking will revolutionise the cost and risk profiles of the power and gas industries in particular.
Australasian companies will struggle to reach a critical mass of customers that will enable them to be cost-competitive unless they aggressively expand internationally or they find innovative ways to deliver scale economies through regional strategic partnerships. The Australasian marketplace contains only around 12 million customers in total, which is still not sufficient scale when competing against the future global monoliths with 50 million customers or more.
Aligning the culture of an organisation with the market positioning and vision is essential and is often underestimated. It takes decisive leadership, single-minded determination and open communication. Change is especially difficult for a large and mature organisation. Cultural alignment will help bind the organisation together in pursuit of the vision. It makes change happen faster, reduces the risk of failure and lowers the cost.
Information and technology can help enable change in two key ways. First, by facilitating communication between leaders and their people. E-mail systems have helped enable leaders to communicate to their people quickly, frequently and cheaply. However, this does not enable leaders to easily read the mood of the organisation nor does it allow the informal communities within organisations to easily collaborate and exchange intellectual capital. Some of the collaborative technologies from EDS' own Technology Policy, published in January 2001, are Internet chat, computer telephony, computer videoconferencing, data sharing, workflow management and digital training/learning technologies. Many of these technologies represent value opportunities for utility companies to enable a culture of collaboration and teamwork.
The second technology area to support cultural alignment is knowledge management. When organisations go through change, inevitably valuable knowledge is lost as people leave or move to new roles. Capturing, retaining and making knowledge available about processes, competitors and customers can only be achieved using technology. Knowledge management is a process that is enabled and supported by technologies. To be effective, knowledge management must become an integrated part of everyday life. Technology such as wearable computing and the aforementioned collaborative technologies will help make knowledge management an achievable goal in the near term by making the capture and sharing of knowledge effortless, cost-effective, fast and accurate.
Know Thy Customer.
In order to serve customers well, you must first know the customer and understand your relationship with them. To be able to sell new products and services to customers, you must have the ability to identify when a customer has a need and have the facility to satisfy that need with the right product or service at the right time (see "The CRM Eco-system", below).
Typically, utility companies are able to identify a customer by name or account number but actually know little about that customer. Information such as age, disposable income and marital status describe certain attributes or characteristics of each customer. In order to build long-term relationships with customers, utility companies need to find a way to remember and recall what an individual customer has told them before.
Having customers truly believe that you know their needs intimately and have served them well in the past is a clear point of differentiation. The effect is a higher value perception that will translate to lower churn rates, increasing market share and higher margins. These are desirable attributes for investors and will ultimately lead to increasing shareholder value, other factors being equal.
Realising the benefits requires putting the right information and technologies in the hands of the staff on the front line as well as the marketing and planning departments. Being able to meet customer expectations and deliver on promises to customers can only be achieved by using information technology effectively. The most successful utilities of the future will recognise the key role that technology has to play in this area and will invest in those capabilities that improve service quality and put customer intelligence in the hands of those able to create value from it.
All this leads to the need for customer relationship management (CRM) technologies and capabilities. CRM can be decomposed to three generic components: customer interaction points, operational capabilities and business intelligence.
Customer interaction points used to mean branches and, perhaps, call centres. Today it means much more - including IVRs, kiosks, Internet, digital television and WAP. AT Kearney's research indicates that an Internet customer interaction is about one-fifth the cost of a call centre interaction and one-tenth the cost of a branch customer interaction. Put another way, this means between five and 10 more interactions per customer on the Web for the same cost and almost limitless peak capacity with no waiting time. Operational capabilities refers to the administrative processes in the front and back office of a utility. Historically, the focus has been on bill production, payment processing, service management and accounting functions, and their associated technologies. Increasingly, however, the focus will be on functions such as sales, contract management, fulfilment and knowledge management.
Business intelligence capabilities are executive capabilities predominantly supported in the back office by business processes that collect, analyse, interpret and action value-added information. Data warehouses, data marts, data mining and customer profiling are some of the technologies that enable business intelligence.
In order to make the CRM ecosystem efficient and robust, it must be tied together with technologies that automate the business processes and information flows. The ultimate objective is to have "straight-through" processing from end to end and back again. The value of information is transient and decays quickly, particularly in a highly competitive market or industry. To beat the competition in the near future will require being able to act immediately on the latest information.
Markets and Portfolios.
