By Donald Dawson, Samudra Sen and Mariano Gonzalez, Booz Allen Hamilton
American humorist and philosopher Will Rogers once said, “If we spent as much time studying the future as we do studying the past, we’d be years ahead of where we are now.”
Many utility company CIOs would like to look to the future, but their IT budgets are clearly looking to the past. Regardless of consistent corporate profitability, utility IT budgets have been declining for most of the last 10 years. The fact that IT investment is not keeping up with revenues is a clear red flag for the utility CIO (Figure 1, next page).
Throughout the industry, the downward spiral in IT spending is commonly expected to continue as cost-cutting remains a key IT initiative and merger and acquisition activity continues to put pressure on IT costs in general
Nevertheless, utilities need to reverse this decade-long trend of reduced IT investment. As IT budgets continue to fall, it will become harder and more costly for utility companies to stage a comeback on the IT investments that need to be put in motion to drive the business forward in the future.
Contrary to popular belief outside the utility IT organization, it is not massive doses of new hardware that will be required to modernize utility IT. What is needed is a laser-focused IT strategy, grounded in a deep understanding of future needs and the existing IT landscape, to set IT on the right course for the immediate and long-term future.
The key drivers for renewed IT investment are:
- Major refreshes to aging platforms,
- The drive toward business process reform,
- Increasing interest in emerging technologies, and
- Pervasiveness of information technology.
Major Refreshes to Aging Platforms
Today, most utilities are using IT platforms that have been in service well beyond their design lifecycles. For example, in CIS, most utilities use custom-developed, mainframe-hosted solutions that cannot service current complexity levels and are difficult to support. This is driving utilities to examine major CIS refreshes. Enterprise asset management and work management systems are also beyond their design lifecycles, and utilities are investing in improvements.
Further, a number of utilities continue to operate in a mainframe environment. These platforms are becoming difficult to support. Companies are now undertaking major projects to move to server-based environments.
Drive Toward Business Process Reform
Several processes in utilities are still being performed manually. With load and generation options increasing over the years, these processes are inadequate and need to be technology-enabled. A breakdown in these processes can lead to outages and unplanned maintenance. This is driving utilities to refresh their business processes and, with them, the systems that support them.
Increasing Interest in Emerging Technologies
In the near-term, new technologies such as advanced metering infrastructure (AMI) and broadband over power line (BPL) will become more prevalent. These technologies, however, are expensive (Figure 2). For example, AMI can cost $219 to $567 for each meter. Even a small pilot of 50,000 meters can cost up to $28 million. A portion of these costs are IT costs, likely $70 to $150 per meter, and hence the IT costs for such a pilot would increase IT investment by $7.5 million.
In the longer term, several other technologies still in the development stage have the potential to drive future IT investment (Figure 3, next page). Among these are biotechnology, smart materials, nanotechnology and intelligent sensors to improve reliability, efficiency and reduced emissions of power plant applications.
Pervasiveness of New Technologies and Thirst for Information
The need to be increasingly connected is a phenomenon not specific to utilities. The increased penetration of technology in our daily work lives, from PDAs and cell phones to wireless laptops, shows no signs of waning. Companies will continue to see higher hardware, software and telecom costs as a result.
A New Dawn for Utility CIOs
Utility CIOs have done a commendable job of optimizing their assets and working with less: They have downsized or not replenished retired personnel; they have postponed major expenditures; and they have cut back on all expense fronts.
The bill, however, is coming due and it’s time to invest again as aging platforms give way to newer opportunities. Amidst rising corporate profitability, CIOs have an excellent opportunity to drive their agendas forward within the C-suite.
The time has come for CIOs to showcase IT’s value to the broader organization by taking the lead on technology-driven business transformations through the use and management of emerging technologies. CIOs must also make sure that IT has a seat at the table in making critical technology decisions.
What Should CIOs do to Prepare?
CIOs should be active. They need to put together a methodical program to optimize their IT assets and transform their IT shops. This can be achieved through a three-step organic transformation approach, as show in Figure 4 (next page).
The first step is to identify the universe of opportunities and risks ahead. While CIOs usually think they know their IT landscape, this exercise can often be revealing. For example, when we recently reviewed the applications portfolio at a utility, the CIO was surprised to find that the company had more than 2,400 applications, out of which only 25 percent were business-critical and 46 percent were custom-developed. An IT baseline assessment for another major utility revealed hundreds of servers the CIO did not even know he had.
This is not an exercise of hypothesizing in a closed room. It involves conducting in-depth interviews and surveys within IT and the business, and comparing findings against best practices or a “desired state.”
Some of these opportunities can be categorized as quick wins that further strengthen the case for change, while others will require a more detailed analysis to fully understand their implications on people, processes and technology.
This effort provides fodder for developing a new IT strategy as well as an action plan for the transformation. The key questions to ask are:
- What is the IT strategy and how does it meet business needs?
- What are the specific goals that we need to set forth to achieve this strategy?
The second step is to build the IT fact-base around the list of opportunities identified during the diagnostic. For example, if one of the opportunities identified in the diagnostic was the consolidation of the applications suite, a detailed study of which applications could be disposed of would be performed during this step. As another example, if increased outsourcing is an opportunity identified through the diagnostic, a detailed analysis of process costs and outsourcing options would be conducted during this phase.
This effort also sets the roadmap to deliver the IT strategy. The key questions to ask are:
- How suited is the IT organization to deliver the IT strategy (people and skill sets, processes and governance, hardware and software assets)?
- What new resources and processes need to be put in place to achieve it?
The third step is to design the future state of the IT organization, creating a compelling business case that can be presented to the C-suite:
- Defining the options available to the organization (e.g. IT platforms, sourcing arrangements, etc.);
- Building the right team structure to implement the IT strategy;
- Aligning new processes with other business units; and,
- Establishing metrics to properly measure success-not only against industry benchmarks but also against their historic performance.
Once these steps are completed, CIOs have a clear understanding of the road ahead, and all the elements in place to transform these opportunities into executive initiatives.
Doing nothing has negative consequences: The business will move ahead and keep the investments within itself, e.g. CXO reporting to Strategy Groups. This will cause value leakage as the technology experts (i.e. IT) will not have a say in technology decisions. Once investment decisions are made, IT will not be able to deliver because its existing structure and processes are not geared toward managing large projects, especially after years of cutting costs.
After all, it wasn’t Will Rogers but Yogi Berra who said: “If you don’t know where you are going, you might not get there.”
It is not overly complex to begin putting best practices into action and “getting there” in short speed. Utility CIOs need the kind of professional impetus that gets the whole staff talking, creates “buzz” and energizes the whole team toward reshaping the IT organization. This is the right time to do it. It might also be the last.
Donald Dawson is a principal with Booz Allen Hamilton in the IT practice based in Dallas, Texas. He is an experienced leader who specializes in utilities with over 25 years of experience, 15 in the industry and 10 in consulting.
Samudra Sen is a senior associate with Booz Allen Hamilton in the IT practice based in Dallas, Texas. Mr. Sen has extensive experience in leading IT strategy based transformation programs with a particular focus on mergers, acquisition and divestitures.
Mariano Gonzalez is a senior associate with Booz Allen Hamilton in the IT practice based in Dallas, Texas. He has more than 10 years of consulting and project/program management experience. He is a specialist in IT strategy, merger integrations, and large-scale transformations