Managing by Markets: Bringing Intuition to Fruition
By Bridget Meckley, IBM Utility and Energy Services
As the utility industry moves further into a deregulated and re-regulated environment, new challenges are presented. Not the least of these challenges is maintaining profitability while competitors try to acquire utilities` most lucrative customers. This makes it essential for utilities to know their customers.
Where once only the marketing or sales personnel could talk intelligently about market forces or customer needs and wants, a new process has been designed to gather market intelligence (knowledge about customers, competitors, industry forces and internal capabilities) and align organizational behavior to that market knowledge. This process, called Manage by Markets, helps all employees understand the business drivers and learn how to apply that understanding in their day-to-day roles.
Instituting this process is not necessarily easy. Utility companies have not historically considered customers or employees as assets. Current technologies and processes are not designed to support strategic decision-making; rather they are designed to support efficient transactions. The successful utility of the future will need to invest heavily in the processes and technologies that keep them focused on their customers` value.
Manage by Markets
All resources within an organization are allocated through a process of prioritization, trade-off and negotiation. In most utilities, this happens in the yearly budgeting process when each manager submits operating and capital plans. There are countless variations to this model, but the fundamental premise is that the functional organizations within the company develop plans based on their responsibilities within the business. The result of this internally focused process is an aggregated company-wide view.
Manage by Markets turns this process on its ear. It begins with an outside-in look at the business by answering questions like “What business are we in?”, “Who are our customers?” and “What do they want and need?”. As Figure 1 suggests, if one subscribes to the premise that businesses should decide what to do based on what their customers want, this process is very logical and simplistic. However, utility companies have rarely planned and allocated resources in this way because customers` end use needs have not been a major driver. The new environment of choice has made this method of managing resources and planning actions a requirement.
The Manage by Markets process is intended to “institutionalize” customer and market-oriented thinking. By starting with customer and market questions, it forces the company to aggregate knowledge and make market decisions before the business units budget and plan. This analysis and decision-making involves marketing, operations and strategy personnel so that all available customer views are included.
By the time the organization gets to step 5 (plan market actions), the company has determined its market, competitive, product/service and customer strategies. Having determined these, the business is now ready to make resource allocation decisions. Since functional units within the business understand the customer and market forces that drive the opportunities, action plans that focus on seizing opportunities can be developed. The result is a business aligned to customer opportunities, with a keen focus on the actions that will make a difference.
The process still sounds logical. So why doesn`t this process happen naturally? There are regulatory, cultural and technological hurdles that utilities must overcome before they will achieve this market alignment.
Hurdle #1: Shifting the Focus from Assets to Value-Added Services
Utilities have historically made returns based on physical assets installed and commodity prices determined within the regulated environment. The name of the game was to install the physical plant, serve the customers within your franchise area and meet the regulatory requirements. By doing so, the utility could achieve the allowable rate of return.
This environment no longer exists. Increasing numbers of customers can choose suppliers, utilities have choices about what parts of the energy business they want to be in and regulators are increasingly pressured to reduce rates.
Whether the utility is in generation, transmission, distribution, energy services or combinations thereof, it will require some physical assets. But, these businesses also require other assets, such as:
personnel with skill sets specific to the businesses they run,
a company brand or identity to differentiate themselves from other providers,
world class processes that allow the company to deliver products and services better or to develop them more quickly or inexpensively,alliances with companies that provide necessary support activities or material within company-branded products/services, and intellectual capital that allows the company to understand customers better, lead in development of new products, or target products/services more profitably.
These assets are new to many utility companies. As Figure 2 illustrates, depending upon the future focus of the business, the required asset mix will be different.
There is a new emphasis on acquiring and enhancing assets in order to differentiate the company from other competitors participating in the same portion of the market. This is a very different way of thinking about the business and how it creates value for customers. It also changes the baseline requirements for companies who want to “get into the utility game”.
Hurdle #2: Completing a Transaction or Making a Decision
The traditional utility provides a “standard” set of services revolving around energy use. The services are predictable and standardized across the industry. They satisfy customers` basic needs, but do little else.
Utilities need to identify actions that enhance customer offerings. They must examine every offering and determine whether to offer it and at what level of performance customers will want it. This moves the focus from transactions (doing it) to decisions (doing what, how well).
It is important to contrast the processes and technologies that support transactions from those that support decisions. Transaction processes and technologies are triggered by events–customers call for information, power is out, a work request is made. To respond to these events, a structured set of questions is asked and information is gathered (or provided from existing records). The process and supporting technologies are tuned to provide the desired results quickly and reliably.