The strategic selection of the markets in which to participate will have consequences on future growth prospects. At least as important is the selection of which services and products to include in the portfolio on offer to customers. Most research indicates that customer retention or "stickiness" is directly linked to the number of products or services provided to the customer.
Broad geographic coverage is an important value that customers will respond to positively. With an increasingly itinerant population, the ability for a customer to transfer their utility services from one location to another with the same supplier saves time and adds convenience. This will lead to higher customer retention rates under these circumstances if the utility is able to deliver on the promise of convenience and time saving.
A similar principle applies to the portfolio of products and services. Customers are more likely to consolidate their utility service needs with one supplier if they are able to realise savings in time and money and gain convenience. The relative weighting of these benefits will depend on the individual customer's circumstances. For instance, higher value/lower risk customers are most likely to have higher disposable income and will also be less price-sensitive. Therefore, they are relatively more attractive to utilities in terms of profitability and less likely to switch suppliers. This reinforces the importance of customer intelligence in building long-term customer relationships and hence long-term shareholder value creation.
Delivering multiple products and services to customers, if the internal systems and processes are efficient and effective, should result in a lower average cost-to-serve per dollar of revenue than a single product competitor could achieve. This creates the potential to offer discounted pricing offers for "packages" of services and products.
The ability to cross-sell depends heavily on the information technology capabilities. Expanding market coverage and the portfolio will lead to limited benefits unless the information technology capabilities enable the delivery of the benefits of time savings, lower cost and convenience. Packaging and customisation of services and products for each customer is the ultimate differentiator.
Many utilities in Australia are expanding their range of services to varying degrees. The ability to offer home mortgages should lead to the opportunity to capture other service revenues that follow logically. For instance, an initial mortgage application or sale could be up-sold to include a credit card, electricity, natural gas, insurance, telecommunications, pay television, initial repairs, removalist services, new appliances, initial repairs and a host of other ancillary services.
Enabling the customer service representative on the front line to understand where the customer is in the process and then managing the myriad tasks that follow is best done with technology. When the interaction point is the Internet, this can only be executed with technology in the front and back offices.
What Role Will IT Play?
Information and technology will play many roles in the next 10 years in the utility industries. The roles suggested are:
The source of strategic differentiation for early adopters.
Accelerate the consolidation process and release of scale economies.
Increase the speed of response to changing business conditions - for example, program power trading.
Accelerate the convergence of power, gas, water, telecommunications and financial services industries.
Enable fundamental change to the industry and business cost structures.
Realise intellectual capital value through collaboration and knowledge management.
Revolutionise customer relationships.
Increase sales and improve marketing productivity.
Enable accelerated entry to new markets and geographies.
Utility CIOs have a challenging and exciting five years ahead. The immediate technology priorities should be ensuring that the Wave II and III technologies have been implemented because these will enable the more rapid implementation of Wave IV and V technologies (see "Ploughing Into the Waves",).
The key risks to moving forward relate to funding the retooling of the industry in order to be successful in the digital age. As competition begins to bite, there will undoubtedly be severe pressure on costs and the information technology budget will be affected if it has not been already. While this may deliver the numbers in the short term, it will limit the ability to gain access to larger efficiency gains in future years and will require catch-up investment. The short-term cost-cutting approach will cost valuable time and inevitably lead to lost market opportunity.
The challenge for the CIO is in changing the perception of information technology within their own executive team from ever-increasing cost burden - the traditional view - to ever-increasing competitive advantage.
In most parts of the developed and developing world, deregulation of the power, water and natural gas industries is firmly on the agenda if it has not already been implemented. The process of deregulation has implications for utility companies that penetrate deep within each company.
Deregulation involves the replacement of centralised controls and regulations with decentralised market-based solutions. Implementation requires industry restructuring, ring fencing and re-regulation of the natural monopolies and the introduction of customer choice and competition.
An AT Kearney (an EDS subsidiary) research report, Beyond Deregulation (May 2001), showed that between 80 and 90 per cent of gas and electricity customers switch suppliers based on price alone. The same research also shows that price falls of between 20 and 60 per cent after deregulation are occurring much more quickly as knowledge, experience and technology are transferred from one market to the next. The probability of a rapid loss of customers to aggressive new entrants and more efficient rivals is higher than most of the industry participants expect. While there are currently some barriers to switching at present, these will most likely be regulated or bypassed by new metering technologies.
As the old is replaced with the new, a transition occurs. This transition creates risk and opportunity. It opens previously captive markets to new entrant competitors and creates competition between previous monopolies.
