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In
the past year, e-business has become more of a priority for energy CEOs,
and investment levels in e-business have increased dramatically. However,
the profitability of e-business initiatives is still low, with only 15
percent of the North American energy companies claiming any returns from
their investments. Also, compared to last year, the expected benefits
from e-business have shifted toward process improvements and cost reduction,
as opposed to revenue growth, which was the largest expected benefit cited
in 1999.
These are among
the findings of META Group's latest research comparing development and
implementation of e-business in North American energy companies against
a similar study conducted a year ago. For the purpose of the study, e-business
was defined as conducting some or all aspects of business (i.e., buying,
selling, transacting, or exchanging information) over the web (including
the Internet, intranets, extranets) with customers, suppliers, distributors/resellers,
or employees.
Time
to Integrate Strategy, Systems. Our research shows that energy e-business
is limited to a few countries or regions, with the United States and Canada
having the most advanced markets, followed by the United Kingdom and Scandinavia.
We believe this is due to the fact that high Internet adoption rates and
retail energy competition are preconditions for energy e-business. They
do not cause the market to develop, but are necessary conditions for its
success.
Even in North
America, few energy companies have a well-defined enterprise e-business
strategy. Study results show that only 21 percent of companies have appointed
an executive dedicated to e-business, and 17 percent have not assigned
e-business responsibility to anyone. The lack of a cohesive strategy typically
has resulted in the implementation of conflicting or redundant solutions
within a company.
In the short term
(2001-03), we expect investments in e-business to continue to increase,
especially in areas such as e-procurement, transaction exchanges/clearinghouses
(for customer enrollment, settlement, etc.), energy trading exchanges
and auctions, and customer portals. Longer term (in 2004 and beyond),
we predict the emergence of device-to-device (D2D) e-business, driven
by the convergence of energy, computing, and communications technologies,
especially as it relates to the widespread deployment of distributed generation.
We recommend several
actions for energy companies:
- Assign executives from
both business and IT to developing an integrated, enterprise e-business
strategy.
- Accelerate planning and
implementation cycles, but not at the expense of strategy.
- Tie e-business initiatives
to business goals.
- Leverage outsourcing to
improve the focus on competitive advantage.
- Use technologies for integrating
applications across the enterprise to enable rapid deployment of e-business
projects.
Impacts
More Recognized, But Expectations Shift. Last year, only 17 percent
of the participants in our study indicated that e-business was either
a top priority or the top priority for their CEOs. We believe this was
due to energy executives' preoccupation with mergers and acquisitions,
deregulation, and retail competition. This year, 27 percent of the participants
indicated that e-business was either a top priority or the top priority
for their CEOs. Although mergers and acquisitions, deregulation, and retail
competition continue to be top issues, CEOs are recognizing that e-business
has the potential to significantly impact their business.
The level of spending
by energy companies on e-business has increased dramatically during the
past year. In 1999, the study showed that 70 percent of energy companies
were spending less than $1 million annually, and more than 90 percent
were spending less than $5 million. This year, the number of companies
spending less than $1 million has shrunk to 38 percent. Thirty percent
are spending greater than $5 million annually (see Figure 1). With average
IT budgets for energy companies running at 2.8 percent of revenues, we
expect that average spending on e-business initiatives will approach 1
percent of revenues during the next two to three years.
Despite the sharp
rise in investment levels, returns are slow to materialize. This year's
results are marginally worse than last year's with respect to e-business
profitability. Only 15 percent of the study participants indicated that
they were making some profits on their e-business investments. Forty percent
were breaking even, and the remainder indicated that they were incurring
losses (see Figure 2).
Despite the market
hype leading companies to believe that e-business investments will provide
faster returns than other investments, the truth is that most e-business
projects will have business cases that are comparable to similar IT projects.
Indeed, many high-visibility e-business initiatives such as electronic
bill presentment and payment are being used by less than 1 percent of
the eligible customers. In this case, we believe that adoption rates of
4 to 5 percent are needed for a return on the investments.
When asked which
potential benefit from e-business is most critical to their company, last
year's participants cited revenue growth and process improvement as the
two most critical benefits. Only 15 percent named cost reduction. This
year, reality seems to have set in, with expectations for process improvement
and cost reduction dominating the responses, and only 20 percent indicating
revenue growth (see Figure 3).
Rick Nicholson
is vice president and director of META Group's Energy Information Strategies.
He has more than 15 years of experience with utility industry information
technology, specializing in engineering and operations systems, with an
emphasis on geographic information systems, distribution management systems,
and work management systems. He also is an expert in utility and telecommunications
convergence.
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