The Long View
The Art of War
October
15, 2000
By Ethan
L. Cohen
Energy
companies have the battle talk down, but the time for action is overdue.
How many times have you heard analysts say that deregulation
has changed everything for energy companies? Take stock of the situation,
they urge. Make decisions about your technology systems, assess who will be
competitors and who will be partners, and adopt new ways of thinking about
customers. There is no question that all of this is important. The past five
years have brought some remarkable changes, but the time for reconnaissance
is over.
Competition from
every angle should force energy companies big and small to action. Battle-tested
telecoms and resource-rich oil companies are poised to jump in and dominate
the deregulated energy market. They have the financial resources, often
the physical infrastructure, and the experience with deregulation. Though
dot-coms and other new energy suppliers have to start from scratch in
attaining customers, they have lots of agility and aim to cooperate and
compete their way to the top of the market. Some of the utility giants
also are waking up and realizing they have the organizational muscle to
put behind new competitive initiatives, even if they often move too slowly.
Clearly energy
companies must become agile, opportunistic organizations in order to take
advantage of this market's opportunities. Without any further delay, utilities
must make fundamental changes to their information technology infrastructure
and business mentality. How they will change will depend on each company's
individual context, but a guiding principle is to focus on the customer
with every decision and every step.
Troops
in Disarray. You're not alone if you feel a weight in the pit of your
stomach when you think about the obstacles to be overcome in order to
succeed in deregulated markets. Every energy company confronts the same
new and as yet undefined challenges. Large, incumbent utilities face a
market in which their dominance is no longer guaranteed. Dot-coms and
other energy retailers have tremendous opportunities for competing for
market share, but they also have tremendous challenges, especially financial
challenges. Even pipes and wires companies need new operational efficiencies
and ways of managing relationships with their end-user clients. Further,
although customers now are uncertain about their choices for energy service,
soon energy companies may face a savvy consumer base whose churn rates
could rival what the telecom industry has seen.
For incumbent
utilities, one hard truth of competition is that they must change their
model for managing customers from passive to aggressive. Utilities must
market to consumers, and need both the business and technical infrastructure
to be effective in building and maintaining market share. The mini-newsletters
inserted into monthly bills won't cut it for customer relationship management
(CRM) going forward. Dot-coms and other market entrants seem to have been
born media- and marketing-savvy. But they most often lack the stability
to capitalize more fully on opportunities. They need the resources to
build a reliable and functional business model, as well as an IT infrastructure
that can meet the demands of billing, customer service, and business transactions.
The time it is taking them to develop this infrastructure is a window
of opportunity for larger, incumbent utilities to establish leadership.
Squirt
Gun vs. Ballistic Missile. I've seen dozens of PowerPoint presentations
by energy companies demonstrating how well they recognize the importance
of e-business. The problem is that the market already has progressed beyond
that stage. Progressive companies such as Pacific Gas & Electric and NSTAR
have capitalized on e-billing as a step toward delivering better customer
service. Other utilities-Cinergy, for example-have moved toward streamlining
operations, hoping for the bigger bang for the buck. For most energy companies,
now is the time to follow suit.
The term "legacy
systems" is shorthand for the utility industry's most painful and expensive
problem. Legacy technology environments and legacy thinking not only have
limited utilities in their ability to improve service within core business
competencies, but also have prevented them from identifying and pursuing
new opportunities. It takes time and considerable cost to change utility
IT systems, but inaction no longer is an option. Technologies for e-commerce
and CRM, coupled with stronger back-office systems, will give energy companies
an almost unassailable advantage in the battle for consumer loyalty and
revenue.
In their early
efforts to upgrade technology, customer-oriented firms have focused on
shoring up their billing and customer service capabilities. But they remain
handicapped now, when they can least afford it, by a lack of data and
knowledge integration. Energy companies also tend to limit investments
in information technology to areas of direct need, rather than addressing
tougher, but maybe more important, strategic issues.
Upgrading legacy
systems not only facilitates adoption of next-generation technologies,
but also facilitates the growth of the Holy Grail of utility IT: e-commerce.
In short, a website is not good enough. To attract and keep customers,
and increase revenue through expanded offerings, energy companies must
develop intelligent, interactive systems that deliver service, and enable
a wider variety of transactions.
Villagers
and Mercenaries. How far behind the times is your business? If you're
still trying to understand what e-business is, you're behind the times.
If you don't have an attractive, informational, service- and transaction-oriented
website that facilitates and augments customer interaction, you're behind
the times.
