Thom Tillis, IBM Business Consulting Services
Throughout the past decade, the electric utility industry has completed mergers and acquisitions on an unprecedented scale. Regulated utilities have grown their traditional businesses while expanding into other areas, including merchant energy, oil and gas ventures and telecommunications to name a few. While the impetus behind much of the M&A activity has focused on achieving savings through the elimination of duplicative processes and technologies, the real results have varied thus far. Many utilities have claimed major benefits in the wake of a merger or acquisition, yet a closer inspection suggests that, in most cases, the gains have been largely limited to finance, human resources, and customer service operations. Supply chain and operations (SCO) areas have achieved little or no real savings or synergy.
While utilities have achieved savings in the HR, finance, and customer service functions, why have the supply chain and operations areas lagged behind in achieving M&A synergies? The reasons vary from organization to organization, however the primary factors relate to the complex organization, process, and technology frameworks that have evolved over years of operation and the lack of consistency in how organizations measure themselves.
A critical eye on M&A
The operations and supply chain areas are generally viewed as the areas most critical to a utility’s ability to ensure safety and reliability, the industry’s top priorities. Most utilities are proud of the track record they have established, and the heads of the supply chain and operations areas are reluctant to fix something that they do not believe is broken. Consequently, when two organizations with a long history of safety and reliability come together as part of a “merger of equals,” both parties come into the debate with a bias that what they have worked long and hard to achieve is “as good as it gets—just look at our record.” When the merger teams look for opportunities to combine, standardize, and/or integrate supply chain, work management and asset management functions, the successful track records of the legacy organizations frequently become obstacles in the path towards achieving break-through benefits. As a result, the “combined” organization is largely a confederation of independent business units who operate as they did before the merger.
In the case of an acquisition, where the acquiring organization comes with a clear mandate to combine operations, the challenges and the risk of sub-optimization can be even greater. Best practices in the acquired organization can be lost in the process as the focus on executing a “proven” acquisition/integration methodology and achieving timeline targets takes precedent over assessing potential areas to improve performance through the adoption of the acquired organization’s practices.
So how do you balance the need to integrate supply chain and operations organizations in an expeditious manner following a merger or acquisition with ensuring that the greatest savings and synergies can be achieved? Though there is no simple answer, the key to achieving the right balance is establishing a framework for assessing performance in the context of the end-to-end “value chain,” and in establishing consistent approaches to measuring current performance and setting targets for future performance.
If you asked ten utilities to define what functions rested in their supply chain organization, you would likely get ten or more different answers. Some “supply chain” organizations are effectively the corporate procurement and contracts function while others include procurement, inventory management, logistics and other functions. In some cases, functions are embedded/duplicated in individual business units with little influence or involvement of a central organization. When setting out to integrate in the wake of a merger or acquisition, it is critically important to get all stakeholders on the same page as to how the end-to-end process works. The value of mapping out the key functions of the end-to-end operations and supply chain functions, the role each function plays, and the touch points with other functional areas cannot be understated. A common understanding of how each legacy organization functions from an end-to-end perspective provide valuable insights into why certain functions perform as they do. Defining all of the links in the value chain, between work management, inventory management, procurement, and asset management, as well as the linkages to other supporting functions, such as sourcing, accounts payable, and tax accrual will provide the broader perspective needed to assess end-to-end performance.
For example, assessing the procurement function includes a process inspection that results in the conclusion that the cost per PO falls below acceptable targets as measured by “established targets.” On the surface, the function may be viewed as being data entry intensive or requiring skills that would not seem inappropriate for a purchasing resource. However, if the process has been improved to optimise downstream inventory management, tax accrual, and accounts payable functions, the added work on the front-end may be warranted in order to support the major improvements in downstream process performance.
Once the end-to-end functions have been clearly delineated, the definition of key metrics for segments of the end-to-end process can be established. This includes taking into account how interactions with or dependencies on other functions may skew the traditional measures upward or downward. Developing metrics that not only measure discrete process segments, but also focus on measuring the performance of “process groupings” and/or the end-to-end process chain is an invaluable tool for identifying best practices and problem areas.
An end-to-end approach to assessing process performance and a broader-based measurement methodology can dramatically impact the results of the integration of legacy organizations. In fact, this approach to measurement has, at times, transformed what appeared to be best practices into problem areas and vice versa. While other factors ultimately impact the outcome of an integration effort, a common understanding of the end-to-end process and a consensus regarding how performance is measured will place utilities in the best position to take on the challenge of integrating legacy organizations and achieving real, sustainable savings and synergy.
Tillis is the supply chain practice leader within the energy and utilities group at IBM Business Consulting Services.