Decision-making processes and technologies are more “organic” than the predictable “machine” model just described. This organic ability to adapt or to change the environment is a fundamental requirement in the emerging utility industry. Along with change comes an uncertainty about what questions might need to be answered or what the process might need to deliver.
Responding in these situations requires flexibility and learning–the ability to analyze data in a variety of ways, ask unstructured and unanticipated questions or include one set of employees in the process one day and a very different set on another. Existing utility technologies and processes are rarely capable of responding to this broad range of unstructured requirements.
Hurdle #3: Making Marketing Everyone`s Business
Each time a customer comes in contact with a utility, they form an impression of the company and, in an environment of choice, the impression provides input for a choice the next time around. In process lingo, each contact is called a “moment of truth.” Utilities must recognize these “moments of truth” as new opportunities to improve the relationship, gain valuable information about the customer or promote a product/service.
The traditional forms of marketing–assigned sales reps, bill stuffers, advertising, direct mail offers–create obvious “moments of truth” and will continue to be an important part of the customer relationship with the new utility. But, there are other “moments of truth” that provide the same opportunities: service calls, inquiries about energy usage, outage restoration, new home purchases and appliance replacements to name a few. This dramatically expands the number of people who can influence the customer.
Does the utility know how each of its customers prefers to receive information about new products/services? Does it know enough about the customer to decide which new products/services would be of interest? Does it know what products/services they are willing to pay for and which ones they feel should be “part of the package?” Utilities should turn every employee into an intelligence-gathering asset. They should enhance employees` observation skill sets. Teach them what to look for in each “moment of truth.” Put processes and technologies in place to make it easy to share this intelligence with the broader organization. Utilities should measure employees on the value of the information they contribute to the knowledge base.
Hurdle # 4: Supporting Market Alignment with Technology
Starting with the most basic requirements–complete knowledge of your customer–most utility companies` existing systems are unable to meet these challenges. Customer knowledge is limited and often dispersed throughout the organization.
Building a profile that helps a company understand why and how every customer buys requires additional information. Solid demographics and buying information are available for residential customers as long as the utility has good premise or identification information with which to match the records. Assigned sales reps, industry specialists and business profiles can be used to develop the financial and purchasing profiles required for larger commercial or industrial users. As time of day billing becomes more common, there will be even more detailed information available. And this is just the beginning. To really excel in the competitive market, the utility must acquire new, profitable customers. That means building similarly detailed information about non-customers.
Having found the information, storing and updating it becomes the next hurdle. A data warehouse or focused data mart allows an organization to develop good historical information and consolidate information from a variety of transaction systems. Almost any information gathered by the organization can be added to a warehouse. The tools and structure of a warehouse can be tuned to queries or unstructured questions. Information can be loaded with statistical analysis tools. Anyone in the organization can be given access for analysis, broadening the types of questions that may be asked and the potential for learning through analysis. All this can be done without affecting the organization`s ability to complete transactions quickly and reliably. Now the organization not only supports the transaction, but can apply learning to improve performance or anticipate new requirements.
With this additional information, utilities can begin to use data mining techniques. One key application is customer segmentation. Done well, segmentation can allow a company to target products/services to specific customers. It can also define the types of relationships each customer wants. Performing these complex analyses requires computing horsepower and flexible data management not currently available at many utility companies.
Finally, with a rich customer knowledge base, a utility can enhance customer loyalty and company profitability. In many cases, this requires updating existing transaction systems to collect more information and provide more support. Instead of updating a “customer information” system, the utility will need a “customer care” system. The difference is the decision support component that identifies the customer (by segment based on buying behavior, type of business, preferred relationship, etc.) and prompts the company representative to respond in appropriate fashion. Customers gets the exact interaction they want every time. As Table 1 illustrates, technology costs can vary greatly depending on need.
Is this Nirvana? Not quite, but it goes a long way toward ensuring delighted customers and long term profitability. Is it necessary? Not yet, but the day this environment will be required is already visible on the horizon. This intelligence is not developed in a few months. Systems are not installed in a year. Processes cannot be changed in a few months, without major investment and displacement. Utilities who want to survive and thrive in the environment of choice should be investing now to be prepared to meet the future.
Bridget Meckley is a senior consultant in the Business Transformation Consulting Practice of IBM`s Global Utility and Energy Services Industry. Working with clients, she designs business processes for key functions, aligning them with business priorities and identifying supporting technologies and organizational requirements. Meckley also develops action plans for producing tangible improvements in business performance through information technology and process redesign. She holds a master`s degree in public finance and a bachelor`s degree in political science from the University of Pittsburgh.