A successful e-business
implementation starts with a plan that has been cross-checked with stakeholders
from across the organization. Next, identify what technology investments
are needed to address pain points, and which are strategic. In other words,
select technologies that have functionalities that will meet your needs
today and also tomorrow. Rationalize these decisions against a model of
what it costs to implement each of the solutions. Once you've made those
decisions, create the internal organization to guide the implementation.
The entire process must be held to a timeline that accounts for the expected
and unexpected bumps in the road.
A number of outsourcing
companies and systems integrators have emerged to facilitate IT development
for the utility industry. It's no surprise, because often utilities are
overwhelmed by the changes needed in their business strategy and supporting
IT, and by the expertise needed to make the right choices for change.
It might make sense for those that lack in-house resources or expertise
to partner with outside experts for guidance on e-business technologies,
or to actually host the technologies.
Which e-business
technologies should you focus on? Certain technologies seem glamorous
and full of potential, but actually deliver very little. Focus on technologies
that will have value further down the road. Internet bill presentment
and payment (IBPP) gets lots of attention, but my firm's research suggests
that utilities are not the best bill aggregators because they lack customer
trust in this area. Consumers will go to better-known bill aggregators,
such as banks, for this service. Furthermore, the value of IBPP for a
single bill is negligible. Other technologies that might wait a little
while include buy-side e-procurement, due to the lack of a developed sell-side
market, and involvement in new systems that only partially support your
company's foray into telecom, Internet services, or other niches. Instead,
look at technology for CRM and next-generation utility automation that
can improve operations. The replacement of these essential technologies
is long overdue.
Overtake,
Or Be Overtaken. The culture of change established by transforming
business and technology models should make energy companies all the more
prepared for competitive opportunities, including investment in new businesses.
Take DTE Energy, for example. Had it not been seeking other potential
lines of revenue, the company may have missed out on increased valuation
won through its capital investment in Plug Power.
Traditional business
models won't last, and each energy firm must decide whether it wants to
be a savvy, big organization, or be swallowed whole. Look at the AOL/Time
Warner and Vivendi/Seagrams acquisitions as pan-industry examples of cornerstone
companies joining forces with more nimble partners to maintain an advantage.
Scale is important.
My research indicates that an energy company probably needs about 3 million
customers to take full advantage of some of the best new technology, as
well as economies of scale and scope. Firms that don't meet this ever-increasing
criterion likely will be taken over, just as we saw early on with National
Grid's acquisition of New England Electric Systems and ScottishPower's
buyout of PacifiCorp. If you don't buy the "3 million customers" rule
of thumb, just look at the merger deal between FPL and Entergy.
The way energy
firms think about mergers and acquisitions must become more sophisticated,
too. My merger math tends to avoid, if possible, the 1+1=2 formula, whereby
one company plus one like company equals one larger company that is simply
a bigger version of the individual companies. The true potential of mergers
is when you have 1+1=3. That is, when one solid business merges with another
solid business that is different but complementary to the competencies
of the first, and they form a dynamic third kind of company. M&As among
energy companies should aspire beyond creating bigger firms, to creating
better firms.
Other mathematical
pitfalls threaten companies braving the M&A game. Merging two large companies
with extensive legacy systems into one environment with streamlined processes
is costly. Don't discount these costs by any means. You wouldn't want
to turn a merger into a 1+1=1.5 equation, either.
To
the Victor Go the Spoils. What is the answer to succeeding in deregulated
energy markets? Simply urging you to attain market dominance is glib advice.
It's really about remaining viable in the new order of energy service
providers and discos, and setting a course of action that will enable
success during the short term while also assuring long-term profitability.
For service companies in particular, consumer mindshare, loyalty, and
revenue are the lifeline of the business.
The victors will
be the energy companies that have transformed themselves into customer-oriented,
agile organizations. They will be those that recognized and empowered
their IT managers as business decision makers, because IT defines business
in this new economy.
Winners will take
all. They will have above-average profits. They will be visionaries who
get to shape the direction of the industry. Their leadership in the market
will enable them to take advantage of converging businesses. To date,
some utilities have been opportunistic in telecom as local exchange carriers,
carrier's carriers and so on, while others have embraced the Internet
and offer bundled services. But precious few have demonstrated true entrepreneurship.
That's what I'm waiting for. For the sake of the industry, I hope I won't
have to wait long.
Ethan L. Cohen
is a senior analyst of energy and utilities at Aberdeen Group Inc. in
Boston. Contact him at cohen@aberdeen.com.
Regina
R. Johnson is editor-in-chief of Fortnightly's Energy Customer Management.
Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.
Public
Utilities Fortnightly & Spark
