Lessons learned in California can help utilities boost their operational, financial and environmental performance.
by Surajit Kar and Loren Taylor
Pressure to increase innovation in the utility industry comes from all sides: customers, regulators, investors, public interest groups and competitors. That’s why industry leaders position themselves for success by offering innovative programs and services that meet—or even exceed—the growing requirements of their stakeholders for clean, efficient energy. The majority of utility companies, however, lag behind, despite availability of experienced, talented employees and generous funding from regulators. As a result, they expend resources on merely incremental improvements and disappoint their customers.
California and its investor-owned utilities have achieved world-leading standards of energy efficiency and demand-side management (DSM), along with high rates of customer adoption. As a result, the state has kept its per capita energy usage essentially flat for more than three decades, while the rest of the nation has seen a 50 percent increase. In recent years, California utilities began instituting best practices in innovation management in order to maintain leadership in customer-facing programs—along with business models and technologies that support them.
Roland Risser, director of customer energy efficiency at San Francisco-based Pacific Gas & Electric Company, describes it. “Innovation is more than a phase-gate process. It encompasses idea generation, prioritization and screening, governance and teams, quality and time-to-market, and much more. It also requires a culture of innovation that strengthens the internal organization while better serving customers and regulators.”
The experience California utilities have had with the implementation of cross-industry innovation best practices shows that structured idea generation and management can significantly increase the volume of high-quality ideas for future programs; that rigorous program and product development can reduce cycle time from initial idea to market-ready; and that strategic portfolio and resource management capabilities can help select the most attractive programs and allocate scarce resources rationally.
Moreover, these three interlocked innovation elements complement and reinforce each other in positive feedback loops. (See Figure 1.)
Structured idea generation and management
To provide customers with creative energy management programs in an increasingly demanding market takes more than luck. One utility we worked with was initially proud of its 120 new program ideas until it learned that 110 of them came from state regulators! Lacking a rigorous approach to idea generation, utilities often end up with too few program ideas. At the other extreme, we have seen companies with too many ideas clogging the development pipeline for months.
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Best performers apply structured—and repeatable—idea management techniques that avoid these pitfalls. They regularly facilitate idea-brainstorming sessions, screen new ideas using explicit criteria and prioritize the top candidates for development by analyzing their risk/reward and strategic fit tradeoffs. While brainstorming new ideas, these companies often find the most innovative solutions at the intersection of diverse viewpoints. (See Figure 2.)
One California utility conducted monthly “ideation events” on key topics, such as smart meters, solar energy, and sustainable communities. Cross-functional perspectives generated 40 to 100 raw ideas per event. One participant said, “I would have never believed that 30-year veterans would have so many great ideas just waiting to get out.” To narrow down the choices to the 10 or 20 most attractive candidates, the company applied structured prioritization techniques.
Rigorous program and product development
Historically, utilities have developed new programs and products using ad hoc processes. Today’s top performers apply a structured innovation process with discipline and flexibility to gain better control over their idea-to-launch cycle and to accelerate products to market.
Recent PRTM benchmark studies show how leading service companies outperform their peers: Their customer churn rates are twice as low (10 percent versus 20 percent), their time-to-market for large projects is 10 percent faster, their revenues from new products/services are twice as high, and their gross margins are 35 percent higher.
To build better products faster and cheaper, service innovation leaders use a common approach that includes:
- Innovation processes with logical phases, steps and defined exit requirements
- Cross-functional core teams to guide each idea through the phase-gate process to market
- Structured decision-making to guide core team activities within each development phase
- Cross-functional project governance to ensure that projects are on track and on budget
- A relentless focus on customer needs (voice of the customer) from idea generation to post-launch market assessment
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While robust innovation processes are cross-functional, they must also clearly define functional accountabilities and provide metrics dashboards to track individual projects and the process as a whole. This approach harmonizes functional incentives, process workflows, and team deliverables, which promotes overall speed, quality and visibility.
One California utility that applied this approach reports handsome and quick payback. The company piloted the process with several DSM programs mandated by the California Public Utilities Commission. Within six months, it deployed a $350 million residential demand response program, meeting its regulatory requirements on time and under budget. The utility simultaneously launched a dramatically upgraded version of an existing commercial demand response program, which resulted in a 17-fold increase in energy savings in the first nine months. In addition, the company launched several energy efficiency programs with accelerated time-to-market (by four to eight months). And later in the year, it implemented a new-to-the-world $20 million carbon offset program to reduce greenhouse gases.
Strategic portfolio and resource management
Leading innovators across industries implement foundational portfolio and resource management capabilities to meet customer needs more effectively by setting strategic priorities and rationally allocating scarce resources. This disciplined approach maximizes the long-term value of new product portfolios while allowing companies to balance long-term strategic goals with near-term market requirements.
To create advanced portfolio and resource management capabilities, best practice companies typically follow four steps. First, they develop a set of common “lenses” to view their existing portfolio of products and services. These lenses may include such factors as portfolio alignment with strategic priorities, potential market and technology risks versus benefits, and estimated time-to-market. Second, they cost-effectively estimate resource requirements by identifying critical skill sets needed for typical innovation projects. Third, best-practice companies apply their portfolio and resource lenses consistently to all innovation projects. This analysis provides a shared baseline view of the existing innovation portfolio and resource base. Fourth, they make trade-off decisions to optimize the current portfolio and resource pool based on an aggregate risk/benefit scenario analysis.
While building an interlinked portfolio/resource management capability can be time-consuming, it is well worth the effort. One management team at a leading California utility gained much improved visibility and control over its innovation portfolio when it could finally evaluate its 70 active innovation projects with a common set of portfolio metrics, including benefits, risks, time and cost. In parallel, the executives assessed their resource requirements and uncovered critical skill gaps. One executive we worked with said, “With these tools, I finally have the ability to trade off one project against another. Before they came along, I was flying blind.”
The road forward
Of course, even the best practices in innovation management won’t help unless they are widely accepted by the organization. In the utility industry, common barriers include a regulatory-driven mindset and a culture that often constrains the ability of employees to innovate. However, the experience of California companies shows that other utilities can overcome this cultural legacy. Innovation begins with determined leadership from the CEO and is bolstered by a system of incentives and metrics,along with an active communications program that celebrates successes and learns from failures. Comparing performance with other utilities, as well as other service-oriented industries, helps companies set the right benchmarks.
Utility employees are particularly resistant to change when they believe existing processes are “good enough.” A successful approach in these situations is to demonstrate value through small wins. For example, one California utility first deployed three pilot programs to test the new process. Once the teams climbed the learning curve, there was more buy-in and acceptance for the process. Eventually, as more groups were trained, the company was ready for an enterprise-wide deployment.
Going forward, the utility industry will increasingly embrace innovation excellence. World-class innovation practices discussed in this article are already helping California utilities boost their financial performance, delight customers, empower employees, and sustain high environmental standards.
Surajit Kar is a director at PRTM Management Consultants and a leader in its global utilities practice. He has 14 years of industry and consulting experience in a variety of technology-based industries. Loren Taylor, a manager in PRTM Management Consultants’ product and service innovation practice, has 10 years of experience in the utilities, healthcare and telecommunications industries. You may contact them at email@example.com and firstname.lastname@example.org, respectively.
The authors gratefully acknowledge the contribution of Angela Sanford, a manager at PRTM Management Consultants.