Changes of this scale and scope mean that there will be winners and losers. The winners seize the opportunities and manage the risks. They will successfully make the transition and move their businesses to a new growth curve.
Privatisation is occurring globally. There is a strong link between deregulation and privatisation as governments begin to recognise that they do not have the tolerance for risk nor the commercial flexibility of private entrepreneurial corporations.
Privatisation activity in the power industry, according to a study by CERA entitled Global Power Horizons 1999, is on the increase (see "Power Industry Privatisation" graph, below). In the 40 countries included in the report, privatisations increased from $US255 million in 1991 to $US34 billion in 1997. Until the end of 1998, the total value of privatisations was more than $93 billion.
Privatisation accelerates the change process by separating the social and economic policy roles of governments from the management roles of building shareholder value. These two roles often come into conflict and separating them allows governments to focus on their social and economic objectives by establishing the rules.
Private owners and managers have the ability to raise new capital to invest in future growth that governments are not able to access. They are able to move more quickly and operate across jurisdictional boundaries much more easily than government-owned utilities. Privatised companies are able to take informed commercial risks and make strategic acquisitions much more easily. This is not to suggest that state-owned utilities cannot be successful. However, it is much more difficult for them to balance the social, political and shareholder interests.
While somewhat overused, globalisation does apply to the utility industry and hence is useful in describing where the industry is heading. There has been unprecedented merger and acquisition activity in the utility industries over the last decade. Large utilities in North America and Europe see that in order to grow they need to move into new geographic markets.
This is made possible by deregulation and privatisation as utility assets go up for sale and markets are opened for new entrants. This trend is also being seen in other industries such as telecommunications, petroleum and air transportation, to name but a few. According to the CERA report, at the end of 1996 there were only three of the top 50 power utility companies it rated as internationally diversified. By the end of 1998, however, that number had increased to seven of the top 50 power companies. This is more than a 200 per cent increase in two years.
There are currently many thousands of utility companies around the world. EDS' internal market research conducted, in December 2000, identified at least 5000 individual utilities. In the same research study, consolidation of the industry was modelled predicting the number will steadily decline to less than 1000 over the next 10 years. Of those 1000 utilities that survive, there will be around 20 that achieve a scale of 50 million customers or more.
This has dire consequences for utilities in small economies like Australia that will be competing with those global companies able to leverage their buying power, economies of scale and financial resources to win customers. As technology and communications become cheaper and increasingly sophisticated, there are fewer reasons why physical location is necessary beyond physical delivery, which can be "sub-contracted".
As utilities begin to be exposed to competition and growth plateaus, shareholder value creation is more limited. In order to shift to a higher growth curve, utilities are increasingly looking to move into new markets such as telecommunications, financial services and other utility services. Today there are several multi-utilities even in Australia at various stages of development.
For the future, we look to the US and Europe. In those areas, we see the emergence of what we call omni-utilities. These are companies that are no longer utilities as we know them but consumer service companies that offer a broader range of services focused around the needs of a consumer. CERA's report shows that, of the top 50 power companies in the world, the number of "functionally diversified" companies increased from six in 1996 to 11 in 1998. This is a 183 per cent increase in just two years.
This is a trend we expect to be repeated in Australia as the need for new growth engines becomes apparent. We expect that it is more likely that utilities will attempt to penetrate telecommunications and financial services markets than the reverse. Our logic is that low-growth utility companies are more likely to move into these higher growth markets by leveraging relationships with their customers. This will, however, require yet another round of radical organisational and technological change.
Ploughing Into the Waves.
Technology waves are hitting the beach fast and strong.
The relevant key strategic technology priorities from Waves II and III are:
Open systems architecture (if not already implemented) Enterprise resource planning (if not already implemented) Second-generation customer information system (if not already implemented) Enterprise application integration (EAI) technologies Converged networks.
Policy development, strategy and planning should already be in progress, if not yet complete, on the applications of the Wave IV technologies when they become available. These technologies include:
Third generation customer information system (fully converged) Customer relationship management technologies Digital workflow technologies Wireless and mobile computing.
Tracking of the development of the Wave V technologies should be in place in the event of a breakthrough that enables the technology to be brought forward into an earlier wave. For instance, there are knowledge management technologies available now but they have not reached a stage of development where they are easy to use. The other key technologies in Wave V are:
Andrew Chamberlain leads EDS' Utility Industry practice in Asia Pacific. EDS is a global services company with more than 120,000 staff.