Electronic business (e-business) is transforming all aspects of the energy industry. Between now and 2004, e-business will accelerate market restructuring, redefine business processes, drive down supply chain costs, and provide the catalyst for a new customer-centric focus. However, during this time, adoption rates will continue to lag leading competitive markets, such as high tech, financial services and retail.
META Group recently surveyed more than 350 organizations to assess the current strategic development and implementation of e-business/ e-commerce in North America. The survey population included 35 investor-owned, municipal and rural coope- rative energy utilities ranging from $100 million to $13 billion in revenues. For survey purposes, e-business was defined as conducting some or all aspects of business-buying, selling, transacting, exchanging information-over the World Wide Web with customers, suppliers, distributors and resellers or employees. The Web includes such networks as the Internet, intranets, extranets, etc.
Results from the survey indicate that, not surprisingly, most top and mid-tier North American energy utilities are currently conducting some form of e-business. Compared to the average for other industries, energy utilities believe they are adopting e-business faster than their non-energy peers; 50 percent believe they are innovators or early adopters (see Figure 1), despite the perception that their CEOs are less focused on e-business. Only 17 percent believe e-business is a top priority for their CEOs (see Figure 2).
This is likely due to energy industry executives’ current preoccupation with deregulation and retail competition. Additionally, respondents believe e-business has had less of an impact on the energy industry compared to other industries. Once again, we believe this is due to the primarily regulated nature of the business.
The study validates that energy utility perceptions are a close match to actual usage, with 70 percent of the energy companies indicating that they use e-business extensively or to some degree (see Figure 3).
Although undertaking e-business is relatively widespread, overall investment is low, with nearly 70 percent of energy companies spending less than $1 million and more than 90 percent spending less that $5 million (see Figure 4). When measured as a percent of revenues, energy companies are spending between 0.01 percent and 4 percent on e-business, with an average of 0.6 percent. Return from these investments is also low, with only 20 percent generating a profit (see Figure 5). So far, few if any energy utilities are making serious commitments to e-business. Most real initiatives are coming from new market entrants, such as Utility.com, Enermetrix.com, HoustonStreet.com, which were not part of the survey database. This will likely change between 2000 and 2002, as the industry learns from its early efforts. During this period we expect larger, more focused investments.
The survey results also indicate revenue growth and process improvement are the two most critical potential benefits from e-business. Survey participants deemed cost reduction to be considerably less critical (see Figure 6). This trend will diverge in the period from 2000 to 2004, with unregulated energy businesses deriving most of their benefits from revenue growth and regulated businesses benefiting primarily from cost reduction.
Staff & organization: Survey results show that 63 percent of energy companies have either single or multiple teams fully dedicated to the development and deployment of e-business initiatives. The remaining 37 percent do not have fully dedicated teams. Of those companies with dedicated teams, 30 percent are organized as part of an IT organization, 57 percent are organized as a cross-functional team, 9 percent are organized as a separate division or unit, and 4 percent are organized as a separate business. These findings are consistent with the average figures for other industries. META Group recommends a cross-functional approach that closely integrates business and IT strategies and includes representation from the IT organization and the lines of business. It should operate at two levels-an executive-led e-business steering committee and an IT-led development and deployment team or teams.
E-Business Investments: Energy companies believe the most critical areas for e-business investment are customer service and support (50 percent), sales (18 percent) and marketing (14 percent). On average, other industries rank customer service, sales and marketing as the top three most critical investment areas, but also give high marks to finance/accounting, distribution/ logistics and research/development.
Although customer relationship management (CRM) will be a critical success factor for energy utilities during the next five years, investments in this area will likely provide the greatest return for unregulated lines of business, such as wholesale energy trading, retail energy marketing. For regulated lines of business-transmission & distribution-e-business investments will be more effective when targeted at areas that affect costs-such as procurement and inventory management-or service reliability and quality. Further, e-business investments should be phased, with initial investments targeted at “readying the enterprise” for e-business, followed in order by projects aimed at relationships with suppliers, employees, customers (commercial and industrial customers before residential customers), and competitors.
Data Exchange: The survey indicates that 46 percent of energy companies are currently using Electronic Data Interchange (EDI). Additionally, respondents believe their companies’ e-business strategy will increase the use of EDI. Indeed, energy industry restructuring will likely increase the need for data exchange among market participants. However, while traditional EDI technology (batch file transfer over value-added networks) is appropriate for some processes such as supply chain, it is expensive and not well suited to the needs of a deregulated energy market. During 2000 and 2001, traditional EDI will likely cede dominance to primarily Internet-based forms of data exchange.
Supply Chain: As previously stated, although survey participants did not rank procurement and other supply chain activities as critical business areas, they are a logical first step in an e-business deployment strategy that limits risk (small number of entities) and has the potential for relatively quick payback. Survey results show that 23 percent of respondents are currently using an e-business procurement application, at least to some extent. Energy utilities are expected to initially focus on maintenance, repair and operations (MRO) materials and services, with a strong emphasis on maintenance and repair related items, such as valves, switches, bearings, seals, lubricants. However, we predict the energy industry will lag the mainstream of the global market by 12-18 months.
When asked if their companies’ were moving fast enough to develop e-business, 17 percent of energy companies responded “definitely yes”, 26 percent said “probably yes”, 49 percent chose “probably not” and 8 percent selected “definitely not”, indicating a relatively high degree of skepticism in the companies’ agility. However, corporate agility is not the only challenge facing e-business initiatives in the energy industry. A greater challenge lies in ability of the enterprise to develop and implement an e-business strategy. Maverick e-business deployments run the risk of wasting investments, running counter to enterprise business strategy, or worse, alienating suppliers, employees and customers.
Successful e-business investments in energy utilities will return benefits in revenue growth, process improvement and cost reduction, but will require rigorous planning and integration of business and technology strategies.
The bottom line is that progressive energy IT organizations must embrace e-business and become a valued partner to the lines of business by participating in setting strategy, preparing a solid infrastructure, and deploying applications in a phased manner. n
Rick Nicholson is vice president and co-director of the META Group’s energy information strategies service, where he focuses on utility industry information technology, and engineering and operations systems in particular.